Irish banks to see their loan books grow in 2017, says US broker

The State's banks, whose loan books have shrunk dramatically since the onset of the financial crisis, are poised to enjoy a return to positive loan growth in 2017, according to UK investment bank Keefe, Bruyette & Woods (KBW).

The improving outlook has seen Daragh Quinn, an analyst with KBW, raise his recommendation on Bank of Ireland shares to "outperform", the equivalent of a "buy" , from "market perform", with his price target increasing by four cent to 28c. The analyst raised his view on Permanent TSB to "market perform", the equivalent of "hold", with his price target jumping to €3.10 from €2.20.

"Although loans are currently still declining in Ireland, we believe 2017 will see a turnaround and return to positive loan growth," said Mr Quinn. "Based on the current trends and economic outlook, we estimate that by 2019, loan growth will exceed 5 per cent, led by almost double-digit growth in corporate lending."

Housing supply

Mortgage and corporate lending to the commercial property sector should also be underpinned by “increasing evidence of a recovery in housing supply,” he said.

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Many commentators see the Government’s new help-to-buy plan and the Central Bank’s easing of lending restrictions for first-time buyers serving to boost mortgage demand this year. However, KBW does not see overall mortgage volumes growing again until 2018, with repayments continuing to outstrip new lending in the meantime.

Bank of Ireland’s common equity Tier 1 capital ratio, a keenly followed measure of a lender’s financial strength, should rise to 12.4 per cent by the end of this year from 11.3 per cent in 2015, according to Mr Quinn.

He has factored in a 0.006c per share dividend on the bank’s 2016 results, which would mark a first shareholder return since 2008.

Uncertainties

“A key risk for the Irish banks will be developments around Brexit and the medium-term uncertainties this event could create for the Irish economy,” Mr Quinn said. “In the short term, the initiation process could see foreign exchange volatility, which would impact the earnings outlook for Bank of Ireland.”

While Permanent TSB continues to face "subdued profitability", the completion last year of the sale of its remaining UK loans removes some regulatory uncertainty around the group. The disposal was part of a PTSB restructuring plan agreed with the European Union after its bailout during the financial crisis.

Bank of Ireland shares closed on Wednesday up 0.4 per cent at 24.4c, having earlier surged by as much as 2.9 per cent. Permanent TSB ended the session down 1.1 per cent, reversing an earlier gain.