Bank of Ireland shares

Timing belt

https://www.boards.ie/discussion/comment/121871412#Comment_121871412

Is that taking into account the increased capital that is required on account of higher RWA’s or are you just looking at the p&l hit off the NPL increases? Reason for asking is it’s the increase in RWA’s due to customers falling behind in repayments and the subsequent increase in capital that will restrict ability to pay dividend as opposed to any P&l hit.

it really doesn’t take a lot for the ability to pay a dividend to be wiped in a recession. And just for clarity I’m not talking about needing to raise new capital. By default if the bank is limited in making a dividend payment then share price tanks.

bankboucy

Both - listen it’s dynamic lots of variables here - but don’t forget the counter cyclical capital buffers either…..but you know the probabilities for the stock aren’t dictated by that….its that Irish sovereign remains robust to support consumers if/when distress appears, it’s that the loan book is written to low LTV’s, it’s that housing remain scarce and hugely cash flow generative to 50% ltv holders. The only dark spot I can think of is inability of asset holder to take control of assets in the Irish market i.e. repossessions…..for this to matter at scale your talking about GFC level problems again….household balance sheets and corporate balance sheets are ok…in reality the only balance sheets that look shaky this time around are sovereigns. Ireland being the best worst boy in the class on this front

bankboucy

Pzena Investment Mgmt - a very large value investing shop in NYC has added BIRG to its 2024 best ideas.

Podcast outline below - BIRG @ 15min timestamp

https://podcasts.apple.com/us/podcast/pzenas-best-ideas-2024/id1495884960?i=1000648791020

Lots of same points I’ve raised here - market consolidation, generous provisioning for loan losses, excess CET1’s and on going RoE strength with organic capital generation which should allow for on current share price about a 12-15% annual shareholders dividend yield moving forward (via dividends and buybacks)

Kerl

Hi everybody. Just joined.

@bankboucy - Thanks for posting the podcast. Pretty positive about BOI.

Was wondering about the dividend going forward. I have seen some posters expecting a 30 cent interim. As I understand, this would imply a total div of 90 cent. Are we really expecting a 50% increase. Would be great if that were to transpire.

bankboucy

https://www.boards.ie/discussion/comment/121889694#Comment_121889694

So this year is a bit of a transition year - your getting 60c as dividend against organic capital generation in 2023 that is being paid in 2024.....so one should think of the 60c as being the 2023 dividend.

This year is unusual in that they are beginning what looks like an interim dividend....interim as being related to the current fiscal year.......this is making fiscal 2024 dividends returns as in the NTM (60c (2023) + 30c est. 2024 interim) that combine to 90c which will be unusually large total dividend payout

Note - I'm being lazy on the interim dividend and calling it 30c (50% of 2023's 60c).......most likely is that the interim is smaller....perhaps 20c p/s.

On a go forward basis....on a purley dividend basis I think Davy has it about right when you consider the impact of buybacks on s/o

2025 dividend will be ~67c p/s...rising to 78p/s in 2026 (according to Davy)......my bet is BIRG doesn't get to buyback shares at these levels for that long......so I think a 2025 dividend per share of 73c p/s is more reasonable.

Assuming that 73c p/s dividend in 2025 is about right......you'll be looking at 8.1% dividend yield on a €8.85 current stock price.......which is less than half the total shareholder return story here....cause they are forecast to spend about €600m plus per annum on buybacks....bringing total shareholder return (TSR) to exactly what Pzena talks about which is into the mid-teens.........this all assumes a static share price at current levels.......but the reaity is that if all this is true and earnings/RoTE sustainable.....the current share price will not stay down at those levels.

As I've said before and above - BIRG to make the above RoTE, dividend, buyback & TSR make sense on a look through basis......BIRG needs to trade at 1.3 TBV......if/when it does on a look through basis a purchaser of a share of bank of ireland should expect a 10% return on THEIR equity....i.e. the price they've paid for the stock....on the same type of math this would take BIRG to being a dividend stock with about a 4% yield.

Now all of the above 'math' is predicated on one dangerous assumption.....that BIRG through the cycle averages a RoTE of 15%.....some years higher like recently....some years lower like during a recession when NPL's and loan losses spike RoTE drops off a cliff....but averaged out during bueno times and no bueno times 15%......if that turn out to be true BIRG remains deeply attractive at these levels. Let's see - I dont have a crystal ball....but the odds are in your favour when you start at share price at these levels....and investing to a certain extent is about putting the odds in your favor over multiple situations such that averaged across those situations you have expected positive returns....I fully expect to be wrong on occasion (welcome to adult life) but BIRG has one of the better positive expected outcomes just given what I've outlined above.

littlevillage

Does this move from GS signal that there might be value in the Irish market?

https://m.independent.ie/business/irish/investment-bank-goldman-sachs-takes-an-almost-6pc-stake-in-ptsb/a1286031205.html

Kerl

https://www.boards.ie/discussion/comment/121890179#Comment_121890179

Bank, thanks for your response which was quite detailed. I can't say that I grasped everything that you wrote but enough, I think, to understand where you were going.

Perhaps I did not make it clear in my post that I was not looking at the div declared for '23 rather the interim and final dividends for this financial year. With your clarification I think we are on the same page. Anyway, a lot can happen for better or worse in the months ahead.

bankboucy

Yeah we're saying the same thing - final dividends for this financial year (2024).....won't be paid until Q1 2025.......the interim is just that....an early payment on excess capital generated/profits made in 2024.

In this calendar year - you are looking at the final (and only) dividend associated with fiscal 2023......60c per share....and then they've indicated this is the first year since 2008 where they will pay an interim dividend or put another way an intra-year dividend.

This is why the BIRG holder of record today will collect an unusually large amount of dividends in the next ~9 months.....with a normal cadence of interim and final dividends being paid moving forward starting in 2025.

Timing belt

Let’s not forget that excess capital doesn’t necessarily have to be paid out as a dividend and at some point in time BOI will need to upgrade its old systems to remain competitive and you’ll be talking about big money (wouldn’t be surprised to see a 1bn price tag). They have invested little in the past 15 years as didn’t have the cash so have a lot to do in my opinion.

personally I think taking over a fintech and using that front end over existing systems might be a good strategy if they can integrate it.

if done right it would support share price.

Question is with such little competition how long can they keep going with Freddy flintsone set up before customers move to a better service offering.

bankboucy

https://www.boards.ie/discussion/comment/121895436#Comment_121895436

Bank of Ireland upgrading its core legacy IT systems and lifting and shifting them to a new modern microservices infrastructure core has already occured. They've moved their whole internal stack to Temenos UniversalSuite - effectively an IT operating system for a bank. Price tag ~€2bn over the last 3-5yrs.

This was one of the tent pole projects of the McDonagh CEO era.....with all the big ticket costs now in the past.....as BIRG customer it might not feel like it as the front end is still so poor.....but if you look at BIRG operating expenses over the last few years you can see that the €2bn spend has allowed for significant cost reductions in the first instance and more recently impressive cost controls (relative to inflationary wage pressures).

https://www.temenos.com/news/2016/10/03/bank-of-ireland-selects-temenos-universalsuite/

https://www.businessinsider.com/bank-of-ireland-project-omega-over-budget-2019-3

So all this BIG IT spend is behind BIRG - and what remains IMO are the dividends of ripping out the core system......broadly speaking in IT projects it's very difficult and somewhat pointless to put liptstick on a pig.....i.e. make a nice frontend that interfaces with a terrible backend.....BIRG's backend core systems are ready for a better front end now. Let's hope that changes soon - but as I've said the benefit in their operating expenses since moving to Temenos is clear....expense reduction has been impressive.

Short version - BIRG has no large capital or internal projects that might soak up excess capital on the horizon....it is IMO, as I've said, returning to what a duopoly bank in highly consolidated market should be....which is a dependable dividend payer in good times and bad times....BIRG now has the capital base, IT infrastructure & risk/compliance and loan book in place to be just that.

Timing belt

https://www.boards.ie/discussion/comment/121897878#Comment_121897878

Well they never updated front end…..it’s like something that was built when people only had dial up.

bankboucy

https://www.boards.ie/discussion/comment/121898439#Comment_121898439

Agree - but from an investor standpoint - the important thing is that the large technological debt the bank had built up in the 2000's has been rectified and the group is sitting, on the backend anyway, a modern fit for purpose infrastructure stack.

By choosing Temenos, effectively a European bank operating system.....the hope would also be that BIRG will in the future effectively get to piggyback on Temenos R&D (which in effect is a pooled R&D team from the many many banks that use Temenos as their vendor).

Let's hope BIRG's CTO picked the right horse here in terms of the most important vendor to put the bank sitting on.....and in that respect this might be a risk to shareholder returns moving forward if he didn't.

Timing belt

https://www.boards.ie/discussion/comment/121898825#Comment_121898825

Having a relatively new back end helps massively but if they do upgrade front end then you’re still talking large capital expenditure. As said previously would not be one bit surprised to hear that they bought some fintech company and integrate it into back end banking engine…would probably be cheaper than building their own. Either way they will need to write the cheque at some stage.

bankboucy

Maybe Im mistaken @Timing belt (given my limited knowledge of tech stacks its possible)......but building a pretty frontend with a slick modern UX/UI as a technology project is much smaller ticket item than ripping out a core compliance/crm/accounting system........so you know what we are talking about here is building an improved iOS/Android app/WebApp......which if the backend is modernized and standardized....is not IMO a €2bn project like the Project Omega/Temenos deployment was.

I mean how much could it reasonably cost to hire some Revolut-esque hotshots to build three apps........€50-100m?

Such a project with that expense profile would therefore not be material for the share price for a bank producing say €1.5bn of PBT annually.

Timing belt

https://www.boards.ie/discussion/comment/121899316#Comment_121899316

Yes I understand what is involved but it’s nowhere near as simple as you make it out…..it’s not just a flashy front end where the work is…..it’s the integration and all the testing where the real work is.

Having a single system in the backend definitely makes it easier if you can route into this and it then flows through to all other systems but I highly suspect that this will not be the case unless system architects totally nailed it and didn’t compromise to meet deadlines and budgets.

if it was as simple as you say and not expensive then they would have already implemented it when replacing back end and that way only one lot of regression testing would only be needed among many other savings.

bankboucy

@Timing belt so what would you estimate would be the sticker price at the very very high end to deliver a new iOS/Android/WebApp experience?....I mean throw everything at it and assume the worst.

Timing belt

https://www.boards.ie/discussion/comment/121899771#Comment_121899771

It all depends on complexity and amount of regression testing required, how many short cuts were previously taken.

im sure you could get a after school coding club to build or go high end all bells and whistles this is why asking for a price tag is the same as asking How long is a piece of string. (Go for worst case how long is the string?)

The point all along is that you could have capital expenditure rather a dividend payment. (And before you reply with your extreme bullish ‘to the moon’ view yes it can be a good thing if done right but we do know they need investment and it’s not as simple or as cheap because if it was it would already be done.).

bankboucy

🤣 Bank of Ireland is never going to the moon 🫣 I'll leave that to the astronauts 👩🏻‍🚀 15% annualized return over say the next three years will work very well for me...majority of which is made up of forecastable & relatively predictable dividend distributions (~10%) and the remaining 5% made up of share price appreciation driven by buybacks/NII per share growth (5% of s/o shrinking p/a)......the upside is that in that same period one might get a re-rating of multiples or P/TBV that the marginal buyer is happy to pay....the ceiling on this is a 1.3 P/TBV IMO....will be interesting to watch