Bank of Ireland shares

Great results today- its pretty clear the pillar banks are completely transformed in terms of their ability to generate RoTE through the cycle.......better for them when rates are higher for sure such that non-bank lenders are out of the equation.....but the dynamic now is that during higher interest rate periods.....BOI and AIB can seed their mortgage book with higher yielding mortgages......and during low interest rate periods they can go toe to toe with the non-bank lenders for mortgage business......their duopoly position makes them somewhat anti-fragile now........they've got great control over their funding costs (deposits) and by extension then they can price the asset side of their business competitively but with a view to a reasonable RoTE through the cycle.

I dont expect BIRG to earn €2.2bn every year.......but I think its reasonable to assume a kind of median RoTE of 15%(as they've guided).....which would work out at about a €1.5bn run rate.....some years, like 2023, above and some years slightly below.......but think they got the toolkit now to smooth out earnings through the cycle if they continue to manage things prudently

Funnily enough the NIM's for BOI haven't really expanded by much........that is yet to come........as loans that were originated during ZIRP on 3yr or 5yr fixed rates begin to roll into new higher variable & fixed rate mortgage products.....obviously new loans have wider NIM's right out the gates.....but the front book is only a small part of the banks wider & much bigger back book...which are loans originated over the last decade and with a big chunk of mortgages fixed by customers in 2020/2021..... so you dont get that REAL NIM uplift happening until next year.....front book growing as proportion of total book.....and 2020 vintages customers rolling out of 3yr fixed deals into the arms of wherever mortgage rates are in 2024

The expansion in net interest income for the bank this year up until now.....is in the main coming from excess deposits that they are getting to park at ECB for 3.75% where they used to get zero or worse.......so net interest income but not technically NIM....as these aren't earning assets.....the deposits from customers are getting shuffled to the ECB not into new loans (or 'earning assets).

The most interesting aspect of BOI right now......is if higher rates persist for way longer than anyone has predicted....say out into 2025/26.......BOI has only had stage 1 in its earnings uplift (NII expansion).....we are yet to see meaningful NIM expansion but if ECB rates stuck around in this territory for much longer.....almost 70% of BOI's current mortgage book would turn over into higher rates......and assuming deposit beta stayed the same.....NIMs would really blow out......it would be wild to see BOI generate €3bn in pre-tax profits in say 2025......when in 2020 the bank could be bought for less than €3bn!

I wonder is it possible for the ECB to reduce deposit rates, while leaving their other rates alone?

It's crazy isn't it? I give 50k to bank of Ireland to deposit, they happily take it from me and in return give me a kick up the arse a derisory 0.05% in interest meanwhile they deposit that 50k with the ECB and get a bit fat 3.75%

Just goes to show, you are far better off buying shares of the bank, than depositing your hard earned loot with them.

Not investment advice.

In the banks defense - when ECB rates were NEGATIVE you gave them 50k….they put it on deposit at the ECB and they lost money doing so…..and with the exception of large corporate depositors….the Irish banks just ate that loss themselves and didn’t pass it on to customers like many European banks did.

The reality of banking is you have lean years and feast years…..over a cycle you want your banks to earn in excess of their cost of capital…..RoTE of ~15% as BOI is guiding too…..is IMO a healthy banking system….you don’t really want a banking system that is living on scraps….and at the first sign of trouble they have to start burning the furniture to stay warm.

Ireland’s economic model is volatile enough without a banking system that in tough times can’t lend through downturns…..we saw what that looked liked in the 2008-2012 period.

The story of BOI’s results right now is that at the margins they are leveraging their duopoly deposit franchise and not passing on interest rates increases to savers…..but in return BOI/AIB have shown a lot of restraint around increasing their new mortgage rates when they quite clearly could…..go look at new mortgage rates in the UK/Europe….Irish mortgage borrowers are enjoying some of the lowest rates in the whole Eurozone…..this is a choice the banks are making….I won’t call it altruistic….but they are deciding to favor their mortgage customers more than their depositors…..and for a country with a housing shortage I think we should be thankful for them doing that….last thing we need is an affordability crisis around the purchase of new homes due to expensive mortgage credit making things completely unaffordable such that builders back away from supplying more.

I think the deposit guarantee schemes have a lot to do with the inertia. The most recent financial crash is not ancient history, and there is always another one somewhere down the road. And as has been stated, if people are happy to stuff the banks to the gills with deposits getting 0.05%, then why should the bankers give them any more. They want to deter more deposit, not attract them.

NIM is the net interest margin on the total banking book and not just on the loan book.

The margin on the loan book will remain more or less constant but the mix of the loan book may change so if selling more mortgages and less corporate loans the margin will change.

As for NIM blowing out you need to remember that the bank will be building up structural interest rate hedges on the deposit book to lock in rates in the event of rates falling in the future so if anything the NIM will more than likely fall in the future. Remember they entered this rate rise cycle with more or less no hedges due to the low interest rate environment being around for so long so were able to take full advantage of rate rises.

The ECB deposit rate is there to set a target/floor for interest rates and its purpose in fighting inflation is not to make banks just park excess liquidity there. The banks need to look at the composition of their deposits and that determines how much is deposited with ECB and how much HQLA (gov bonds) the hold. The ECB raising rates should results in less demand for loans (which is less money creation) and at the same time result in more loans being repaid due to the increased cost (where there is capacity to repay. This is the destruction of money)….net result less money in the economy. (Assuming governments don’t mess it all up with giveaway budgets)

The biggest problem the banks and regulators have at the moment is understanding the behaviour of the deposit book because traditional behavioural analysis is more or less meaningless because the deposit book is more or less all on call and the stickiness of the book is very unpredictable. E.g. it only takes one bank to offer better rates and you could see a large outflow of deposits.

NIM doesn't capture everything...if you deem deposits to part of the 'banking book' which i do.......NIM relates to the margin between earning assets i.e loans and/or debt securities portfolio against the funding cost of the deposits used to make those loans or buy that government paper.......it captures the spread/margin aspect of a bank.....it captures alot but not everything.....and in the case of BOI/AIB specifically it doesnt capture the MARGIN these banks are making on excess deposits that now sit at the ECB.....because they aren't considered earning assets in this instance and for the purposes of a NIM calculation

NII captures the totality of interest being captured......i.e. excess deposits that havent been deployed into earnings assets.

Irish banks have excess deposits vs.loan/securiy book.... that they (wisely) in the past decided not to take interest rate risk with at all by deploying into NIM related 'earning assets'......versus say a First Republic or SVB who when presented with excess deposits and not enough loan opportunities decided to take what turned out to be outrageous interest rate risk by buying low yielding long duration sovereign paper or MBS's with the deposit windfall they were presented with.....over indexing to a particualr rate enviroment.

AIB/BOI had similar deposoit windfall post KBC & Ulster departure......and they had the discipline not to get too cute with the influx.

BOI's NIM has only expanded about 1%.......as its earnings assets.....loans/securties portfolio.......have different vintages many originated in the past.....it will take time for newer higher rate loans to become a larger proportion of the total book........and for the existing book (3yr/5yr mortgages) to roll-off into higher rates.

Your spot on that the roll off of some of these loans wont be as uplifting as they could be......because wisely again......BOI has decided to hedge their loan book

Agree on mechanism of ECB....getting banks to deposit cash at ECB is not the method by which they cool the economy by constricting credit......raising the price of money (interest rates) & by extension the opportunity cost of all incremental activity is the way it gets done

My understanding of NIM was that it was a simple calculation of NII divided by Assets (mainly loans and the liquidity Asset Buffer (LAB). The LAB includes both gov securities, MBS etc and central bank deposits (which are are all earnings assets)

BOI didn’t invest in gov securities or MBS like US regional banks not because they were ‘Wiser’ but because they were required to keep to keep x amount of excess liquidity with the central bank due to the nature/behaviour of the underlying deposits as per the regulations in CRDIV. On top of this the ECB don’t use interest corridors anymore so there is less incentive to place funds elsewhere unlike the USA banking system.

Normally As Assets rollover to higher rates margins shouldn’t increase because the funding cost should also increase and he Margins more or less remain the same. As Irish banks are not paying for deposits (or paying very little to depositors) the underlying funding cost is remaining low and enabling the banks to not pass on all rate hikes on their lending.

This won’t continue forever as depositors will eventually start moving deposits. The big risk is that traditional banks used to rely on behaviour analysis but I fear that this won’t be reliable because a depositors behaviour in a low rate environment is very different to rising rates environment and I would not be one bit surprised if regulators implemented adjustments to the behavioural analysis and LCR calculations.

At the end of the day Irish banks are small and despite lack of competition if the European banks require funding we could easily see deposits move away from Irish banks at a very quick pace.

Have a look at the average balance sheet In the interim statements and it is quite clear that central bank deposits are included in the NIM calculation.

The 34 yards of loan and advances to banks will be 99% placements with central banks.

I assume when you refer to wholesale loan book you are taking about Liquidity assets portfolio (LAP) which will consist of government debt, MBS etc. if that is the case I don’t see a a NIM expansion because nearly all government debt has an inverted yield curve where by rates further out the curve are lower than the short dated debt.

The only way that BOI could have a NIM expansion is if they increase the margin on their loan book which they have scope to do especially in the mortgage market. But that doesn’t look like their strategic goal at present. Their focus is on lending as much as possible even at reduced margins because the returns are better than central bank placements or gov debt. BOI are in a position to do this because they are not paying for deposits.

The analyst concerns and questions are on what happens if they need to pay for deposits and will NIM drop. Because most of the lending is fixed and the fact that they are passing on rates on variable rate lending (tracker and SVR mortgages) the NIM shouldn’t be impacted. If they were selling variable rate mortgages at reduced margin then NIM would be impacted. The analyst main focus will be on customer lending and if for some reason this was to slow down, or the quality of lending decreased in an effort to lend more then share price will fall. At the moment this isn’t an issue but they will be keeping a close eye on it.

In my opinion The UK book is where they have most vulnerability at the moment and once UK banks start reporting lower profits due to increased wage bills, greater defaults etc. Then Irish banks share prices will be dragged down by association.

NIM has already expanded, from 1.73% to 2.96%.

"Italy has approved a one-off 40% tax on profits banks reap from higher interest rates and it plans to use proceeds to help mortgage holders, in a move that sent banking shares plunging.

Sharply higher official interest rates have yielded record profits for banks, as lenders were able to hike the cost of loans while holding off paying more on deposits.

Countries such as Spain and Hungary have already imposed windfall taxes on the sector.

Only for 2023, Italy will tax 40% of banks' net interest margin, a measure of income banks derive from the gap between lending and deposit rates."

Zilch.

nada

nope

zero.

Given that we already have a Bank Levy, and that it is under review at the moment, I don't third a third tax on bank profits will be introduced.