Bank of Ireland boss Francesca McDonagh stuck doggedly last week to her line of not setting job reduction targets, even as she was forced by a challenging backdrop of negative central bank deposit rates and muted loan book growth to find additional savings to give herself a fighting chance of reaching some of her medium-term financial goals.
“I’ve never had a headcount target, internally or externally. I think they drive the wrong outcomes for both colleagues and customers,” she told reporters on February 24th as she pledged to find an additional €50 million of cost cuts.
That’s in addition to McDonagh’s plan, unveiled in June, 2018, eight months after taking charge of the bank, of cutting the group’s cost base by €200 million by the end of 2021.
Problem
McDonagh's closest rival, Colin Hunt, has had no problem discussing job eliminations. The problem, however, is that figures he suggested a mere five months ago are not only out of date – they've doubled.
Last October, Hunt signalled that he expected to cut the bank’s workforce – which stood at about 25,000 before the financial crisis – from almost 10,000 to below 9,000 by 2022.
Having eliminated 500 jobs in the second half of last year, through voluntary redundancy and natural attrition, the chief executive set out on Friday in his long-awaited vision for the country’s largest mortgage provider to remove a further 1,500 from the annual payroll by 2022.
The international banking sector was already in the doldrums when Hunt made his initial estimate, as it grappled with the prospect of interest rates remaining lower for longer, rising regulatory capital demands, uncertainty over the global outlook and – of particular concern for Irish players – Brexit.
Irish banking shares have slumped by almost a quarter since then, with the fall having been accelerated in recent weeks as a result of political unease prompted by the inconclusive general election and rapid spread of the coronavirus.
It has left AIB’s market capitalisation at less than 40 per cent of the level at which the bank values its own assets, with the wider European banking sector trading at an average depressed level of 60 per cent of book value.
With McDonagh having been forced last week to drop her key target of achieving a 10 per cent return on tangible equity – a key measure of profitability relative to shareholders’ equity – by 2021, Hunt and his team have set themselves less stretching, and fewer, objectives.
Plan
While McDonagh’s plan to scrape out savings are designed to shave 13 per cent off running expenses over four years, Hunt’s three-year blueprint is designed to leave it with a cost base that’s in line with 2019’s level of €1.5 billion.
Bank of Ireland now sees its return on tangible equity coming in at 8 per cent in 2021, leaving 10 per cent as a key goal, albeit pushed out to an unspecified date in the future. (Analysts keep a close eye on this profitability measure as it forms the basis for whether – and at what price – investors are prepared to buy shares or debt issued by a company.)
Hunt, meanwhile, has opted for a return of at least 8 per cent by 2022. Meanwhile, he’s set a pragmatic aim of having capital reserves, measured as core Tier 1 equity capital ratio, of more than 14 per cent, as regulatory requirements are only going one way.
Although AIB’s last strategic outlook, issued just before its initial public offering in 2017, included targets for net interest margins and costs relative to income, the latest plan has neither.
Analysts suggest that the bank will do well to have a cost-income ratio approaching 60 per cent by the end of 2020, compared to a figure below 50 per cent that's something of a North Star for the industry.
Projects
While the bank hasn’t set any loan-growth targets, it indicated in a presentation for analysts that it expects its loan book to expand by a little over 10 per cent over the next three years – driven by lending for renewable energy and other green projects.
McDonagh predicted 20 per cent growth in her four-year vision – though that is looking increasingly overambitious.
The Bank of Ireland chief, no doubt, rues some of the ambitious goals set in her 2018. And while she is sticking to her commitment of maintaining the overall budget for the bank’s IT and wider restructuring programme at €1.4 billion, that’s the project that concerns investors the most.
Even if the figure doesn’t move, will the scope of technology overhaul meet the original ambition?
Hunt’s financial goals aren’t nearly as lofty – even though he has the luxury of working for a bank that has invested much more over the years on its systems.
The question is whether he has deliberately set out his targets to under promise so that he can over deliver, or is he waving something of a white flag?
