Bank of Ireland, €0.225: After Bank of Ireland’s 15% correction recently, we raise our 12 month target price to €0.29 and our recommendation to “Buy” offering 30% total return over 12 months.
Bank of Ireland has corrected by 15% recently and 43% below peak levels seen in early 2015. The share price decline is in disconnect to the future growth opportunities available to a core market leading “Irish domestic brand” that is niche in its offering as a bancassurer.
We assume that their UK exposure (20% of income) risk is priced in and that their ability to grow their Irish loan book (70% on income) is significantly undervalued. Bank of Ireland reported 30% loan growth in ROI mortgages in Q1 2017 and we expect momentum to continue at 15-20% for the FY 2017. Industry trends would suggest that 2016 lending into the Irish economy remained some 25% below trend, highlighting that loan growth volume has more to go.
The group exited 2016 with a net interest margin of 2.27%, up from 2.19% for the FY 2016. Their current margin is running at 2.3% and we expect this to be sustained through 2017 boosting group profits by 5% on margin alone.
As the banks productivity and product margin grows over the next 2-3 years, we expect their cost income ratio to reverse toward low 50’s which will subsequently boost the bank’s return in equity to 11% by H2 2018. A higher return on equity will imply a higher valuation.
With the group’s non-performing loans now down to €7.9bn (of which 73% exposed to the buoyant property market) and 56% provisioning in place, we expect asset quality to continue to improve and redemptions/asset sales on impaired loans to further positively impact earnings given collateral movements.
Bank of Ireland currently has a fully loaded CET 1 ratio of 12%, with organic capital build run rate of 120bps per annum. They are sufficiently capitalised with an extensive buffer.
As a result, we expect Bank of Ireland’s net loan book to grow toward €90bn by H2 2018, from €78bn currently, and their net asset value per share to grow to €0.32 over this same period. Their tangible net asset value should increase toward €0.28 over the same period.
We expect Bank of Ireland’s earnings per share to grow by 20%, over the next two years, to 2.7c which would imply a forward P/E ratio of 8.3x, the lowest of the large cap ISEQ.
We raise our 12 month target price €0.29, reflecting a 10% discount to forward net asset value come June 2017. We see 30% total return over the next 12 months including a 2.5% dividend yield payable in March 2018.
Senior Equity Analyst: Darren McKinley, CFA
Equity Analyst: Dylan Simmonds