It retains its outperform rating on the part state- owned bank and has upgraded pre-provision profit levels by 33% for this year and 37% for 2014.
One of the most encouraging trends in Bank of Ireland’s results for the first six months of the year — which prompted the upgrade in earnings forecasts — was the average net interest margin over that period which was 1.65%, said Davy. This was a considerable improvement on the 1.2% for the same period in 2012.
The net interest margin (NIM) is the difference between what a bank earns on its lending and what it pays out in deposits. The bank is successfully repricing its deposits and increasing the rate on its variable rate mortgages and other lending products. Davy expects the NIM to reach 2% in 2014.
The research note, which was written by analysts Emer Lang and Stephen Lyons, said the process of balance sheet deleveraging is now more or less complete. Total funding has fallen from €135bn at the end of 2010 to €103bn at the end of last June, which was made up of €72bn in deposits and wholesale funding of €31bn. Wholesale funding was €70bn at the end of 2010. Moreover, the reliance on Central Bank funding has reduced from €30bn to €9bn.
In June, the European Commission announced that BoI could keep New Ireland Assurance in return for selling UK assets.
Davy views this as a positive development, “giving the group a solid and predictable earnings stream”.
The bank’s capital position remains sound and well within regulatory requirements.