UK vote to weigh on outlook for Irish banks

The fallout of the Brexit vote could weigh on all three Irish lenders for some time, a leading broker has said.

Shares in Bank of Ireland, AIB, and Permanent TSB were hit hard as sterling slumped against the euro in the wake of the vote.

The focus has now extended beyond the slumping value of sterling to whether economic conditions in the UK will worsen.

The market continues to try to get a grip on the likely washback on the banks and the economy here from the UK decision to leave the EU.

All three major Irish lenders are due to issue earnings reports next week, and markets will also be watching for what some of the UK’s largest banks have to say about their prospects when they too report their first-half results.

Emer Lang at Davy Stockbrokers said the banks here will be quizzed on what has happened since June 23 and whether any potential hit will be confined to sterling, or whether they expect demand for loans in the UK to slow.

Any withering of loans demand would send out signals about the wider implications for a slowing of the UK economy.

Although clawing back some losses, Bank of Ireland shares have fallen 30% since the referendum, and are now down almost 45% this year.

Permanent TSB shares yesterday rose slightly. 

The shares have, however, dropped 57% this year amid concerns about whether it will be forced to follow the large mortgage cuts announced by rivals.

Thinly traded AIB shares have risen almost 2% since the UK referendum.

Davy reiterated that Bank of Ireland’s plans to resume dividend payments and how it will deal with the Brexit uncertainty will be under the spotlight.

The broker in recent weeks reduced its forecast for the proportion of earnings the bank will likely pay out in dividends and predicts continuing Brexit-driven pressure on its pension deficit “in the near term”.

Bank of Ireland has long said it plans to resume paying dividends based on this year’s earnings. 

It will likely report lower levels of bad-loan costs, while, “given the high degree of uncertainty post Brexit, outlook comments — particularly regarding management’s ambition to re-instate dividends and its strategy for the UK business — will be closely scrutinised and will arguably be the key area of focus on July 29 [results day]”, Davy said in research published yesterday.

AIB, which reports its first-half earnings on July 28, will likely report improvements in its net interest margin and in new lending, while its “UK operations will come under scrutiny following the referendum result, especially given the notable contribution — 30% — to 2015 lending activity”, the broker said.

AIB’s pension deficit could stall capital growth at the bank, it said.

Meanwhile, at Permanent TSB, Davy said its first-half results, on July 27, will show an underlying improvement at the lender.

The effects of the Brexit vote will play a role in future months, with the sale of the CHL loan book in the UK to be delayed to the middle of 2018, the broker predicts.

“The outlook post-Brexit is likely to be a key focus on results day,” said Davy. 

“In particular, Brexit has heightened the uncertainty in relation to the EU-mandated deleveraging — both timing and price — a necessary hurdle on the path to sustainability.”

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