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Zippy economy lifts Bank of Ireland H1 earnings above analysts' expectations

Bank of Ireland Group PLC exceeded analyst expectations for first-half earnings as Irish economic growth helped lift new lending and trim nonperforming exposures.

CEO Francesca McDonagh told reporters July 30 that the results represented "good progress" toward the transformation goals she had set out for the bank by 2021, adding that economic trends "continue to be supportive."

New lending rose 16% in the first half over the year-ago period to €7.7 billion, bringing Bank of Ireland's net loan book to €76.6 billion from €76.1 billion at the end of 2017. NPEs fell 10% during the half to €5.9 billion, and now make up 7.5% of gross loans, down from 8.3% six months earlier. Irish GDP growth of 9.1% in the first quarter buoyed both measures.

Irish mortgages proved the mainstay of loan book growth, with new mortgage lending up 30% against the first half of 2017, and domestic mortgage market share stable at 28%. McDonagh said new property construction was "coming through, if not necessarily at the level to meet demand from Irish consumers," and that Bank of Ireland aimed to be "the leading supporter of home building and buying in Ireland."

The bank will re-enter the Irish broker market later in 2018, as a further way of driving mortgage growth, she said.

Meanwhile, small businesses' appetite to take on new debt in the second half would depend largely on the course of the Brexit negotiations, McDonagh added.

Restructuring

A €46 million restructuring charge cut into first-half profits, as the bank attempts to bring down operating costs by 10% by the end of the 2021 financial year. Operating costs, excluding levies and regulatory charges, came to €933 million in the first half, down 3% compared to the second half of 2017.

"We're guiding the second half [operating costs] will be down a bit more, and 2019 costs will be lower again," CFO Andrew Keating said.

The cost-cutting target will require the bank to cut 15% to 20% of its workforce by the end of 2021, analyst Owen Callan from Investec Ireland told S&P Global Market Intelligence, or up to 2,180 roles from a headcount of roughly 11,000 at the end of 2017.

The staff cuts are necessary for the bank to meet its targets in a five-year strategic shift that will cost a total of €1.4 billion, but will be a "sensitive issue both politically and with unions," Callan added.

Keating said the 2021 strategy also involves reducing two legacy portfolios in Great Britain, bringing a €4.5 billion commercial book to zero by 2021 and reducing a €1.1 billion mortgage book by 20% to 25% in the same period.

The bank's first-half pretax profit of €454 million exceeded consensus estimates by 10%, said Callan, even though the restructuring charge meant a slight decline from the €460 million of pretax profit booked in the first half of 2017.