AIB shares dip as Davy downgrades to ‘neutral’

Shares in AIB dipped on Tuesday as Davy downgraded its earnings forecasts, share price target and recommendation for the group. The broker says it expects little further momentum for the bank's lending margins as its ability to lower deposit rates runs out of steam.

Davy analysts have lowered their stance on AIB’s stock to “neutral” – the equivalent of “hold” – from “outperform”, while their price target has scaled back to €5.45 from €5.65. They have reduced their 2019 and 2020 net profit forecast for the group by 2 per cent and 3 per cent respectively to €965 million and €1.025 billion.

Late last month AIB reported a €762 million pre-tax profit for the first half of the year, helped by a €140 million gain from the disposal of non-performing loans to a group led by US distressed-debt firm Cerberus.

The result had also been buoyed as the bank’s net interest margin, the difference between the average rate at which it funds itself and lends on to customers, stood at 2.5 per cent, ahead of its 2.4 per cent medium-term target.

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"We are reducing our margin forecasts as customer deposit re-pricing appears to have mostly run its course," said the Davy analysts Stephen Lyons and Diarmaid Sheridan.

Non-performing loans

Shares in AIB declined by as much as 2.2 per cent during trading on Tuesday, in a climate where the wider European banking sector was selling off for the fifth straight session. The bank closed off its lows, down 1.1 per cent at €4.94.

AIB’s non-performing loans (NPLs) fell by 27 per cent during the first half to €7.5 billion as it sold a portfolio of soured debt to the Cerberus-led consortium and the bank continued to restructure problem loans at pace. AIB is planning another NPLs portfolio sale, said to amount to €1.5 billion of loans.

The bank, led by chief executive Bernard Byrne, said last month that it expects to start returning excess capital to shareholders from early 2020 after the bank reduces its NPLs ratio to the European Union average of 5 per cent. The ratio stood at 12 per cent at the end of June.