Bank of America Global Research has reiterated its “buy” ratings on Bank of Ireland and AIB in a note on Irish banks titled “Well it’s taken a while – but we’ve got it”.
Research analyst Alastair Ryan’s note expects the two big banks to increase lending amid strong economic, employment and wage growth.
The departure of Ulster Bank and KBC Bank from the Republic has allowed a “re-allocation” of market survivors AIB and Bank of Ireland, which now have “outsized upside potential” for higher interest rates, the statement said.
Bank of America raised its earnings targets for AIB and Bank of Ireland for the second time in a month, citing expectations that interest rates will rise.
While the margin on the tracker mortgage portfolio that AIB is set to acquire from Ulster Bank is tight, its contribution will increase “directly and proportionately” if the European Central Bank (ECB) hikes rates.
“Therefore, portfolio acquisition will be immediately earnings enhancing without reducing proper sensitivity to future increases.”
Bank of America price target was raised from €3.20 to €3.30 for AIB and from €7.30 to €7.50 for Bank of Ireland.
While the two banks have tripled their current accounts over the past decade to more than €100 billion, which has cost them money since 2014 when the ECB’s deposit rate went negative, expected increases in that rate over the coming months and years will be rewarding them for it.
The rate hikes, which are expected to start as early as July, are “potentially very significant” for AIB and the Bank of Ireland.
“Market shares and pricing should also support loan revenues,” the research note continues.
“And with the excess deposits held by listed banks, we believe they will be the direct beneficiaries of higher interest rates, while competitors funded by large customers may find the bond market less accommodating.”
With the Irish economy expected to grow faster than elsewhere in Europe and collateral values rising, Mr Ryan said Bank of America Global Research is “confident in a favorable impairment outlook” for the two banks.
“As the two big banks have repositioned themselves through acquisitions and their balance sheets will grow organically, the excess return on capital is a smaller part of our investment case. Growth and dividends are a bigger part,” he wrote.