AIB, Bank of Ireland, and PTSB may yet 'sustain most of outstanding' profit drivers

Credit ratings firm said Irish banks benefitted from the fact their customer deposits had not yet incorporated most of the interest rate hikes, resulting in an average deposit beta rate that is one of the lowest across Europe

AIB, Bank of Ireland, and PTSB passed on the ECB rate increases by charging customers more for their loans, but not necessarily passing on much of the rate increases for customer deposits.

The three main Irish banks could still sustain most of the factors that helped drive profits to record levels in 2023, including benefitting from the exits of Ulster Bank and KBC Bank and paying out relatively little compared with European peers to customers for their deposits, a major credit ratings firm has said.

In their commentary, Morningstar DBRS senior analysts María Jesús Parra and Elisabeth Rudman also said AIB, Bank of Ireland, and PTSB had delivered "outstanding" performances in terms of the profits they made in 2023 and that the lenders have set aside sufficient provisions, despite early signs of deterioration in some loan books.  

The three lenders posted combined net profit of €3.7bn in 2023, up by more than 100% from the previous year, as they increased net interest income after the European Central Bank hiked official interest rates, the analysts said. 

AIB, Bank of Ireland, and PTSB passed on the ECB rate increases by charging customers more for their loans, but not necessarily passing on much of the rate increases for customer deposits, as measured in the banking industry by the so-called deposit beta.

Their interest income "benefitted from the fact that customer deposits — which are the main source of funding for the banks and grew by 2% year-on-year at end-2023 — have not yet incorporated most of the interest rate hikes, resulting in an average deposit beta rate for Irish banks of circa 10%, one of the lowest deposit betas across Europe", the Morningstar commentary said. 

Higher interest rates

The banks benefitted from the higher interest rates and from the exits of Ulster Bank and KBC  from banking in the Republic. 

"Yet, looking into 2024, we expect most of the enhanced profitability seen in 2023 to be sustained on the back of a more normalised interest rate environment after almost a decade of ultra-low and even negative rates, active management of deposit beta, additional growth potential after the consolidation of the retail Irish banking market and the good and resilient prospects for the Irish economy," the analysts said in the commentary. 

The assessment comes as international stock market investors puzzle over whether the three banks can build on the huge gains for their share prices since Ulster Bank and KBC announced their shock plans to withdraw from the local market in 2021. 

Their departure effectively removed once fierce rivals that competed on price for loans and deposits with AIB, Bank of Ireland, and PTSB.  

The shares of the three banks have been more mixed, after unveiling their 2023 results in recent weeks. AIB shares have climbed 15% in the past month to value the lender at €12bn; Bank of Ireland shares have risen 8% to value the bank at around €9.4bn; while PTSB shares have tumbled 19% in the same period for a stock market capitalisation of €731m. 

AIB had posted a record annual net profit haul of €2bn for 2023 after the lender tapped the surge in ECB interest rates that has driven income, and faces little significant competition to pay out to attract deposits; Bank of Ireland posted a record profits haul of €1.9bn before tax; and PTSB unveiled an underlying annual profit of €166m.