Bank of Ireland falls as recovery spend rises

By Geoff Percival

Bank of Ireland shares fell 2% as the lender earmarked an additional €500m to spend on improving its business models and IT systems; taking its overall planned ‘transformation’ investment from 2016 to 2021 to €1.4bn.

Unveiling its strategic plan for the next three and a half years, to analysts and investors at its capital markets day in London, the bank’s senior management said it was targeting a significant reduction in costs and lending growth of 20% by the end of the three years.

“Our strategic ambition is clear — to be the national champion bank in Ireland, with UK and selective international diversification,” said chief executive Francesca McDonagh.

“The group is now in a growth phase. We expect to grow our loan book by around 20% by 2021, enabled by the strength of our franchises and a supportive economic backdrop in our main markets. We are also focused on transforming our efficiency. We are targeting a reduction in our cost base to around €1.7bn by 2021, while delivering on our growth ambitions,” she said, expressing confidence in the bank’s ability to execute the plan.

That lending growth is expected to be only modest this year before growing more strongly from 2019 onwards and adding €14bn in value by 2021. Approximately 65% of the planned loan book growth should be generated in Ireland, with the remaining 35% through what the bank called “selective international diversification”. This predominantly refers to the UK, but there will be an element of corporate lending growth further afield; such as via its leveraged acquisition finance unit which has offices in Ireland, the UK, continental Europe and the US.

Half of the bank’s additional €500m investment will go on improving its IT systems. That, in itself, is in addition to €900m put aside two years ago to reform its technology platforms. All in all, between 2016 and 2021, the bank will spend €1.15bn on IT costs alone.

Bank of Ireland said its overall investment will support its loan book growth and increase wealth management and insurance income. It will also help reduce its cost base from €1.9bn to the aforementioned €1.7bn target and enable the bank to reduce its costs every year between now and 2021. Management said it will also support the group in achieving a cost income ratio of around 50% by 2021, compared to one of close to 65% last year.

At the end of February, Bank of Ireland produced flat underlying profits of €1.08bn for 2017, but showed strong lending growth — including a 41% rise in mortgage lending, boosting its share of the homeloan market to 27% — and, as promised, a first annual dividend for a decade.

That equated to 18% of group earnings and will be added to over the coming years until it reaches 50% of earnings.

Speaking yesterday, Ms McDonagh said it was not her belief that the Irish economy was in danger of overheating, citing stricter mortgage lending rules and “real economy demands, not credit-led growth” as her reasoning.

She also said the bank was committed to its UK operations and growing them was in the best interests of shareholders.

The bank will look to invest in profitable business lines in the UK, reposition others — such as its credit card business — and improve others like funding costs and customer acquisition.

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