The half-year results for 2015 confirm the recovery of Ireland's lenders. 

The past 18 months have marked a turnaround for the crisis-stricken Irish lenders, as Allied Irish Banks (AIB), Bank of Ireland and Ulster Bank posted profits for the first time since 2008.

This recovery is the result of a long period of painful restructuring that all three banks have undergone. The half-year figures for 2015 suggest that the banks have put most of these troubles behind them and turned themselves into far leaner organisations (see chart 1).

Chart one 3, ungrouped

Profits at the Irish banks are a significant improvement on the first half of 2014 – at Bank of Ireland, AIB and the UK-owned Ulster Bank, pre-tax profits more than doubled year on year. The results at Ulster Bank were affected by the weakened euro, as the Irish bank reports its quarterly numbers in pound sterling through its parent RBS. Additionally, half-year results for Ulster Bank are available only as consolidated figures from both the Northern Ireland and Republic of Ireland.

Wages of recovery

In 2014, Irish banks returned to profitability largely on the back of provision releases. Dhruv Roy, an analyst at Standard & Poor’s, says that in 2014 Irish banks were able to write back the provisions as they progressed on restructuring their defaulted loans and adjusted provisioning model assumptions on house prices – improving housing prices made previous loss assumptions too conservative. “But,” he adds “property price recovery has flattened this year which is one of the reasons we are unlikely to see the same level of write-backs as in 2014.”

The recent half-year results have been encouraging at AIB and Ulster Bank – in June 2014, AIB still had to set aside €92m in impairment charges, while the bank was able to recover €543m in the first half of 2015. The same happened at Ulster Bank as the lender posted a £52m (€70.75m) impairment release.

While this has not been the case for the Bank of Ireland – it has written down €168m-worth of bad loans so far this year – the amount that the lender has set aside was €276m lower than a year ago, a trend the bank expects to continue.

Impairments have been on the wane for a number of years (see chart 2), as deleveraging units were founded; Financial Solutions Group at AIB in 2012 and RBS Capital Resolution Ireland (RCRI) at Ulster Bank in 2013. 

Chart two, ungrouped 2

Economic rebound

The Irish economy grew by 6.5% in the first three months of 2015 when compared against the same months in 2014. This helped to bolster new lending at Bank of Ireland and AIB and improve net interest margins (NIMs), leading to net interest income increases of 5% and 16%, respectively. Net interest income generates the majority of business at the three banks; 69.3% at the Bank of Ireland, 69.69% at AIB and 72.01% at Ulster.

However, the repricing of deposits, which was largely responsible for increase in NIMs in 2014, has mostly run its course for now. “Bank of Ireland was the market leader in repricing of deposits and started cutting rates back in 2013,” says Mr Roy. This does not necessarily apply to all banks, as some, such as AIB “probably can do some more catching up with cutting deposit rates”, he adds.

At Ulster Bank, however, the net income fell 18% relative to the year before due to the weakening of the euro, according to the bank. The net interest margin also declined to 1.94%, 38 basis points lower than the first half of 2014.

It seems likely that recovery of provisions will come to a stop at Irish institutions as banks finish restructuring soured loans and net interest margins stabilise, especially considering the low-interest-rate environment in the eurozone.

The outlook for banks is also affected by large amount of non-performing loans (NPLs) weighing down their balance sheets. Mr Roy does not expect a rapid decrease in NPLs, and notes that a high stock of NPLs is a sign that the Irish banking system still has some way to go toward “normalisation”, he says.


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