Bank of Ireland Upgrades Full-Year Earnings Forecasts Amid Slow Rate Cuts

The Bank of Ireland has raised its full-year earnings forecasts, adjusting expectations due to the European Central Bank’s (ECB) slower-than-anticipated pace of interest rate cuts and the continued inertia of its own deposit customers in moving their savings into higher-rate accounts. The bank’s updated projections reflect a more optimistic financial outlook for the year.

The bank now anticipates a 2.7 percent decline in net interest income, amounting to €3.55 billion for the year. This revised forecast is based on current interest rates, business momentum, and funding costs. Previously, the bank had expected a steeper decline in net interest income, predicting a fall of up to 6 percent.

The initial forecast was based on the assumption that the ECB would reduce its deposit rate from 4 percent to 2.75 percent throughout 2024. However, financial markets now project that the rate will settle at around 3.25 percent by the end of the year.

Despite the availability of higher interest accounts offering up to 3 percent annual interest, customers have only transferred €1.3 billion of deposits to these accounts during the first half of the year. The majority of deposits remain in on-demand or current accounts, which yield minimal or no interest.

The Bank of Ireland holds €28 billion of surplus cash in the Central Bank, with nearly all of it earning the ECB’s official rate, currently at 3.75 percent.

Additionally, the bank has revised its expectations for bad loan provisions. Thanks to a robust domestic economy, the anticipated bad loans charge for the year is now lower than previously guided. Regulatory charges are also expected to be between €125 million and €130 million, down from the earlier estimate of €160 million to €165 million given in March.

The bank has also improved its projection for return on tangible equity (RoTE), a key profitability metric. It now expects RoTE to reach 17.3 percent for the year, up from the earlier forecast of exceeding 15 percent.

“The group delivered an excellent performance in the first half of 2024, reporting a pretax profit of €1.1 billion, a 5 percent increase,” said CEO Myles O’Grady. “This strong performance, driven by growth in our loan book and wealth assets, higher income, and robust capital generation, supports our upgraded earnings guidance for the year.”

This optimistic outlook has enabled the Bank of Ireland to commence interim dividend payments. Since resuming dividends after the financial crisis in 2018, the bank had only made annual payments. The interim dividend for this period is set at 35 cents per share, totaling €352 million.

Net interest income for the first half of the year rose slightly to €1.83 billion from €1.80 billion in the same period of 2023, a time when the ECB was still raising official rates.

The bank recorded a €49 million impairment charge, which is less than a third of the amount reserved for problem loans a year earlier. Market consensus, according to Goodbody Stockbrokers analyst Dudley Shanley, had expected the bank to set aside €124 million for provisions in the first half.

Rival banks Permanent TSB (PTSB) and Allied Irish Banks (AIB) are scheduled to report their results in the coming days.

This revised outlook from the Bank of Ireland reflects a more stable economic environment and improved financial health. The bank’s ability to adjust its forecasts and perform strongly amid fluctuating economic conditions is a testament to its resilience and strategic management.

In addition to the improved financial forecasts, the Bank of Ireland’s performance highlights the ongoing challenges and opportunities within the banking sector. The reluctance of depositors to move their savings into higher interest accounts, despite the availability of better rates, underscores a broader trend in consumer behavior. This trend has allowed banks to benefit from lower interest payouts while maintaining substantial cash reserves earning higher official rates.

The ECB’s interest rate policies continue to play a crucial role in shaping the financial landscape. The slower-than-expected pace of rate cuts has significant implications for banks’ income and profitability. The Bank of Ireland’s ability to navigate these changes and adjust its strategies accordingly is a key factor in its improved outlook.

Moreover, the bank’s focus on managing bad loan provisions and regulatory charges demonstrates a proactive approach to risk management. The lower-than-expected provisions for bad loans indicate a healthier loan portfolio and a stable economic environment. Similarly, the reduced regulatory charges reflect effective cost management and compliance strategies.

The decision to commence interim dividends is a positive signal to shareholders, reflecting confidence in the bank’s financial stability and future prospects. The interim dividend of 35 cents per share not only provides immediate returns to shareholders but also reinforces the bank’s commitment to shareholder value.

Looking ahead, the Bank of Ireland’s strategic investments in its loan book and wealth assets are likely to continue driving growth. The strong performance in the first half of the year sets a solid foundation for sustained profitability and capital generation. As the bank continues to adapt to the evolving economic environment, its focus on innovation and customer-centric solutions will be crucial in maintaining its competitive edge.

In conclusion, the Bank of Ireland’s upgraded full-year earnings forecasts and improved financial performance reflect a resilient and adaptive approach to a challenging economic landscape. The bank’s strategic management, proactive risk mitigation, and commitment to shareholder value position it well for continued success. As it navigates the complexities of interest rate changes and consumer behavior, the Bank of Ireland remains a key player in the financial sector, poised for growth and stability in the coming years.