Bank of Ireland may redeem €1.3bn of preferred shares earlier than expected clearing the way for a resumption of higher dividends, according to analysts at Cantor Fitzgerald.
In a note to clients, Cantor Fitzgerald said it had raised its target price for Bank of Ireland shares to 45 cents from 43 cents, on the back of last week’s interim financial results.
The shares closed at 38.8 cents yesterday.
In a revision to the brokerage’s outlook for Bank of Ireland, it’s predicting bigger than expected growth in the Irish lender’s UK loan book as a driver of interest income.
Interest margins will remain under pressure, however, and Cantor Fitzgerald said it previously overestimated the benefits to the bank of recovering house prices.
“Our expectation of large house price driven write-backs across the Irish banks has proved misplaced in view of static house prices in the first half of this year following the Central Bank of Ireland’s introduction of strict loan-to-value limits for mortgage lending,” Cantor Fitzgerald said.
“We had previously looked for a 10pc move in the house price assumption in 2015-16; now we have a more modest 2pc for this year and 3pc next year (with the underlying impairment change a little lighter than we had envisaged), the net increase in our cumulative impairment charge projection comes to €110m).”
More positviely, the firm said a sharp improvement in Bank of Ireland’s capital position is set to continue.
Bank of Ireland has increased its Common Equity Tier 1 ratio – a key measure of the bank’s financial strength – to 11.1pc from 9.3pc at the end of last year.
As a result, Bank of Ireland analysts expect the bank to redeem a €1.3bn slice of expensive preference shares – a form of debt – as soon as January 2016.
The resulting interest savings combined with a declining need to set aside cash will be boost the bank’s ability to pay shareholder dividends.
Those payouts will be larger than previously forecast with a pay-out ratio of 60pc by 2018, Cantor Fitzgerald predicted.
Last week Bank of Ireland reported an 80pc surge in half-year net profits to €624m – well ahead of expectations and company chief executive Richie Boucher made clear his firm was now in growth mode.
The half-year profit compared to €344m a year earlier and came on the back of revenues of €1.76bn.
Profits were driven in part by a sale of government bonds worth €171m, while defaulted loans fell by 27pc.
The bank cut its impairment charges against customer loans from €444m to €168m.
Bank of Ireland has nearly three million customers in the UK through its tie-in with the Post Office there, but Richie Boucher said he felt the firm was well insulated from a potential ‘Brexit’ as that business was effectively a standalone entity and was funded in sterling.
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