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Bank of Ireland returns to dividends, but margin guidance tempers enthusiasm

Bank of Ireland Group Plc confirmed a return to dividend payouts but warned that the profitability of its lending is likely to decline in 2018.

Ireland's biggest bank said Feb. 26 that it would pay a dividend of 11.5 cents per share in respect of 2017, its first payout since 2008, even as consolidated profit attributable to shareholders fell year over year to €664 million from €799 million. New CEO Francesca McDonagh told analysts on a conference call that the resumption of dividends was "a pivotal moment," and the bank said it will aim to build toward a roughly 50% payout ratio on a "prudent and progressive basis."

New Irish mortgage lending increased 41% in 2017, to €2 billion, and the lender's share of overall new Irish mortgage lending rose to 27% — 29% in the fourth quarter — from 25% in 2016. Bank of Ireland will re-enter the mortgage broker market in 2018, McDonagh said, projecting that this would further increase its share of new mortgages.

A fifth of Irish mortgage customers use a broker, said CFO Andrew Keating, who noted that a new Irish credit register is expected to enter into force in the second half of 2018. Ireland does not currently have a comprehensive register of personal debt from credit union as well as bank sources.

But although lending is on the rise, the profitability of that business is not.

Bank of Ireland's average net interest margin rose to 2.29% in 2017 from 2.20% in 2016, but the group's "exit NIM" fell to 2.24% at the end of December from 2.32% at mid-year. That trend is likely to continue in 2018, McDonagh said, in part because of Brexit headwinds in the U.K. business.

The group's "Retail U.K." division represented 9.6% of the group's €1.08 billion underlying pretax profit in 2017, down from 12.1% in 2016. These activities include retail and commercial banking in Northern Ireland, services in Great Britain in partnership with the Post Office and the Automobile Association, and a business loan book in Great Britain that is being run down.

'Solid progress'

Dublin-based Davy Stockbrokers wrote in a note that "while the rebasing of NIM will come as a disappointment, the impending return to loan growth will somewhat offset this." The bank's "robust" capital generation, progress in asset quality, and resumption of dividends added up to "another year of solid progress" for the bank, said Davy.

Investec analyst Owen Callan said that although the moderating margins would "get a lot of the attention," the bank's forecasts on volumes and costs "are significant, and the upfront capital build helps on numerous fronts."

The bank increased its fully loaded common equity Tier 1 ratio to 13.8% from 12.3% in 2016, and McDonagh said the bank expects to maintain a ratio in excess of 13% on a "regulatory," i.e. phased-in, basis, and on a fully loaded basis after July 2021.

Buoyed by 4.8% GDP growth in the Irish economy, nonperforming loan exposures fell 31% to €6.5 billion, and impaired loans by 35% to €2.2 billion. McDonagh said the bank had "zero plans" to sell NPL books, following plans to do so by rivals Permanent TSB and Ulster Bank.

The bank also booked exceptional costs of €226 million in 2017, include a €170 million provision for tracker mortgage redress. Allegations that tracker mortgage customers were treated unfairly have haunted the whole of the Irish banking sector, and Keating said Bank of Ireland expects the money it has set aside to be "sufficient to compensate and redress all our valued customers."

Bank of Ireland Group is the parent of Bank of Ireland. Shares in the company were down more than 1.1% at €7.66 apiece as of 1 p.m. Dublin time Feb. 26, although that marked a recovery from an intraday low of €7.42 just after market open. The STOXX Europe 600 Banks index was up just under 0.2%.