Bank Earnings

Irish bank stocks could double after ECB rate hike, Deutsche says – The Irish Times

Share prices of Ireland’s two largest banks could double in coming years as they will be among the biggest winners among eurozone lenders as central bank interest rates raise interest rates for fight against soaring inflation, according to Deutsche Bank.

Analysts at the German investment bank have raised their forecast for AIB’s pre-tax profits by around 40% in each of the next two years to 1.45 billion euros in 2024, as they take into account the ECB deposit rate dropping from minus 0.5% to 1 percent and the main Bank of England rate dropping from 1.25 percent to 2 percent currently.

Financial markets, however, expect more aggressive rate hikes from the ECB.

Deutsche analysts, led by Robert Noble, raised their Bank of Ireland pre-tax forecasts for 2023 and 2024 by 21% and 37%, respectively, to 1.72 billion euros.

The earnings advantage will be driven by banks no longer being charged negative rates for billions of euros in excess deposits they store with the ECB, rather than mortgage rate hikes, it said. they stated.

Analysts see the possibility for both banks’ share prices to rise 50% from their newly raised official price targets. However, they suggest that shares could actually double in value if the market rises to appreciate the profit potential of lenders and the level of excess capital they hold.

“The upside can reach 100%,” they said. This would require European banking stocks to bring their current discount back to their intrinsic value – and Irish banks to rally to their own discount for the sector, they said. This is even after Irish banking stocks rose this year to outperform the broader sector.

Deutsche estimates AIB shares are trading at a discounted rate of around 60% of its so-called tangible book value, based on earnings forecasts for this year, while Bank of Ireland changes hands at just over 70%.

Why are stock markets so volatile right now?

“Irish banks are among the most rate-sensitive banks in the eurozone and they are grossly undervalued by consensus and valuations,” Deutsche analysts said. “Substantial restructuring after the housing crisis puts banks in a relatively strong position against the headwinds of the economy.”

The profit outlook for the three remaining Irish banks, including Permanent TSB, is also underpinned as they prepare to split the loan portfolios of Ulster Bank and KBC Bank Ireland as the two foreign lenders exit the Irish market .

“The balance sheet structure of Irish banks is predominantly rate hike driven – with AIB more sensitive than Bank of Ireland,” the Deutsche report says, noting that Bank of Ireland has a stronger presence in the UK, where rate hikes were more taken into account. by the stock market.

Still, Deutsche believes the difference between Irish mortgage rates and average rates in Europe will narrow as domestic banks become more profitable in an environment of rising official rates. The average rate for a new home loan in the Republic was 2.77% in April, 1.18 percentage points higher than the euro zone average of 1.59%.