Slowing house prices to impact bank earnings

Half-term reports due next week from two of Ireland’s diminished roster of lenders — Bank of Ireland and Permanent TSB — will likely reflect something of the two-speed turnaround for the once battered banking sector.

Slowing house prices to impact bank earnings

Analysts say potential writebacks previously chalked up against souring mortgage and business loan assets may not feature strongly in their results.

There may be some noise at how quickly Bank of Ireland — 14% owned by the State — plans to resume paying out dividends, but few analysts expect any significant news on payouts until this time next year.

Investors in Permanent TSB — which is also preparing to release its first-half report for the six months to the end of June — may have to wait to 2017 for any such dividend news.

Analysts now say the costs to the banks in cutting standard variable mortgage rates may be limited after all. As their costs of funding reduce, lenders may likely have paid out less to depositors.

An improving housing market — the pace of house price growth may have slowed for the time being — can significantly boost the amount of losses lenders write back.

Regulators tend to eye writebacks with some suspicion. It will be interesting to see if the Central Bank voices concern if lenders were to resume accounting for writebacks to loan values in the coming months.

The slowing pace in house prices after the Central Bank imposed its new mortgage lending limits may limit the scope for the banks to tap improving home loan books.

A year ago, Bank of Ireland declared that the banking emergency had passed: With employment increasing and unemployment falling, Ireland is experiencing “a classic” economic upturn, chief executive Richie Boucher said at the time.

A year later, Ireland is recording growth rates similar to the virtuous export-driven early Celtic Tiger years, before the banks helped to create an over-inflated bubble economy.

Lenders continue to carry a large number of non-performing home and corporate loans on their books and household debt levels are among the highest in Europe.

Davy Stockbrokers adopts what it calls a conservative model in assessing Bank of Ireland’s potential to write back loan losses.

Analyst Diarmaid Sheridan points out that the CSO Residential Property Price Index was little changed through the first half of this year and there may be little scope for Bank of Ireland to account for writebacks as a result.

It forecasts Bank of Ireland will have earned a pre-tax profit of €386m over the first six months. That compares with a pre-tax profit €399m a year earlier, but only after the bank posted a number of exceptional gains.

Capital levels as measured by the CET1 ratio will have increased to “an adequate” 10% from 9.3%, says Davy.

For Permanent TSB, following the surprising success of its capital raise earlier this year, recovery is still under way.

Davy forecasts the mortgage lender will post a half-year pre-tax loss of €60m, down from the €171m loss a year ago. An elevated capital ratio of 15.7% will reduce as PTSB sells down its UK mortgage loan book.

Eamonn Hughes at Goodbody Stockbrokers sees “flat” house prices in the first half also affecting PTSB’s ability to write back previous loan losses.

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