Shares in AIB and BoI hold gains chalked up this year despite interest rate cuts getting closer

The prospect of the ECB cutting interest rates this year ought to have dented the prospect of a significant increase in income for the Irish banks but their shares have risen

AIB shares have risen 21% since the start of the year.

Shares in AIB and Bank of Ireland have held onto significant gains since the start of the year despite interest rate cuts by the European Central Bank drawing closer.   

The ECB strongly signalled this week it will unveil its first rate cut in June after aggressively hiking its deposit rate to 4%, the highest level since the birth of the euro almost 25 years ago. 

Irish banks benefitted last year from huge inflows of net interest income as they tapped more money from the higher costs of loans they charged their customers while paying out relatively less to customers for their deposits. 

All things being equal, the prospect of the ECB cutting interest rates this year ought to have dented the prospect of significant increases in income for the Irish banks but their shares have risen nonetheless. 

Shares in AIB and Bank of Ireland had fallen in the run-up to the ECB meeting in Frankfurt on Thursday, but have still climbed by 21% this year. Recently AIB posted a record profit haul of €2bn for 2023 after the lender tapped the surge in ECB interest rates, as its net interest income soared to over €3.8bn.

Bank of Ireland had posted an underlying profit of €1.9bn before tax for 2023, as its net interest income soared 48%, and PTSB had unveiled an annual profit of €166m, which compared with a €45m profit in 2022. 

PTSB shares have been the exception and have shed 15% of their value this year. Local banking observers have long said that the market clout of AIB and Bank of Ireland has increased substantially since the exit of once fierce rivals, Ulster Bank and KBC Bank from banking in the Republic of Ireland. 

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European shares rose to over a week's high on Friday, with major stock markets turning optimistic about ECB interest rate cuts as soon as June. Government borrowing costs across the eurozone also fell sharply on the prospects for lower official interest rates. The yield on the Irish 10-year bond — which is the implied cost for the State to borrow money from international debt markets — traded lower to 2.77%. That compares with equivalent rates of 2.85% for France and 2.34% for the German government. 

Meanwhile, economists are sticking to their view that inflation in the eurozone will fall to 2% and stay there, an ECB survey showed on Friday, in comforting news as the ECB prepares to cut interest rates. The ECB's latest Survey of Professional Forecasters put inflation at 2.4% this year and 2% in 2025, 2026 and in the longer term — unchanged from the previous round of the poll three months earlier. 

Separately, German inflation eased in March, adding to signs that eurozone price pressures are abating and increasing the pressure on the ECB to start cutting interest rates.