BARCLAYS RAISES BANK OF IRELAND PRICE TARGET TO 6 (4.30) EUR - 'OVERWEIGHT'
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Davy View
Impairment charges in 2020 far outpaced the increase in Stage 3; key aspects of the Irish economy, like economies elsewhere, have proven far more resilient than initially thought – aided by early intervention and state support. Our review of the current state of play indicates that existing guidance for 2021 is too conservative, with lower impairments supporting earnings in the coming years. We also assess valuations in the context of potential accretion and believe that significant upside remains.
Asset quality remains stronger than anticipated
Asset quality was broadly unchanged in Q1 compared to FY 2020, with non-performing loans (NPLs) broadly unchanged on an underlying basis and payment breaks continuing to roll off. Macro-economic assumptions will be reassessed as part of H1 and appear too conservative on both a base case and across weighted averages for base/upside/downside. Changes in macro-economic assumptions, together with a reassessment of the provisions required for loans that previously availed of payment breaks, will present opportunities for lower charges. For now, we do not forecast outright write-backs but believe the possibility remains given the scale of charges recognised during 2020.
Lower impairment charges versus guidance
Our previous forecasts were broadly in line with company guidance. We now believe this position is too conservative for the reasons outlined above. We lower our 2021 impairment forecasts by 34% for AIB, 40% for BOI and 50% for PTSB. We also forecast lower charges in 2022 and 2023. This drives material increases in 2021 earnings, particularly for AIB and PTSB. Higher earnings benefit AIB as it increases dividend capability while raising capital levels for BOI and PTSB.
Valuation – significant upside remains
Irish banks are among the best performers year-to-date and over the last 12 months and represent a large about-turn from the picture 12 months ago. We do not believe that valuations reflect the additional earnings that can arise from the prospective transactions that are currently being negotiated. We update our price targets to €3 at AIB (from €2.90), €6.7 at BOI (from €6.5) and €2.1 (from €1.8) at PTSB.