Donal O'Donovan: 'Market is nervous over Bank of Ireland Brexit exposure'
Bank of Ireland has a massive question mark hanging over it, and it won't be answered for investors until we see how Brexit pans out.
A shares plunge yesterday took the shine off some good news for shareholders in the shape of an increased dividend and confirmation that the bank finally managed to grow its loan book for the first time since the crash. Disappointing margins momentum was the immediate trigger for the share fall, but the wider context is a bank almost unique in its exposure to the two markets most vulnerable to Brexit.
That's a hard narrative to combat. Chief executive Francesca McDonagh was keen to point out at a press conference yesterday that the consensus view among experts is that both the Irish and UK economies will grow this year, despite Brexit.
Bank of Ireland itself is just six months into a 40-month strategic plan, Ms McDonagh pointed out. Management are hitting their targets, but delivery is necessarily in its infancy.
The bank's own relatively benign outlook is based on the expectation there won't be a hard Brexit and resulting economic shock.
But for a nervous stock market, the upsides for Bank of Ireland are medium- to long-term and relatively modest. The downsides are close and potentially big.
There probably won't be a hard Brexit. But there is a material risk that the British economy is about to be plunged into a crisis, beginning as soon as March 29, that will send shock waves through swathes of the Irish economy too.
Those countries make up Bank of Ireland's only substantial market - split roughly 30pc (UK)/70pc (Ireland).
To date Brexit has had relatively little effect; despite two years of currency volatility and economic and political uncertainty.
Ms McDonagh said yesterday that Bank of Ireland's Irish small- and medium-sized business customers are deferring investment decisions, and when they do borrow are opting to draw down only a fraction of the funds available. It's a short-term problem for the bank that could reverse quickly if there is a real resolution to their Brexit uncertainties this year. Bank of Ireland is certainly well-positioned to benefit from a Brexit rebound.
But if a hard Brexit causes a real economic shock the bank faces into a very different prospect. SMEs in Ireland will be hammered if the UK throws up a tariff wall next month, especially those in counties on each side of the Border, and in sectors like agri-foods and traditional manufacturing.
Retailers and the hospitality sector will be equally battered if a sterling crisis means British tourists no longer have the means or inclination to visit and shop here.
In the UK, Bank of Ireland has largely exited business lending, but it has a big exposure to British consumers through its mortgage, car finance and consumer lending. Inflation caused by a decline in the value of the pound is a potential trigger for an interest rate shock. Consumers will be squeezed.
Unlike the last crash, Irish consumers are the best-insulated part of the bank's business.
If things do come to the worst, Bank of Ireland can point to a track record of resilience and crisis management dating back to 2008.
But in the meantime, uncertainty will weigh regardless of the bank's own actions.