Bank of Ireland will more than triple returns to shareholders for the second successive year, the country's largest lender said today after higher interest rates helped it to nearly double full-year profit.
But its share price tumbled about 11% today as it said its net interest income is expected to ease this year as the ECB is expected to lower rates and it took a larger than expected impairment charge.
The highly concentrated Irish banking sector makes more of its profit through interest revenue than European peers, with lenders enjoying a surge in net interest income since the European Central Bank started increasing rates 18 months ago.
Bank of Ireland's pretax profit rose 92% to €1.9 billion, up from just over €1 billion in 2022, as net interest income jumped 48% on an annual basis to €3.7 billion in 2023.
But it added that 2024 net interest income is expected to ease as the ECB lowers its key rate this year to what Bank of Ireland forecasts will be 2.75% by the end of the year from a record high of 4%.
The bank also said it plans to return €1.15 billion to shareholders.
€634m of these will come through dividends, which equates to a 40% ordinary payout ratio, and the rest through share buybacks.
Bank of Ireland also more than doubled its underlying net credit impairment charge to €403m, which the bank said included adjustments to address potential risks, mainly in commercial real estate.
Speaking on RTÉ's Morning Ireland, chief executive Myles O'Grady said the higher loan impairment provision for 2023 was designed to 'capture known and future risk, particularly in the commercial real estate sector.
"We have a €7.2 billion commercial real estate book. That's about 9% of total loans, and by design, that was reduced by about 12% in the year, so we've taken a very cautious approach to commercial real estate," he explained.
"Part of that [impairment charge] is capturing the potential risk into the future. There is a risk here that possibly commercial real estate prices could fall by 10%. We'll see how that plays out but we've captured that risk."
The bank said its total income rose by 42% on the back of higher interest rates and acquisitions, while its new mortgage lending in Ireland came to €4.9 billion, an increase of 25% on 2022.
Bank of Ireland's loan book increased by €7.7 billion during 2023, including a 23% increase in the Irish loan book on the back of the €8 billion of loans acquired from KBC Bank Ireland in February 2023.
It said a €2 billion increase in net lending in Irish non-property loan books was offset by a €0.1 billion reduction in non-performing loans and a €0.8 billion reduction in its UK retail operations - which was in-line with its strategy.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
It also reported a €1.6 billion reduction in net lending in property and international corporate, which it said reflected "prudent" capital allocation and against an uncertain geopolitical backdrop.
The bank said its asset quality also improved during the year and its NPE ratio reduced 50 basis points year on year to 3.1%.
The lender today reported an 8% increase in customers in 2023, adding that it is seeing ongoing evidence of increased digitalisation with improved customer metrics.
It said that active digital users increased by 18% during the year, while its mobile app customer effort score increased by three points and complaints about its mobile app reduced by 35%.
Myles O'Grady said today's results represented an "excellent start" to the bank's three year strategic cycle, which was underpinned by its differentiated business model, the attractive markets in which it operates, especially Ireland, where the loan book grew by 23% and Wealth assets by 18%.
"We look to the future with continued confidence. While we are mindful of the risks presented by the external environment, the overall outlook for our core markets, and Ireland in particular, remains positive," the CEO said.
"The combination of this positive outlook, the attractions of the markets in which we operate, our differentiated business model and our strategic clarity and focus supports this confidence in our prospects. We remain on track to deliver the financial and non-financial targets set over our FY23-25 strategic cycle," he added.
Analysts at Davy Stockbrokers said the guidance from the bank today implied that its 2024 profit would be below market expectations. The forecast for the bank's 2024 underlying pretax profit is likely to be lowered by 9% as a result, they added.
'Strongly performing year'
Mr O'Grady said all parts of the bank had performed well, supported by the interest rate environment and growth in the Irish loan book of 23%.
The Group CEO told Morning Ireland that the bank had taken a 'balanced approach' to higher rates passing on increases in the region of 1.7% to mortgage customers but, on the other side of the book, that it was now offering rates of up to 3% on deposits.
The bulk of deposits are sitting in accounts that yield negligible interest but he said there had been some momentum towards the higher yielding products towards the end of last year with 'thousands' of customers availing of them.
Mr O'Grady said the bank did not feel the need to make an impairment provision for a UK watchdog review into motor finance commissions which, it is estimated, could cost the bank over £100m.
He said the car finance book represented a relatively small component of the UK balance sheet and makes up €2bn or 2.6% of the entire group's loan book.
In relation to last year's IT outage at the bank which led to queues at ATMs as some people thought they could access cash they did not have in accounts, Mr O'Grady said the bank has invested heavily in its technology for resilience and compliance purposes, but also for a future business model as more customers seek to use digital platforms.
He said the bank's online services are expected to be operational on a 24/7 basis, but in August that did not happen.
Mr O'Grady said the financial impact of the incident in August was not material.
He said the bank made the decision in the interests of the vast majority of customers to ensure customers could withdraw money and he maintains that was the right decision to make, even though it was made knowing a very small cohort of customers might take advantage of it.
But he added that the bank will invest €1 billion into its technology over the next three years.
Regarding the future of branches and cash services, Mr O'Grady said branches continue to be very busy and the footprint is where the bank wants it to be, with further investment in branches planned.
"From my experience of being in branches, it is clear there is a strong demand for cash," he said.
"We have 4 million customers, we need to meet all of their needs," he added.
Sinn Féin calls for bank levy to be increased
Sinn Féin spokesperson on Finance Pearse Doherty said the state carried Bank of Ireland during the "harsh times" but now the profits will be reaped by private individuals, as the Government is no longer a shareholder.
"As we see from Bank of Ireland there is about €1.15 billion going to be paid back to shareholders either through dividends or through a share buyback programme and the state no longer is a shareholder in that bank, so we do not get any of those dividends," he told RTÉ's News at One.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
The opposition party is calling for the bank levy to be increased to €400m.
Mr Doherty said profitable banks are a good thing as they mean additional capital and lending in the economy, but a fair banking system was also important.
He said Bank of Ireland made nearly €2 billion profit last year not due to huge innovation but as a result of ECB interest rates that have been happening since July 2022.
He said that Irish banks were benefiting more than any other European banks in terms of the interest rate hikes.
Mr Doherty said the banks have been "significantly profitable for the last number of years".
In terms of AIB, he said there is a minority shareholding which should be kept.
"Because these banks are profitable and as we can see, they can continue to pay dividends for the Irish state into the future, but having an appropriate levy on the banks at this point in time makes absolute sense," he added.
- Reporting Brian Finn, Will Goodbody, Reuters
