Business Irish

Saturday 22 September 2018

BoI's return to balance sheet growth marred by margin fall

Bank of Ireland CEO Francesca McDonagh and chief financial officer Andrew Keating unveil the results. Photo: Damien Eagers
Bank of Ireland CEO Francesca McDonagh and chief financial officer Andrew Keating unveil the results. Photo: Damien Eagers

Gretchen Friemann

Bank of Ireland's balance sheet is set to expand this year for the first time since the crash.

But the restoration to growth, unveiled in its full year 2017 results, and the recommencement of a dividend payment, was overshadowed by a forecast fall in margins, which triggered a sell-off in the share price yesterday.

The stock slipped by close to 4pc in early morning trading as the market digested an unexpected decline in the 2018 net interest margin (NIM) - a key barometer for measuring the profitability of banks.

While the share price clawed back most of those losses by the afternoon to close 2.45pc down at €7.56, investor "disappointment", as Davy's analysts characterised it, at the "rebasing" of NIM tempered the reaction to the lender's projected return to growth and the restarting of the dividend. However it was a message new CEO Francesca McDonagh was keen to drive home, even though underlying earnings were largely static at €1.08bn in 2017 compared to €1.07bn in 2016.

The relatively weak revenues came as the bank's annual report showed Ms McDonagh's salary will top her predecessor's due to her decision to opt for a lower pension contribution.

Her overall remuneration is likely to remain in the same ballpark as Richie Boucher's, who received a package of €964,000. Speaking at her first set of results since taking over the reins in October, Ms McDonagh said variable pay in the sector is about "attracting and retaining" talent as "well as driving accountability".

Ms McDonagh's gross salary for the first three months of the year hit €238,000, indicating her salary will be higher than the €690,000 figure announced in May, due principally to a lower pension contribution.

When asked by the Irish Independent about her pay, Ms McDonagh said "we are very supportive of the normalisation of the banking sector".

She was keen to drive home the importance of the return to growth in net lending and the restarting of the dividend, describing the payout as a "pivotal" moment for the lender.

The resumption of dividend payments is widely expected to pave the way for the Government to exit part of its 14pc stake in the group, as prospective buyers of the shares would now include income fund managers.

Bank of Ireland plans to pay out 11.5c this year - equivalent to 18pc of earnings and below market expectations of about 15c.

While the bank has committed to increasing the dividend to 50pc of earnings, chief financial officer Andrew Keating steered clear of a specific time frame.

He said the dividend will increase "prudently and progressively". When pressed on a deadline, he claimed "it will take a number of years before we get there" and cited other cost pressures weighing on the board's thinking, including the €800m-€900m investment in the bank's technology system and the greater capital required to grow the loan book.

Ms McDonagh stressed the expansion of the overall loan book reflected the improving economic conditions but also pointed to the group's fixed-rate mortgage strategy, which she described as "working".

"We know that because our market share is increasing," she said.

Bank of Ireland's foothold on the residential mortgage sector climbed to 27pc at the end of 2017, up from 25pc in 2016.

According to Owen Callen of Investec, the group's NIM guidance represented the "only real negative". But he stressed the decline was a "once off" relating chiefly to non-lending or transactional items.

Irish Independent

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