Davy Research |
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Bank of Ireland
BKIR.I
Results highlight weak pre-provision profitability
10 August 2012
Emer Lang |
| Closing Price: 10c | Rating: | OUTPERFORM | Issued: | 04/11/11 | Previous: | NEUTRAL | Issued: | 07/09/10 |
PPP fell sharply on revenue pressures, flat costs
Pre-provision profits (PPP) of €58m (H1 2011: €164m) were weak, falling short of our €104m forecast as costs were flatter.
The underlying net interest margin fell by 13bps to 120bps in H1 (forecast: 117bps) as deposits/low interest rates cost 26bps, offset by other factors, notably a 10bp loan repricing benefit.
ELG fees knocked €212m (€239m in H1 2011) off PPP; getting rid of the guarantee remains key to rebuilding profitability.
Modest improvement in balance sheet metrics
Despite disposal progress, total assets rose by 2% – reflecting the IBRC repo transaction (€2.8bn) and sterling translation.
Wholesale funding rose by €2bn from €51bn at the end of 2011 to €53bn. Additional three-year LTRO usage of €4.8bn (cumulative €12.3bn includes €10.8bn term extension) boosted net monetary authority reliance to €26bn (€22bn at end-2011).
Deposits of €71.7bn compare with €70.5bn at the start of the year. With loan disposals completed ahead of schedule, the key LTD ratio ended the half at 136%, down from 144%, leaving the bank well on its way to the end-2013 target of 122.5%.
Impairment charge is broadly in line with our estimate
At €0.94bn, H1 loan impairments are up 12% year-on-year (yoy), albeit below H2's €1.1bn. Irish mortgage (+108%) and L&D (+8%) charges pushed the charge up yoy.
Irish mortgages 90+ days in arrears have risen from 10% (by value) at end-2011 to 12%. This includes buy-to-let, yet is still below the Q1 market average of 13.6% for owner occupiers.
FY PPP estimates are clearly too high
These results are disappointing, highlighting the extreme pressure on pre-provision profits in a very weak environment despite bank action on margins and costs.
We will review our FY2012 forecasts (existing forecast PPP is €450m) after this morning's briefing.