Banking shares across Europe have lost between a quarter and a third of their value since the start of the year as stock markets appear to signal their deep fears about a looming slowdown in the world economy.
Debts piling up in emerging economies, allied to the sharp falls in the price of oil, has helped weigh on the price of distressed corporate debt.
Activity across the eurozone remains low, as measured by stubbornly low inflation rates, despite the best endeavours of the ECB to pump up asset prices.
Europe’s banks are still working through the fallout of the global and property crash.
Irish bank shares have not been immune, losing in some cases more than their continental counterparts.
The sell-off and market conditions has raised question marks about whether an incoming government can sanction selling a 25% of AIB in an initial public offering, in the autumn, in the absence of a rebound in the shares across European banks.
Bank of Ireland shares are now down 26% and Permanent TSB has slumped even more.
But Merrion Capital yesterday argued that, following Bank of Ireland’s full-year presentation this week, the rout in the lender’s shares has been overdone.
“The recent sell-off in Bank of Ireland shares presents an opportunity to buy into an industry-leading franchise where profitability will start to be driven” by its main business, namely lending money, said equity analyst Darren McKinley.
“Unlike other European banks, Bank of Ireland is not exposed to major risks by regulatory changes or energy-related exposure. Bank of Ireland trades on 0.85 times book value and 9.4 times our forecast 2016 earnings — lowered by 4% due to currency impact.
“We expect 15% earnings growth in 2016 and a reversal in the recent sterling weakness would see earnings revised up again.”
Bank of Ireland plans to expand its loan book this year and is “now sufficiently capitalised” and on course to restart paying dividends next year to reach a payout dividend of 6% in two years, the broker said.
In the UK, Lloyds Bank — whose shares had fallen in this year’s banking sell-off — said it plans to pay out a special £2bn (€2.53bn) dividend, underlining its intent to be the biggest dividend payer among Britain’s banks.
Its shares rose nearly 10% as shareholders were reassured by its ability to boost capital and increase dividends in the face of a sluggish economy and record low interest rates.
Despite weaker-than-expected fourth quarter profits of £1.6bn, Lloyds said it would pay a special dividend of 0.5 pence and an ordinary dividend of 2.25 pence a share.
Lloyds, once a darling of the FTSE index for its payouts to shareholders, offered its first dividend in more than six years last year, under terms of its recovery from a £20.5bn bailout by the British government during the global financial crisis.
It was not all good news for investors, however, with missed cost targets and yet more provisions for its role in Britain’s payment protection insurance mis-selling scandal.