Bank of Ireland (BoI) reported FY 2013 underlying losses before tax of €569m (2012: -€1.5bn), with the result broadly in line with consensus estimates (-€0.6bn). Inclusive of non-core items (pension gains: €274m offset by adverse movements in credit spreads), FY 2013 losses reduced to €525m (2012: -€2.2bn).
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<b>BSA/AQR takes its toll on capital:</b> The CT1 ratio dropped to 12.3% (2012: 14.4%) or 6.3% on a fully-loaded Basel III basis (excluding the Preference Shares) while the total capital ratio decreased to 13.6% (2012: 15.3%). RWAs increased by €5.3bn in H2 to €56.4bn, though further engagement with the CBI is expected on this issue during 2014 (implying additional increases remain a possibility over coming months).
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<b>Further top-line recovery evident:</b> Net Interest income rose by 22% in 2013 to €2.1bn with margin expansion of 59bps to 1.84%, offset by average interest earning asset (AIEA) contraction of 13% to €115bn (year-end IEA declined to €111bn). Government guarantee (ELG) fees fell by 67% to €129m as covered liabilities reduced to €5bn (2012: €28bn). Other income rose by 12% to €652m, while expenses declined by 3% to €1.6bn. Overall, pre-provision profits recovered to €1,065m (2012: €224m) which was above our forecast of €938m.
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<b>Stabilisation in asset quality:</b> Addressing the CBI’s BSA/AQR concerns, the H2 impairment charge rose to €885m (H1 2013: €780m) though the full-year charges decreased by 3% to €1,665m. Defaulted loans (+90days and/or impaired) increased to 18.5% (from 17.7% at June), but declined by €1.2bn in nominal terms over H2 to €17.1bn with the provision stock rising to €8.24bn (equates to total coverage ratio of 48%, up from 44% at H1 2013). Irish mortgage defaulted loans increased to 14.2% (2012: 13.1%).
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<b>Balance sheet reduction continues:</b> Net loans declined by 9% in 2013 to €85bn (below BoI’s “steady state” target of c. €90bn) and deposits decreased by 1%/€1bn to €74bn. The deleveraging helped the loan to deposit ratio improve to 114% (2012: 123%) and wholesale funding to decline to €27bn (Dec 2012: €39bn).
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<b>Outlook:</b> BoI notes that economic conditions continue to improve and is confident in the group’s prospects and ability to deliver sustainable shareholder returns.
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<b>Our view:</b> Post the year-end BSA/AQR hit, we estimate that BoI’s capital buffer has eroded to €2.4bn ahead of the European stress test (above the 8% CT1 base-line threshold). While loan growth continues to disappoint and represents a medium term headwind potentially delaying the return to normalised profitability, margin and asset quality trends remain positive. Following the recent share price appreciation, BoI is trading on forecast 2016 discounted TNAV and P/E ratios of 1.8x and 16x respectively. We see downside risk to this rich equity valuation, but remain overweight the bank’s debt.
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BoI will hold a conference call and webcast at 9.00am – (International +353 1 246 5603, International +44 203 427 1913, code 3031198)<p><h5>Ciaran Callaghan</h5>
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