Economic & Bond Outlook - Ireland - Risks Dominate in Post Brexit World - Cantor Fitzgerald Ireland
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Ireland
- Risks Dominate in
Post Brexit World
Economic &
Bond Outlook
May 2018
MiFID II: Research
Under MiFID II any investment firm providing execution services must unbundle Research costs
from Execution costs.
• The provision of research falls under the category of a MIFID II service and material that is
deemed as research must be paid for by the client.
• Materials classifieds as minor non-monetary benefits can be received by clients free of charge.
Materials classified as Minor Non Monetary Benefits under MiFID II
• Brief non-substantive summaries of research reports
• Market Commentary /market colour on industry news (with no
substantive analysis)
• Macro-Economic and FICC research that is made publicly available
to whoever requests it.
• Research paid by the issuer (including IPOs) made available to
investment firms or the public
• This presentation is macro-economic focused and is available to the public on the Cantor
Fitzgerald Ireland website.
2
Brexit is Number 1 External Risk
• The impact of Brexit on Ireland will be large due to significant amount of Anglo-Irish trade.
• This is based on huge historic crossover of cultural, legal, and linguistic practices, inter
connected financial sector, close geographic/travel links, same time zone etc.
• Progress to phase 2 of Brexit negotiations does not alter the likelihood of a ‘hard Brexit’.
Although the British response does appear to be softening, Europe will ultimately determine the
hard/soft Brexit issue.
• Ireland will negotiate as part of the EU but will be pushing for an orderly withdrawal
incorporating a free trade deal and a transitional arrangement bridging the gap between a
withdrawal agreement and a future relationship agreement.
• Although surprised by the initial strength of the British economy we assume significant
deterioration of confidence in UK and risk of capital flight as economic and political uncertainty
impact on investment and business/consumer sentiment.
• Decisive action by the Bank of England responsible for the UK’s resilience.
3Brexit – Social Impact, The Irish Border, Phase 1
• Irish issues were one of three critical areas that needed to be dealt with in Brexit talks, before
the EU and the UK could proceed to Phase 2 of negotiations.
• The Good Friday Agreement in all its parts is protected. Everyone born in Northern Ireland will
continue to have the right to Irish and therefore EU citizenship.
• The Common Travel Area will continue allowing people to travel freely between Britain and
Ireland.
• British and Irish citizens will continue to have the freedom to live, work, study, access housing,
healthcare, pensions and welfare in each other’s countries as though citizens of both.
• Phase 2 of Brexit negotiations to include issues such as trade and the new political and
economic relationship between the UK and the EU.
• There will continue to be a distinct strand on Ireland in phase two of these negotiations.
4Brexit – Social Impact, The Irish Border, Phase 2
• The UK’s determination to leave the single market and the customs union seems difficult to
reconcile with its promise to avoid a hard border in Ireland. The commitments entered into by
the UK on the Border now will need to be translated into workable, practical solutions in the
second phase of the negotiations.
• The UK Government's Has Proposed 2 Customs Options
A 'highly streamlined' customs arrangement - This would minimise customs checks rather
than getting rid of them altogether, by using new technologies and things like trusted
trader schemes, which could allow companies to pay duties in bulk every few months
rather than every time their goods cross a border.
A customs partnership - This would remove the need for new customs checks at the
border. The UK would collect tariffs set by the EU customs union on goods coming into the
UK on behalf of the EU. If those goods didn't leave the UK and UK tariffs on them were
lower, companies could then claim back the difference.
• A border could be avoided either through
A “close” future trade relationship between the U.K. and EU.
Northern Irish rules remaining aligned with the Republic of Ireland if all other options fail.
5Brexit – Economic Impact, Trade Risks
• 20% of Ireland’s services exports (no 1 destination) and 14% of goods exports go to UK (2nd
most important destination).
• Of the highest Manufacturing goods subsets,
Chemicals and related products (57% of total goods exports)
Machinery and transport equipment (15% of total goods exports)
Only 7% and 16% go the UK, respectively.
• At the same time, Ireland imports 25% of its goods from the UK.
• The level of exports to the UK and NI has historically lagged the movement in the currency.
However, exports to the UK rose in 2017 despite Irish exports being more expensive.
Irish Goods Exports to GB+NI vs. GBP-EUR
1,700 1.55
1,600 1.50
1.45
1,500
1.40
1,400 1.35
1,300 1.30
€m
1,200 1.25
1,100 1.20
1.15
1,000
1.10
900 1.05
800 1.00
Exports to GB+NI (value) GBP- EUR
Source: CSO
6Brexit – Low Margin Sectors Affected by Currency
• Ireland wants as close a trading relationship between the UK and the EU as possible after
Brexit.
• EUR/GBP strengthening erodes Irish exporters’ competitiveness. Risks have been well flagged,
and some experience in handling GBP volatility/weakness during 2007-2009 crisis, but will still
be problematic.
• Agri-food trade is a relatively small share of Ireland’s total trade (estimated at 9%). However,
40% of agri-food exports go to the UK. Importantly, Irish agri-food exports to the UK represent
about one third of Ireland’s total merchandise exports to the UK.
• Agri-food exports to the UK are primarily in the form of beef, dairy products and processed
foods.
• SMEs particularly vulnerable due to lower margins and higher labour intensity.
• Irish retail sector is heavily dependant on UK names. Disruption to the supply chain is a major
risk for retailers.
• 40% of Irish tourists visit from the UK but only account for 23% of tourist spend.
7Brexit – WTO
• The most negative outcome for Ireland would result if the UK and EU27 failed to
negotiate the terms of the UK’s exit. At that point, as World Trade Organisation (WTO)
members, the EU27 and UK, would only be obligated to offer each other Most Favoured
Nation (MFN) status.
• This would result in the imposition of MFN tariffs on trade between the UK and the EU27
and would be expected to lead to a reduction in the level of trade between the UK and
the EU27.
• Trade under WTO rules mean that some of the most important elements of current
bilateral trade in agri-food products between Ireland and the UK would face taxes of
25%-50%.
• Ireland’s beef, dairy and lamb exports would be affected. Denmark’s pig and dairy trade
and the Netherlands’ exports of vegetable products would be affected. In Southern
Europe, exports of wine from France, Spain and Italy would be affected, as would exports
of olive oil from Greece
8Brexit – Potential Benefits
• Potential FDI benefits for Ireland obvious, particularly in financial services. Significant
infrastructure constraints in Ireland in short term (housing, offices) need to be addressed.
However, the commercial property ‘pipeline’ is strong.
• Need to demonstrate ‘substance’. Key management and key positions need to be located in
Dublin.
• The Irish Government is targeting the creation of 10,000-15,000 jobs in financial services.
• More than a quarter of the 222 UK financial services firms monitored by the EY Brexit Tracker
have announced that they are moving some staff or part of their operations out of the UK.
• Dublin is the top destination of the leading financial services companies that have already made
statements on where they plan to set up their post-Brexit EU bases.
19 companies have indicated a preference for Dublin, mainly insurers
18 companies have indicated a preference for Frankfurt, mainly investment banks
11 companies have indicated a preference for Luxembourg, mainly wealth managers
• H1 2018 seen as a crucial period for announcements.
9Brexit – Potential Benefits
BREXIT
10Brexit - Impact on Ireland
• A reduction in national wealth, GDP to be 3.5% smaller after five years and 4% smaller after 10
year than it would have been without Brexit.
• The Department of Finance estimates that a hard Brexit could cost up to 35,000 jobs.
• NTMA estimates 1% appreciation of the euro decreases Irish goods exports to UK by 0.5%.
Historically, a 1% reduction in UK GDP has caused a 0.3% reduction in Irish GDP. Combined,
these suggest near term risks to Irish GDP growth of the order of 2-3%.
• 30% decline in exports to the UK, while total exports will be 4% smaller.
• Exports of meat to the UK will be subject to a 50% tariff, dairy and eggs a 25% tariff, and
processed meat would attract a 35% tariff.
• To counter this threat, the Department of Jobs, Enterprise and Innovation and IDA Ireland need
to attract new entrants to the retail sector from other EU countries.
• UK has historically acted as an Irish unemployment safety valve in times of an Irish recession.
11Trump Tax Reform
• A key pillar of Irish economic policy has been using a low tax, business friendly climate
and suitable workforce to lure US multinationals to provide employment and tax revenue
for the State.
• The Obama administration closed tax inversion loopholes. US drugmaker Pfizer and
Ireland based Allergan walked away from $160 billion merger in 2016.
• Trump Tax reform included a cut in corporation tax from 35% to 21%. Companies are
required to pay a one-time tax, at a reduced rate of 15.5%, on foreign-held earnings
whether they intend to bring them back to the US or not.
• The policies threaten a slowdown in the flow of FDI in future but that is based on the
assumption that ‘tax’ is the sole reason for US FDI. Access to the single market should
ensure that the majority of the incumbent companies remain in Ireland.
• Two types of FDI. ‘Brass plate’ and infrastructurally committed.
12European Tax Harmonisation
• EU leaders have resumed political pressure on Ireland to soften its’ opposition to
corporate tax harmonisation.
• Europe wants tax to be levied where wealth is created and not where notional corporate
headquarters are located.
• Ireland retains a ‘veto’ and it opposes plans to harmonise corporate tax, fearing it could
lower the amount of tax collected and potentially threaten inward investment.
• Ireland is supported by 4 other member states, resisting tax change.
• Ireland is compliant with BEPS (base erosion and profit sharing) which is looking at how
and where tax should be paid.
• The European Commission is proposing two approaches to “digital tax”
A long-term attempt to get agreement that digital tax should be levied where the
value added or profit is created and not at companies’ physical headquarters.
In the interim it is proposing a 3% levy on specific aspects of internet companies’
activities.
13European Tax Harmonisation
• Corporate income tax receipts, while buoyant, are concentrated in a few multinationals
and thus vulnerable to shocks,
• In 2017, Corporation Tax collected amounted to €7.7 billion out of a total collected
receipts of €50.8 billion. The European average for corporation tax as a percentage of
revenue is 8%.
Total Tax Sector
45.0% 40.0% 40.0%
40.0%
35.0%
26.4%
30.0% 25.9%
25.0%
15.2%
20.0% 15.4%
15.0%
10.0%
5.0% 2.5% 2.6% 2.5% 2.6%
0.0%
Income tax VAT Corporation Excise duty Stamp duty
tax
Total Tax Sector % 2016 Total Tax Sector % 2017
Source: Department of Finance
14Tariffs - Protectionism
• Broader concerns surround the possibility of a tit-for-tat trade war between the US and
the rest of the world. Indeed, a long term retrenchment of globalisation could adversely
affect a small open flexible economy like Ireland.
• There are about 8 different export categories in which the EU has a trade surplus with the
US, that could potentially be targeted.
• Pharma accounts for over 50% of Irish goods exports. It is unlikely that pharmaceuticals
will face a tariff threat. Almost all countries in the developed world have signed up to a
‘zero-for-zero’ approach to tariffs in pharma.
• The Irish alcohol sector appears to be most at risk. Irish spirits exports to the US have
experienced huge growth over the last number of years. Although small when compared
to pharma, the Irish spirits industry employs 1,500 people.
• Global economic slowdown:
Ireland’s economic model relies heavily on exports nurtured by government
agencies and built around foreign direct investment from the US.
A geared play on global growth – performs exceptionally well when global growth is
on an upward trajectory, but is at greater risk when global growth slows.
15Outperformance vs. Fiscal Targets
• Deficit now fully under control and well below the Euro area 2017 average of -1.5%. In 2017 the
deficit-to-GDP ratio was -0.3%.
• The pace of deficit reduction has slowed the and the fiscal stance is broadly neutral in 2018 and
2019.
• Fiscal loosening in 2018 still leaves an official deficit/GDP projection of -0.2%. The 2018 Budget
plans allow for a gradual pace of debt reduction; moderate increases in current expenditure; and
a ramping up of public investment to rates that are among the highest in the EU, while also
complying with the requirements of the fiscal rules.
• The 2018 primary balance is expected to be 1.5%.
General Government Defict % GDP
5.0%
0.3% 0.8%
0.0%
-0.3%-0.2%-0.1%
-5.0% -1.9%-0.7%
-4.1%
-10.0% -7.3% -7.2%
-9.5%-8.2%
-15.0%
-14.0%
-20.0%
-25.0%
-30.0%
-35.0% -30.9%
Source: DoF
16New Fiscal Rules Under Preventative Arm
• Ireland has exited the corrective arm of the Excessive Deficit Procedure (“EDP”)
and entered the preventive arm of the Stability Growth Pact (“SGP”).
• Creation of a “Rainy Day” fund starting in 2019, estimated at €500 million per year.
• In Q1 2018, tax receipts were up 3.6% on the same period in 2017.
2017 2018F 2019F 2020F 2021F
€ bn € bn € bn € bn € bn
General Government Revenue 76.3 79.3 82.6 85.4 88.9
General Government Expenditure 77.2 80.1 83.0 84.5 87.5
General Government Balance -0.9 -0.8 -0.4 0.9 1.5
General Government Balance (% of GDP) -0.3% -0.3% -0.1% 0.3% 0.4%
General Government Primary Balance (% of GDP) 1.5% 1.5% 1.5% 1.7% 1.8%
Structural Budget Balance (% of GDP) -0.4% -0.9% -0.4% 0.1% 0.3%
General Government Debt (% of GDP) 68.0% 66.0% 63.5% 60.2% 58.7%
Net Government Debt (% of GDP) 58.9% 56.5% 54.7% 53.3% 51.6%
Source: DoF, Cantor Fitzgerald Ireland Research forecasts
17Debt Reduction Faster than SGP Requirement
• At end-2017 Ireland’s general government debt was 68% well below the euro area average of
92%. The debt ratio is expected to decline over the forecast horizon due to favourable debt
dynamics. Aided by a primary surplus forecast of 1.5% of GDP in 2018, year end debt is
expected to be 66% of GDP.
• However, the State sold almost 30% of its’ stake in AIB, raising €3.4bn which will be used to pay
down debt.
• In view of the evident distortion to the GDP figures (the denominator effect), it is inappropriate to
place too much reliance on the debt to GDP metric.
• With strong growth rates forecast and low effective interest rates on government debt, this
should facilitate a steady pace of debt reduction from ratios.
Debt-to-GDP Forecasts
140%
120%
100%
80%
60%
40%
20%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F
Cantor Including Bank Asset Sales DoF
Source: DoF, Cantor Fitzgerald Ireland Research forecasts
18Contingent Liability Turns Contingent Asset
• AIB
• Largest of the state’s banking assets
• Owns 71% of equity
• Repaid almost €10bn to state so far - €3.2bn in fees, coupons, dividends and levies,
€1.7bn through partial redemption of preference shares in December 2015, €1.6bn in
redemption of contingent convertible notes in July 2016
• The Government sold a 29% equity stake sale in June 2017 . The total proceeds from the
IPO were €3.4 bn
• Market Cap estimated to be close to €13bn, Government on course to recoup its full €20.5
bn investment.
• BKIR
• Repaid c.€6bn to state (vs. €4.8bn invested)
• State continues to hold 14% of equity but unlikely to be target for early divestment
• PTSB
• 75% state-owned following recent capital raise where government sold 4.8% of enlarged
share capital to ensure stock market listing
• Returned €0.5bn to state in 2015 (additional €400m from CoCo redemption)
19NTMA: Funding
• The NTMA plans to issue between €14 billion and €18 billion of bonds in 2018.
• In 2018 the funding needs include
€9 billion for the Irish 4.5% 2018s,
€2 billion for the Exchequer Borrowing Requirement (remember Ireland is very close
to a balanced budget and is running a primary surplus),
Cash for buybacks of long dated FRNs (the schedule is at the Central Bank of
Ireland's discretion and not the NTMAs),
Starting to prefund the € 13.5 billion of maturities in 2019.
• The NTMA issued a new €4 billion Irish benchmark 10 year in January 2018 at 0.94% and
a new €4 billion Irish 15 year benchmark in April 2018 at 1.32%
• Annual cash holdings of around €10 billion are anticipated going forward.
2018F 2019F 2020F 2021F
€ bn € bn € bn € bn
Exchequer Borrowing Requirement 1.5 2.4 2.0 0.8
Long Term debt (Irish and External) -10.0 -15.3 -19.4 -3.5
Total Funding Requirement -8.5 -12.9 -17.4 -2.7
Change in Exchequer Deposits 2.5 -0.3 -5.0 2.2
Source: Department of Finance , Cantor Fitzgerald estimates
20NTMA: Programme Funding
• Ireland repaid early the IMF and some bilateral loans.
Programme loans Outstanding Rate Weighted Average Maturity
EFSM €22.5bn 2.7% (Fixed based on EFSM CoF) 8.63*
EFSF €18.4bn 2.24% (Pooled Rate based on EFSF CoF) 17.60
UK €3.9bn 1.85% (Fixed based on UK CoF) 4.20
Proposed for Early Repayment
Sweden €0.6bn 1.00% (3 mth Euribor + margin 1%) 4.60
Denmark €0.4bn 1.00% (3 mth Euribor + margin 1%) 4.60
IMF SDR3.8bn (€4.5bn) 1.6% (Variable SDR +Margin 1%) 6.00
Source: www.Oireachtas.ie
*EFSM loans are subject to a seven-year extension. It is not expected that Ireland will have to refinance any of its EFSM loans before 2027. However, the revised maturity dates of individual
EFSM loans will only be determined as they approach their original maturity dates.
• In 2013 the NTMA issued €25.034 billion nominal of Floating Rate Bonds, with original
maturities ranging from 25 to 40 years, which were exchanged for the Promissory Notes
held by the Central Bank of Ireland (CBI), on foot of the Irish Bank Resolution
Corporation Liquidation.
• The Central Bank are well ahead of the minimum repayment schedule as imposed by the
ECB.
21NTMA Funding Outlook
• The nominal value outstanding of Irish government bonds is €118.39 billion
• Within the next 3 years, €44.85 billion of external debt will mature. The weighted average
maturity of Irish debt is 10.2 years which compares very favourably to the Euro Area average
weighted maturity of 7 years.
• The weighted average cost fixed coupon for Irish debt is 3.15%.
• The NTMA has taken advantage of favourable market conditions to reduce the 2019/2020
refinancing requirements.
Irish Maturity Profile
25,000
20,000
15,000
10,000
5,000
0
Source: NTMA Irish Government Bonds Inflation Linked Bilaterals EFSM EFSF
22ECB Sequencing
• Less ECB accommodation imminent, most likely in the form of forward guidance and not
action.
• In October 2017, the ECB announced bond purchase tapering.
• Our base case is that QE concludes in September 2018.
• ECB doesn’t have to hike the deposit rate but has room for maybe 15bps if it wants to
narrow the corridor in early 2019. This can’t happen until after purchases have stopped.
• First Refinance rate hike in H2 2019.
• Euro Area economic recovery still strong although the risk is that the pace of the recovery
peaked in Q4 2017. Inflationary dynamics continue to be insufficiently broad-based and
durable, leaving the central bank overall to sound dovish rhetoric despite a slow and
gradual move towards normalisation.
23PSPP, Head-Room Issue Eliminated
• ECB currently owns €27.099 billion (by market value) of Irish government debt under PSPP,
along with substantial other holdings via SMP, FRNs and ANFA holdings.
• Ireland had previously run into PSPP purchasing issuer limit problems and the ECB were forced
to start the Irish taper in January 2017.
• The ECB purchased €1.248 billion of Irish in Q1 2018 versus €1.669 billion in Q1 2017, a drop
of 25.2%.
• The headroom issue has largely been eliminated due to the decrease in purchase amounts and
new issuance. Ireland in a lower total APP environment is now benefiting from increased
purchases relative to peers.
• Purchases have averaged at €454 million per month since the ECB decreased total QE to €30
billion per month.
• Ireland has accounted for 2% of PSSP purchases so far in 2018, versus a capital key ratio of
1.16 and an adjusted capital key ratio 1.65.
• Irish PSPP has focused on newer issues as some bonds are thought to be close to 33% issue
limit.
24PSPP Irish Purchases Higher than Capital Key
Purchases Cumulative Monthly Apr 2018 as Total Country Capital Adjusted Apr 2018
Apr 2018 €bn Total €bn Ave €bn % Mthly Ave % PSPP to date Key % Capital Key % as a % of Total
Austria 631 54,277 1428 44% 2.69 1.96 2.78 2.67
Belgium 801 68,450 1801 44% 3.39 2.48 3.52 3.39
Cyprus 0 213 6 0% 0.01 0.15 0.21 0.00
Germany 4718 478,702 12597 37% 23.72 18.00 25.57 19.97
Estonia 0 66 2 0% 0.00 0.19 0.27 0.00
Spain 3103 241,601 6358 49% 11.97 8.84 12.56 13.13
Finland 542 30,561 804 67% 1.51 1.26 1.79 2.29
France 4565 392,525 10330 44% 19.45 14.18 20.14 19.32
Ireland 567 27,099 713 80% 1.34 1.16 1.65 2.40
Italy 3971 341,179 8978 44% 16.90 12.31 17.49 16.80
Lithuania 42 2820 74 57% 0.14 0.41 0.58 0.18
Luxembourg 40 2504 66 61% 0.12 0.20 0.28 0.17
Latvia 29 1813 48 61% 0.09 0.28 0.40 0.12
Malta 4 1074 28 14% 0.05 0.06 0.09 0.02
Netherlands 1290 107,314 2824 46% 5.32 4.00 5.68 5.46
Portugal 623 33098 871 72% 1.64 1.74 2.47 2.64
Slovenia 127 7366 194 66% 0.36 0.35 0.50 0.54
Slovakia 170 11418 300 57% 0.57 0.77 1.09 0.72
Supranationals 2407 216,271 5691 42% 10.72 n/a n/a 10.19
Total 23631 2018235 53114.5 44% 100.01 68.34 97.09 100.00
21,224
Source: ECB, Cantor Fitzgerald estimates
25ECB Impact on Irish Market Hasn’t Diluted
• ECB Irish nominal purchases were 29% lower in 2017 compared to 2016.
• Total volume of the Irish market in 2017 to be 26% lower compared to 2016.
• ECB percentage of the Irish market only dropped from 12.79% to 12.28% in 2017.
• To assess the impact of tapering, the decrease in total market activity needs to be considered.
• In Q1 2018, ECB Irish volume decreased by 25% while total Irish traded volumes increased by
11.4%.
ECB Purchas es Projected ECB
2016 Purchas es 2017
January 782 547
February 803 557
March 808 565
April 1,078 522
May 1,112 516
June 1,085 518
July 986 599
Augus t 697 499
September 982 577
October 1,022 1022
November 979 1171
December 648 691
Total ECB Purchas es in 2016 10,982 ECB Purchas es 2017 7784
Estimated nominal ECB purchas es 2016 9984 Estimated nominal ECB purchas es 2017 7076
Decreas e in ECB Nominal Purchas es in 2017 2907
Nominal 2016 ECB Purchas es Doubled Counted 19967 ECB Purchas es 2017 Double Counted 14153
*Nominal Volume of Iris h Market in 2016 156112 Volume in Iris h Market 2017 115247
% of 2016 Iris h Volume Attributed to ECB € 12.79% % of 2017 Iris h Volume Attributed to ECB (E) 12.28%
*ISE Volumes
Source: ISE, Cantor Fitzgerald estimates, ECB
26Irish Sovereign Volumes
• Q1 2018 traded IRISH volumes were up 11% in YoY terms, reversing the contracting trend that
had been in place since 2015.
• 2017 average daily volume was 472 million versus an average daily volume in Q1 2018 of 716
million.
2018 Irish Sovereign Bond Monthly Turnover
Jan : +29% 35,000
Feb: -15% 30,000
Mar: +31% 25,000
Apr: -13% 20,000
15,000
2017
10,000
May: -31%
5,000
Jun: -42%
-
Jul: -13% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Aug: - 25% 2013 2014 2015 2016 2017 2018
Sep: -33%
Oct: -8% Source: ISE
Nov: -46%
Dec: -25%
27Credit Ratings
• Moody’s finally in line with both S&P and Fitch after September 2017 upgrade.
• DBRS previously upgraded Ireland in March, raising it to A (high) with a stable
outlook.
• S&P rates Ireland A+ (stable) and Fitch A (stable).
• Brexit referendum is the primary negative risk on the horizon, but agencies seem
relatively relaxed about it’s impact.
Rating Agency Long-term Short-term Outlook Last Change
Standard & Poor's A+ A-1 Stable Jun-15
Fitch A F1+ Stable Feb-16
Moody's A2 P-1 Stable Sep-17
DBRS A (high) R-1 (middle) Stable Mar-16
Source: S&P, Fitch, Moody’s, DBRS
28GDP Growth – 2015 Statistical Re-classification
• Massive distortions make GDP/GNP poor indicator of economic performance. In 2015 GDP was
revised higher from 7.8% to a massive 26.3%. 2014 GDP was revised higher from 5.2% to
8.5%.
• Ireland has been a beneficiary of the OECB BEPS, as companies move money away from
traditional tax havens to low tax shelters such as Ireland.
• 50% of the world’s leased commercial aircraft is managed in Ireland.
• Companies re-locating intellectual property to Ireland (on-shore) materially increased the size of
the ‘balance sheet’ of the Irish economy as measured by standard International National
Accounting practices. Apple appears to have moved part of its intellectual property to Ireland.
• Contract Manufacturing is assumed to be a major contributor to the overstatement of export
levels. This is process where Irish exporters engage overseas third-parties abroad to
manufacture products on their behalf, which are recorded in full as Irish exports.
• Previously, contract manufacturing did not significantly impact GDP since the companies
involved ultimately sent royalties back to its parent with this being offset as a royalty import.
However, following the relocation of some parent companies to Ireland, GDP inflated by the
absence of a negative in the form of the Import.
29Apple Responsible for 25% of Ireland’s Growth - IMF
• In a special feature on smartphones and global trade in its’ April 2018 World Economic
Outlook, the IMF estimates that Ireland along with Korea and Taiwan to be the main
beneficiaries of the new tech cycle in value added terms.
• In Ireland, where the intellectual property of Apple Inc. resides, the IMF estimate the
contribution in value added terms of iPhone exports account for 25% of the country’s
economic expansion in 2017.
• Overall, the Irish economy expanded by about 7.8% in 2017, which means that iPhone
sales would have accounted for a quarter of that, or about 2% of overall growth.
• Risks to headline Irish GDP could now not only include Apple relocating away from
Ireland but also a high beta play on Apple’s ability to remain the dominant player in the
smart phone market.
30GDP/GNP Poor Indicators of Economic Performance
• The reclassification was most visible in Q1/15.
Private Consumption Growth % QoQ
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
• Alternative measures of the real underlying growth of the Irish economy
2017 Q1 2018
GDP 7.8% NA
GNP 6.6% NA
GNI* NA NA
Modified Domestic Demand 3.9% NA
Income Tax 4.4% 5.7%
Vat 7.1% 2.4%
Employment 3.1% 0.0%
Source: CSO, DoF
31Modified Gross National Income (GNI*)
• A new supplementary indicator to account for the large multi-national presence in Ireland.
GDP
Minus Net Factor Income from Abroad
GNP
Minus Domestic Income Tax paid EU
Plus Domestic Subsidies received from EU
GNI
Minus Retained Earnings of redomicled firms
Minus Depriciation of foreign owned IP
Minus Depriciation of aircraft owned by leasing companies
Modified GNI
• If a foreign-owned firm relocates its head office to Ireland, its profits are retained until that entity
is disbanded in future or it pays a dividend to a related company. This adds to Ireland’s GNI but
not to the income of its households. The IP assets that MNEs have moved into Ireland will not
boost the living standards of domestic residents. To offset this, the CSO will outline an estimate
of annual depreciation against those intangible assets.
• A key question, is whether GNI* will be optimal for judging debt sustainability? For the bond
market, we believe that GDP is still superior: in theory Ireland can tax all of GDP if it wishes. But
for living standards – the political economy - and for financial stability (e.g. scaling of credit
growth) GNI* will become the most reliable guide.
322017 Growth
• Preliminary Irish GDP results for 2017 showed an increase of 7.8% in 2017.
• GNP increased by 6.6% in the year.
• CSO noted that its indicator for modified domestic demand (strips out the impact of
aircraft leasing and intellectual property imports) which rose by 3.9%, was probably
a more accurate gauge of economic activity.
• Looking at the components on the Expenditure side,
Personal consumption rose by a marginally disappointing 1.9% in 2017.
Government expenditure increased 1.8%.
Capital investment showed a decrease of 22.3% in 2017 in a partial take back
of the outsized gains in 2016 (61.2%).
Overall, Total Domestic Demand decreased by 7.9% in 2017 compared with
2016.
Exports of Goods and Services grew by 6.9% in 2017
Imports of Goods and Services decreased by 6.2%. Net exports rose by a
massive 65.2% during 2017.
33Growth Remains Strong
• Irish growth continues to surprise to the up-side.
2015 2016 2017 2018F 2019F
GDP 25.6% 5.1% 7.8% 4.6% 3.6%
GNP 16.4% 9.6% 6.6% 4.2% 3.6%
Personal Consumption 4.2% 3.3% 1.9% 2.0% 1.8%
Investment 27.9% 61.2% -22.3% 8.0% 6.0%
Government spending -0.8% 5.3% 1.8% 1.9% 2.0%
Private domestic demand 8.5% 23.5% -7.9% 2.6% 3.3%
Exports 38.4% 4.6% 6.9% 5.0% 4.0%
Imports 26.0% 16.4% -6.2% 4.5% 4.0%
GDP Deflator 9.1% 0.0% -0.3% 1.0% 1.0%
Unemployment (end of year) 8.9% 7.3% 6.3% 5.5% 5.2%
Consumer price index -0.3% 0.0% 0.3% 0.9% 1.5%
Property price index 8.3% 7.4% 11.4% 11.0% 7.0%
Housing completions 12666 14932 19271 24089 30111
Source: CSO, DoE, Cantor Fitzgerald Ireland Research forecasts
• Cantor Fitzgerald Ireland remain conservative on Irish growth.
GDP Projections 2018 2019
Cantor Fitzgerald Ireland 4.6% 3.6%
Department of Finance 5.6% 4.0%
Central Bank 4.8% 4.2%
ESRI 4.8% 3.9%
European Commission 4.4% 3.1%
IMF 4.5% 4.0%
Source: CSO, DoE, Cantor Fitzgerald Ireland Research forecasts
34Consumer Demand Driving Economy
• Personal Consumer Spending was relatively subdued last year, increasing by just 1.9%.
• This was a surprise considering the key drivers such as employment and consumer confidence.
• The main source of weakness was in consumption of services which decreased by 0.1%.
• Goods consumption increased by 4.9% in 2018, although car sales were weaker.
• The savings ratio increased to 8.6%.
Private Consumption Growth % QoQ
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
Source: CSO
35PMI Data – Rebounding After Initial Brexit Impact
• High frequency leading indicators remained strong into the start of 2018, indicating that the Irish
recovery continues to be broad based.
• Services PMI index above the 50 level that separates expansion since September 2013
• Manufacturing PMI dipped following Brexit but rebounded in Q4/16.
• Consumer confidence remains elevated although latest readings show a continuing see-saw
pattern of improving confidence in one month being followed by a weakening the next month.
Irish Sectoral PMI Indices Consumer Confidence Index
75 120
70 110
65
100
60
90
55
50 80
45 70
40 60
35
50
40
Manufacturing Services Construction
Source: Bloomberg, Markit Source: ESRI/KBC
36Consumer Spending Broadening
• Discretionary spending returns: cars, furniture and electrical goods.
• Headline retail sales now above the October 2007 peak. YoY retail sales growth 3.3% in H1
2017.
• Year on Year new private car license have slowed as replacement cycle matures. The weaker
sterling has encouraged a spike in imported second hand cars.
Retail Sales Seasonally-Adjusted Volumes New Private Car Licences, 12M Rolling Sum
140 190,000
130 170,000
150,000
120
130,000
110
110,000
100
90,000
90
70,000
80
50,000
Total Ex-motor
Source: CSO Source: CSO
37Labour Market – Heading Towards Full Employment
• Irish unemployment at 5.9% (monthly unemployment) is the lowest since 2008. Labour force is
increasing and is above 2 million.
• Unemployment has decreased for 20 consecutive quarters on an annual basis.
• With domestic GDP data often distorted by the influence of the large multinational sector, the
quarterly employment data is seen by many as one of the most reliable gauges of activity in the
Irish economy. There was an annual increase in employment of 3.1% in the 2018.
• Employment is approaching peak levels in many sectors excluding retail and construction.
• Unemployment is expected to be around 5.5% by the end of 2018 with employment growing by
2.5%. Irish Unemployment vs. Eurozone
16%
14%
12%
10%
8%
6%
4%
2%
0%
Ire Euro
Source: CSO
38Investment Buoyant but Volatile
• Investment fell by 23% in 2017, mainly due to a significant decline in aircraft purchases and the
low level of investment in intangible assets. The volatility in intangibles and aircraft make
forecasting very difficult.
• Core machinery and Capital Spending fell by 12% in 2017. Building and Construction increased
by 16.5%, with both sub components residential (increased 16.5%) and commercial property
(increased 19%). Construction sector beginning a multi-year period of expansion. Underlying
investment increased
• R&D, machinery/equipment and commercial property investment all critically dependent on
MNCs. Ireland specialises in technology, digital media, business services and pharmaceuticals.
Concentration risk in the tech sector is a potential risk. Indigenous SME sector rebounding too
with hospitality/retail recovering strongly.
Investment Growth % QoQ
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Source: CSO
39Housing Shortages: Key Risk to Growth
• The gap between current demand and supply is narrowing. Housing completions increased from
14.9k in 2016 to 19.2k in 2017 (data set based on electricity connections and may be
unreliable). Q1 2018 data indicates that completes are up 26% on the same period in 2017.
Housebuilding activity in Ireland is “substantially below” what official data suggests.
• 2019 forecasts completions to be close to 25k. There are still too many one-off houses being
built rather than multi-unit developments in supply-starved urban areas.
• Housing is a key part of the new programme for government.
Double output to about 25,000 units per year
Establish a €200 million fund to put infrastructure into lands zoned for housing
Planning reforms will enable larger housing applications go straight to An Bord Pleanála
National House Completions
100000
80000
60000
40000
20000
0
Source: Department of the Environment; Cantor Fitzgerald Ireland estimates
40House Prices vs. Rents
• Residential property price increases have regained momentum after levelling at single-digit
annual growth for almost two years up to mid 2017. Property prices are increasing nationally at
double-digit rates (11.4% in 2017) and rents have surpassed their pre-crisis levels (+6.4% in
2017). Property prices are expected to grow by 10% in 2018 (Q1 2018, + 12.9%).
• From the trough in early 2013, prices nationally have increased by 75%. Dublin residential
property prices have increased 90.8% from their February 2012 low, whilst residential property
prices in the Rest of Ireland are 67% higher than the trough, which was in May 2013
• A shortage in housing supply, the relaxation of mortgage lending rules for first-time buyers, and
growing demand from those borrowers who stand to benefit from the State’s new help-to-buy
scheme.
Irish Residential Property Prices Irish Private Rents
140 130
130
120
120
110
110
100
90 100
80
70 90
60
80
50
40
70
National Index Dublin Index Ex-Dublin National Index Dublin Index Ex-Dublin
Source: CSO Source: RTB
41Mortgage Market
• The mortgage market is finally improving. Value of the mortgage market increased from €5.7
billion in 2016 to €7.3 billion in 2017.
• Relaxed central bank mortgage rules have increased first time buyer levels but lending rates still
somewhat high vs. Eurozone comparisons.
• In Q1 2018, mortgage drawdown activity increased in volume terms by 13.5% year-on-year and
increased in value terms by 22.4% Anticipate that the value of the mortgage market will hit €9.5
billion in 2018.
• Domestic bank loan books turned positive inQ1 2018
Mortgage Drawdowns Number of Mortgage Approvals
12,000 2,500
5000
10,000 4500
2,000
4000
8,000 3500
1,500
3000
6,000
1,000
2500
4,000 2000
500 1500
2,000 1000
0 0 500
0
Draw Downs Number of Loans Number of Mortgage Approvals
Drawdowns Value of Loans, EUR Mill
Source: Banking and Payment Federation
Source: Banking and Payment Federation
42Mortgage Market – Macro Prudential
• The Central Bank introduced rules in February 2015 to limit the amount of money lenders
can give out to mortgage borrowers. The mortgage measures are aimed at enhancing the
resilience of both borrowers and the banking sector.
• The measures set limits on size of mortgages that consumers can borrow through the
use of loan to value (LTV) and loan to Income (LTI) limits. These macro prudential rules
have been reviewed annually since inception.
• Under the existing measures First Time Buyers and Second and Subsequent Buyers
mortgages are capped at 3.5 times income.
• Banks or other credit institutions can issue loans for primary dwelling homes
20% of the value of new mortgage lending to FTBs can be above the LTI cap.
10% of the value of new mortgage lending to SSBs can be above the LTI cap.
• Banks or other credit institutions can issue loans for primary dwelling homes
90% of the Loan to Value for FTBs. However, 5% of new lending to FTBs allowed
above 90%.
80% of the Loan to Value for Non- FTBs. However, 20% of non-FTB new lending
allowed above 80%.
43Export Sector
• Ireland turned a large pre-crash current account deficit into a sizeable surplus.
• Fluctuations in exports mainly due to contract manufacturing. Exports were up 6.9% in 2017 far
exceeding global growth.
• Pharma accounts for 56% of goods exports, can be affected by currency movements as priced
in USD.
• Exports of Food (+12.5%), Meat (+7%) and dairy (+36%)
• Imports fell sharply in 2017, (-6.2%). Not reflective of the current point in Ireland’s economic cycle.
Merchandise Goods Exports and Imports
15,000
12,000
13,000
10,000 11,000
8,000 9,000
€m
€m
6,000 7,000
5,000
4,000
3,000
2,000 1,000
0 -1,000
Trade Surplus (Exports minus Imports) Total Imports Total Exports
Source: CSO
44Services Exports
• Services exports have become critical to Ireland in the last 15 years, accounting for 47%
of exports.
• Services exports increased strongly (+12.8%) lead by computer services exports.
• Other services which includes business services and tourism has also grown strongly.
• Ireland’s exports are concentrated in a small number of products in certain sectors.
• Ireland is one of the most concentrated EU countries with the top 10 goods export
products accounting for 45% of all goods exports.
• Export risks include
Multinational companies relocating
Idiosyncratic sector risk
Brexit
45Household Debt Burdens Improving
• Household debt deceasing but elevated at €140.5bn, the lowest level since late 2005. Since its
peak of €204.2bn in Q3 2008, household debt has decreased by 31.2 per cent, or €63.8bn.
• Though the pace of debt decline has slowed, the ratio of household debt to disposable income
has fallen by 67% since its peak of 213.9% in Q2 2009, reflecting both the decline in household
debt, as well as, strong growth in annualised disposable income.
• Debt as a proportion of disposable income fell is now 136.9 per cent. Still elevated by EU norms
– only Denmark, the Netherlands and Sweden have higher debt burdens.
• Interest burden on households suppressed by tracker mortgages – we estimate that just under
7% of household income goes on debt servicing compared with a peak of 13% in 2008.
Irish Household Debt and Debt Sustainability
220,000 220
200,000
180,000 200
160,000
140,000 180
120,000
€m
%
160
100,000
80,000 140
60,000
40,000 120
20,000
0 100
Household Debt, €bn % of Disposable Income
Source: CBoI
46Mortgage Arrears
• Principal dwelling house (“PDH”) mortgage arrears (>90 days) peaked in Sep 2013 at 99k or
12.9% of all mortgage accounts; this had reduced to below 50k or 6.6% of accounts by
December 2017. Although the pace of decline is slowing there has been 19 consecutive
quarters of decline. Long-term arrears (>720 days) account for 88% of the total value arrears,
but finally declined in Q3 2015.
• 87% of restructured accounts are deemed to be meeting the terms of their current restructure
arrangement, split mortgages, arrears capitalisation and term extension are the preferred
solutions.
• BTL arrears (>90 days) peaked in June 2014 at 32k or 22.1% of all mortgage accounts; this had
reduced to 18.2k or 15% of accounts by December 2017
PDH Mortgage Arrears , No. of Accounts BTL Mortgage Arrears No. of Accounts
35,000 25%
120,000 14%
30,000
100,000 12% 20%
10% 25,000
80,000
20,000
15%
8%
60,000
6% 15,000
10%
40,000
4% 10,000
20,000 2% 5%
5,000
0 0%
0 0%
> 90 day arrears % of mortgage accounts
Number of accounts, >90 day arrears % of loan accounts
Source: CBoI
47Inflation Still Benign
• Irish inflation has consistently undershot the ECB’s 2% target for 5.5 years. In 2017, Irish
inflation was just 0.3% versus the Eurozone (1.5%)
• The appreciation of the EUR versus GBP has dampened inflation. Potential to have less impact
in 2018, although some further GBP weakness is expected.
• Prices of goods (-2.1%), prices of services (+2.1%)
• Household spending on retail goods only accounts for 40% of total spend versus 60% in the mid
1990s. Mainly due to increased spending on services and non discretionary spending.
• Some upside pressures in pipeline – wages increased 1.7% in 2017
Irish HICP vs. Eurozone HICP
4%
3%
2%
1%
0%
-1%
-2%
-3%
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Series6 Eurozone Target
Source: CSO, Eurostat
48Political Risk
• February 26th 2016 General Election Result:
Dáil
2011 2016
Fine Gael 68 50
Labour Party 33 7
Fianna Fáil 21 44
Sinn Féin 14 23
Renua 3 0
Social Democrats 3 3
Socialist Party 2 0
Anti-Austerity/People Before Profit Alliance 2 6
Green Party 0 2
Independents 19 23
Source: RTÉ
• Fine Gael now lead minority government in coalition with group of independent TDs and
informal support agreement with Fianna Fáil, who will abstain on agreed votes.
• FG/FF/Independent agreement is scheduled to last two and a half years (October 2018).
• Election expected in late 2018 or early 2019.
• Recent surge by FG in opinion polls increases the risk of a snap general election.
49Bad Apple
• The European Commission has ordered that Ireland recoups back taxes from Apple of
approximately €13 billion. In the simplest of terms due to the belief that Apple recorded sales in
Ireland rather than in the countries where the products were sold due to the advantageous tax
rate.
• The Commission found that selective treatment allowed the US multinational to pay a tax rate of
1% on EU profits in 2003, down to 0.005% in 2014
• Both Apple and Ireland are to appeal the decision to the European courts, a process that is
likely to take up to four years. In the interim, Apple will be obliged to pay the tax shortfall to the
Irish exchequer.
• It is important to note that
No fine or penalty has been levied against the Irish State.
This decision has no effect on the 12.5% of corporation tax and is not about Ireland’s
wider corporation tax regime.
No other companies are subject to this decision
The Irish government is stressing that these kind of ‘stateless’, non-resident companies
that were investigated by the Commission have since been phased-out by the Irish
government which means that the Apple judgment is unlikely to impact on Apple’s future
tax arrangements in Ireland.
50Bad Apple
• Although the verdict is to be appealed, there is significant reputational damage for Ireland
with potential negative implications for future foreign direct investment. We would
anticipate that projects that are already in the pipeline will remain unaffected but future
targets may be compromised.
• The first tranche of the tax bill will be paid into an escrow account in May 2018. A series
of unspecified payments are to follow with the full amount expected to be recovered by
the end of September (when interest is added the final figure could reach €15 billion).
Amundi, Blackrock Investment and Goldman Sachs has been selected to manage the
money.
• Apple has changed its tax structure since the commission’s ruling but remains a big
investor in Ireland with large amounts of intellectual capital held in the country.
51Irish Banking Sector
• Consolidated market: Market Share - Mortgages
Pre-crash 12 banks in Irish market
3%
10%
AIB
Now 2 large players (AIB and BKIR), 3 medium players 30%
BKIR
14% PTSB
(PTSB, Ulster Bank and KBC) and a number of niche Ulster
players KBC
Big 2 account for c.80% of new lending 13%
Other
Pricing power 30%
Market Share - SME
• Asset quality is improving due to:
0% 6%
Positive macro environment 18%
AIB
BKIR
Sharp step-up in restructuring activity 38%
PTSB
1% Ulster
KBC
• Scope for sizeable impairment provisions write-backs in Other
coming years.
37%
Market Share - Deposits
• Growth will be supported by stronger employment and
9%
investment rather than credit. AIB
28%
BKIR
12% PTSB
• Elevated private debt leaves companies and households Ulster
vulnerable to higher interest rates. Other
12%
34%
Source: Company data
52Irish Bank Overview
Comparison of Irish Bank 2017 results.
Comparison of 2017 results BOI AIB
Profit Before Tax (€'m) 852 1,306
Net Interest Margin 2.29% 2.58%
Impaired Loans (€'m) 4,000 6,300
Impaired Loans reduction in the period (€'m) -2200 -2,800
Non-Performing Exposures (NPEs) 6,500 10,200
Impaired Loans as % of Gross Loans 5.20% 10.00%
Provision coverage Ratio 49% 47%
Transitional CET1 Ratio 15.80% 20.80%
Fully Loaded CET1 Ratio 13.80% 17.50%
Dividend Payout Ratio 18.00% 33%
Cost Income Ratio 62% 48%
Retail Ireland 5,300 3,200
Corporate 3,600 4,600
UK 5,200 1,600
New Lending (€'m) 14,100 9,400
Market share of Irish Mortgage 28% 33%
Gross Loans (€'m) 78,500 63,300
Provisions (€'m) 2,400 3,300
Net Loans(€'m) 76,100 60,000
Customer Deposits (€'m) 75,900 64,600
Net Loan to Deposit Ratio 100% 93%
Risk Weighted Assets (RWAs) 44,800 51,823
Average Interest Earnings Assets (€'m) 97,200 84,400
SREP Minimum capital requirements 8.90% 9.50%
Source: Company data Pension Deficit (deficit)/ surplus (€'m) -480
53Bank of Ireland (Baa1/BBB/BBB-)
• The strongest of the Irish banks through the crisis, avoided full state ownership, has
issued right across the credit curve, diverse revenue stream with 40% of loan book
in UK. However, post Brexit with the headwinds of rising EUR/GBP, this has been a
negative.
• Largest lender to the Irish economy.
2013 2014 2015 2016 2017
Net interest income after ELG €m 2,133 2,321 2,444 2,278 2,248
Other income €m 642 653 828 848 801
Total income €m 2,646 2,974 3,272 3,126 3,049
Operating expenses incl. bank levy €m -1,581 -1,673 -1,821 -1,850 -1,888
Core Banking Platform Investment -41 -111
Pre-provision profits €m 1,065 1,301 1,451 1,235 1,050
Impairment charge €m -1,665 -472 -296 -178 -15
Reversal of charge on AFS assets €m 70 0 -2 0
Associates €m 31 92 46 41 43
Underlying profit/loss €m -564 921 1,201 1,096 1,078
Exceptionals €m 44 -1 31 -63 -226
PBT from continuing operations €m -520 920 1,232 1,033 852
NIM % 1.84% 2.11% 2.19% 2.19% 2.29%
Net loans €bn 84.5 82.1 85.0 78.0 76.1
Defaulted loans €bn 17.1 14.3 10.6 6.9 2.5
Total capital ratio transitional 11.3% 15.8% 18.0% 18.5% 20.20%
CET1 fully-loaded % 7.7% 9.3% 11.3% 12.3% 13.80%
Loan to deposit ratio 114.0% 110.0% 106.0% 104.0% 100%
TNAV per share 5.73 6.48 7.23 7.41 7.52
Source: Company data
54Bank of Ireland - NIM
• 2017 FY NIM at 2.29% up from 2.20% in 2016. Although NIM increased 9bps in 2017, it was
down from the half year figure 2.32% and 2.38% in Q4. This was mainly driven by actions taken
by management to address some technical and structural issues (mainly related to MREL, TRIM
and IFRS9).
• Management guidance on NIM was somewhat lacking with expectations that 2018 NIM will be
modestly lower than 2017, broadly in line with a 2017 exit NIM of 2.24%.
• Further upside dependent on loan growth. Average interest earning assets reduced to €98.2bn
in 2017 from €99.4bn in 2016 primarily due to the FX translation impact, which will continue in
2018. Net-interest income decreased from €2.3bn in 2016 to €2.25bn in 2017
Average Interest Earning Assets and Net Interest Margin €bn
2.50% 200
180
2.00% 160
140
1.50% 120
100
1.00% 80
60
0.50% 40
20
0.00% 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F
AIEA NIM (incl. ELG)
Source: Company data
55Bank of Ireland - Costs
• Operating expenses increased in 2017 to €2bn from €1.9bn in 2016. Staff costs rose by 2.5%.
Management guided that operating expenses are to reduce in 2018.
• The implementation of the multi year core banking investment programme seen as a critical
enabler to achieving a cost income ratio target less than 50% in the in the medium term by
providing a structural reduction in costs from 2019 onwards.
• The programme is expected to have a CET1 ratio impact of c. 35-45bps per annum over the
next 4 years.
• Launched to new customers in H2 2018
Operating expenses 2015 2016 2017 2018F
Staff 736 742 752 767
Pension 158 135 148 151
Other 852 870 889 899
Levis and Regulatory 75 109 99 87
Core Banking Investment 41 111
Operating expenses 1,821 1,897 1,999 1,904
Cost/income ratio 53% 57% 59% 51.0%
Cost/income ratio Ex Core Banking Platform 53% 56% 62% 59%
Source: Company data
56Bank of Ireland – Underlying Loan Inflection Point
• Net loans in 2017 decreased by €2.4 bn to €76.1bn from €78.5bn a year previously, primarily
due to the FX translation impact on EUR-GBP (€1.5bn). Small decreases in Residential
Mortgages, SME &Corporate, Property & Construction while Consumer lending increased.
• New lending in 2017 of €14.1bn in 2017, an increase of 11% on a constant currency basis
compared to 2017
• Redemptions of €13.8bn were broadly in line with 2016
• Management expects loan book to grow in 2018, assuming no adverse move in the currency
Share of the Irish mortgage market in 2017 is 27% (2016; 25%)
Expect to re-enter the ROI brokerage market in 2018
Corporate Ireland new lending increased by 13% in 2017
Retail UK new lending at risk on UK economy stagnation
120 Loan Book €bn
100.2
100 92.6 95.0 93.0 91.8 93.4
90.6
86.9 89.5 88.0
85.0 83.4 85.3 85.0 84.0 86.0
82.1 82.0 80.0 78.0 76.1 78.0
80
60
40
20
0
H2/12 H1/13 H2/13 H1/14 H2/14 H1/15 H2/15 H1/16 H2/16 2017 2018F
Gross Net
Source: Company data, Cantor Fitzgerald Ireland Research
forecasts
57Bank of Ireland – Loan Book Better Quality than Peers
Non Performing Exposures decreased from €9.4bn (11.4% of net loan book) in 2016 to €6.5bn in
2017 (8.4% of net loan book). Substantial reduction from peak (-42%), but large stock of NPEs still
leaves BKIR vulnerable to stress test type scenario modelling.
Non
Performing Impairment
Exposures Provisions
Loans and Receivables December 2017 Book €Bn % of Book €Bn % €Bn Coverage %
Mortgages 46.7 59% 3.1 6.6% 0.7 23%
ROI 24.1 31% 2.7 11.2% 0.6 22%
UK 22.6 29% 0.4 1.8% 0.1 25%
Non-property SME and corporate 18.7 24% 1.7 9.1% 0.9 53%
ROI 8.2 10% 1.3 15.9% 0.6 46%
UK 1.7 2% 0.1 5.9% 0.1 100%
Corporate banking (ROI&UK) 8.8 11% 0.3 3.4% 0.2 67%
Property and construction 8.8 11% 1.7 19.3% 0.7 41%
Investment property 8.3 11% 1.5 18.1% 0.6 40%
Land and development 0.5 1% 0.2 40.0% 0.1 50%
Consumer 4.3 5% 0.1 2.3% 0.1 100%
Loans and advances to customers 78.5 100.0% 6.6 8.4% 2.4 36%
Impairment
Defaulted Provisions
Loans and Receivables December 2013 Book €bn % of Book loans €m % €bn Coverage %
Mortgages 51.6 56% 4.4 8.5% 2.0 45%
ROI 26.7 29% 3.8 14.2% 1.8 47%
UK 24.9 27% 0.6 2.4% 0.1 22%
Non-property SME and corporate 21.5 23% 3.9 18.1% 1.9 49%
Property and construction 16.8 18% 8.6 51.2% 4.1 48%
Consumer 2.8 3% 0.2 7.1% 0.2 105%
Loans and advances to customers 92.7 100% 17.1 18.4% 8 47%
Source: Company data
58Bank of Ireland – Capital Concerns Comprehensively Answered
• Organic capital generation of 140bps in 2017. Dividend of 11.5c per share proposed as the bank
builds slowly towards a pay-out ratio of around 50% of sustainable earnings.
• Expect to maintain a CET1 ratio in excess of 13% on a transitional basis and on a fully loaded
basis by the end of the phase-in period. CET1 at the end of 2017 was 13.8%, the Group's
transitional CET 1 ratio was 15.8%, and the Total Capital ratio was 20.2%.
• Volatility in pension scheme deficit has reduced following increased interest rate and inflation
hedging.
• Core banking platform (40bps), IFRS 9 (20bps) and the outcome of the TRIM process(50bps)
will offset organic capital generation somewhat in 2018.
Capital Ratios
25.0%
20.2%
20.0% 18.5%
17.5%
15.8% 15.8%
14.7%
15.0% 12.9% 14.2% 13.8%
11.8% 12.2% 12.3%
11.3%
10.0% 8.6%
7.0%
5.0%
0.0%
2013 2014 2015 2016 2017
Total capital ratio Transitonal Basel III ratio %
Source: Company data
Fully-loaded Basel III ratio %
59Bank of Ireland – BOIG (Baa3/BBB-/BBB-)
• BOIG (Group holding company) was established in July 2017; future senior and junior debt
issuance for MREL purposes expected to be issued from BOIG. The Group has been advised of
the minimum requirement for own funds and eligible liabilities (‘’MREL’’) to be met by 1 January
2021. This has been set at a level of 12.86% of total liabilities and own funds as at December
2016 (equivalent to 26.39% of risk weighted assets).
• Level of funding estimated at €3-€5 billion.
• Funding requirements may also continue to be met, through the issuance of Irish covered bonds
by Bank of Ireland Mortgage bank (Aa1).
BKIR Curve Bid % Offer %
AT1
BKIR 7.375% 2049 3.1 2.75
Tier 2
BKIR 4.25% 2024 1 0.75
Sterling
BKIR 3.125% 2027 3.4 3.3
Dollar
BKIR 4.125% 2027 4.3 4.2
Seniors
BKIR 3.25% 2019 -0.1 -0.2
BKIR 1.25% 2020 0.1 0
Covereds
BKIR 2.75% 2018 -0.6 -0.7
BKIR 1.75% 2019 -0.3 -0.4
BKIR 3.625% 2020 -0.2 -0.2
BKIR 0.625% 2021 0 -0.1
BKIR 0.375% 2022 0.1 0.1
Subordinated Debt
BKIR 10% 2020 0.9 0.6
BKIR 10% 2022 1.7 1.5
60You can also read
