Many positives for BoI -- but poster boy for bank recovery has more to do
THERE was a lot to celebrate in Bank of Ireland's 2011 results -- a fact borne out by an 8pc surge in BoI's share price that pushed the stock to a new high -- but there were also lots of comments and numbers that would give a more sanguine investor pause for breath.
First for the positives. Investors no doubt took heart from the fact that BoI didn't come out with any major new "negative" news or any real scary loan loss numbers or guidance.
Yes, the bank set aside close to €2bn to deal with potential loan losses and, yes, the bank admitted that its €28bn Irish mortgage book was panning out worse than the "base" case modelled by the Central Bank, and 2012's mortgage losses could be higher.
But, crucially, chief executive Richie Boucher told analysts he didn't see loan losses in the "stress" (worst case) scenario envisaged in the stress tests. For investors, this roughly translates to "BoI doesn't need more capital, we're not going to get diluted again".
The other positive was that BoI is getting back to "normal" banking. In the second half of 2011 it exited the "emergency" liquidity scheme run by the Central Bank. It also raised €4.2bn in what Mr Boucher described as "expensive" market funding.
Then there was the bank's bullish commentary. Mr Boucher sees 2012 as the land of opportunity for SME lending in particular.
"If we're the best organised, we have the capital, we're sensible about how we apply our risk appetite, then this is a massive opportunity for BoI because we are better organised than our competition," he said.
The beauty of any new lending they get is that BoI can charge more for it.
BoI is already doing new lending at "prices that are competitive" with those funding costs, Mr Boucher said, so the bank gets a "better reward for the risks it's taking".
Yesterday's results, however, and some trends observed by Mr Boucher, do create concern about the magnitude of the challenges our poster boy for banking recovery must still face.
The first cause for concern was BoI's "net interest margin", a key profit measure for banks that looks at how much money it costs them to get money, and how much they make from lending it.
BoI's net interest margin (NIM) came in at 1.33pc for 2011, worse than analysts had expected and worse than the 1.49pc in 2010. Mr Boucher attributed that result to "intense competition for deposits" which was pushing up the banks' deposit interest rates, plus "elevated" costs of wholesale funding and the €449m the bank paid to the government guarantee scheme.
The other big element going forward will be new lending -- quite simply, banks can only make money if they lend out money. And as Mr Boucher admitted yesterday, demand for new lending is "subdued".
The carrying value of BoI's loan book shrank by €12bn last year -- largely because of disposals and impairments -- but the figures suggest new lending was all but matched by repayments so "net new lending" is going nowhere fast.
For BoI to be truly considered "recovered" that new lending needs to happen.