Bank of Ireland Group plc (BIRG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Bank of Ireland's Q1 IMS Analyst Call. Please note that the call will be recorded. [Operator Instructions] I would now like to turn the call over to Chief Executive Officer, Myles O'Grady. Please go ahead.

Good morning from Dublin, and welcome to an update on Bank of Ireland's quarter 1 trading. We had a very good start to the year, with performance and profitability in line with our expectations, and our guidance for the year remains unchanged. This morning, I'm going to cover our quarter 1 highlights. I'll touch on our view of the macroeconomic environment, and I'll reaffirm our outlook to 2027. And after this, Mark and I are very happy to answer your questions. On quarter 1, our performance is in line with expectations as we progress through the final year of our 3-year strategy. The key highlights include core loan book growth, notably in Irish mortgages by 3.5% annualized, and stable deposits in the quarter. In volatile markets, our Wealth and Insurance assets under management were stable, supported by continued net inflows, and asset quality remains robust. All of this translates to net capital generation of 50 basis points and a fully loaded CET1 ratio of 15.9%. In summary, I'm very happy with the group's overall business performance and profitability in the quarter. The current economic backdrop is, of course, colored by evolving international trade negotiations. As you would expect, we will carefully assess any potential risks, particularly relating to credit formation, credit quality and market volatility. As I said in February when the group published its 2024 results, we remain confident in the resilience of the Irish economy with strong a fiscal position, favorable demographics and employment. We've updated our Irish economic forecasts, also published today, and see 2025 GDP growth at 3.5% and employment growth up by 1.8%. This level of economic activity, combined with the execution of our strategy, supports our positive outlook. The trade negotiations are likely to be protracted. So we entered this period from a position of strength, both in terms of the Irish economy and Bank of Ireland's balance sheet. Bringing it all together, we had a very good start to the year, and the domestic economy remains supportive. The Bank of Ireland equity story of a differentiated business model, operating in attractive markets, generating a high level of sustainable capital remains unchanged. Our business model is well positioned to manage the potential impact of current global trade discussions, and this underpins our outlook to 2027. Thank you for your interest, and very happy now to open the line to questions.

[Operator Instructions] Our first question comes from Grace Dargan at Barclays.

I just wanted to start by asking, so note the comments around your kind of in-house economic forecasts. How should we be thinking about that in terms of sensitivity to your ECL? Maybe just to help give us a steer into H1 because I appreciate that's when you'll update. And then secondly, again, noting for '25, I guess you're talking about slightly lower ECB rate assumptions as we'd expect. How are you thinking about the risks to the medium-term outlook and, I guess, in particular, the NII in '26 and '27 that you called out at full year?

Grace, thank you for those questions. And I'll ask Mark to take the relation between the macro forecast and ECL. But let me take the second question, the broader question on outlook. And again, in the context today of sharing our latest economic forecast where, of course, the impact of the trade environment has seen our forecast come down a little bit, but actually still very strong GDP at 3.5% this year and employment at 1.8%. And I called that out to you because back in February, when we shared our outlook to '27, maybe to recap on those pillars. I spoke about the economic environment, about things like GDP over 3 years to be above 10%. Based on everything we know today, that still remain valid. In the context of credit formation, particularly given some of the structural opportunities in Ireland particularly relating to the mortgage business, and I spoke about earlier, our mortgage book grew at an annualized basis by 3.5%. Last year, it grew by 6%. And those factors are very positive. And indeed, from a Wealth and Insurance perspective, when I look at the quarter 1 performance, where markets were down but inflows were up, again, that supports our overall view on the ability for that business to be supportive. So I think there's no doubt that we are in a period of protracted negotiations on tariffs. I referenced that earlier. But the fundamentals that support the key drivers for value creation, the drivers that support capital generation, as we sit here today, they remain broadly unchanged, recognizing, of course, that the downside risk is there as well. I'll ask Mark to take the ECL question.

Yes. Great. Grace, so maybe just maybe to frame it, Grace, in the context of overall asset quality. Our overall asset quality remains very robust. Our NPE ratio remains at very low levels. And then for the portfolio performance in Q1 as well, that has been very much in line with our expectations. And that's why we're reiterating our guidance for the year of low to mid-20 basis points. As you know, we update the macro scenarios on a semiannual basis. So we'll do that in June. What I'd note actually in relation to the economic forecast that we've issued this morning is if you look at our weighted average scenario in December, those -- the update this morning is very, very similar to that.

Our next question comes from Sanjena Dadawala from UBS.

Two, please. Helpful statements on the outlook. If I could ask particularly on your expectations for net interest income within that and the latest thinking for '26 and '27, I know we had shared some numbers with full year results. So how are you thinking about those in the current context? And also, you touched upon the demand environment a bit. But -- so just like loans are flat in 1Q. I know there are portfolio exits in there. But if you could talk about customer behavior and then if there's any change in the thinking about '25 growth and beyond.

Thank you for those questions. I'll ask Mark to take the question on net interest income. From a customer behavior perspective, I mean, as you would expect, we do it anyway but, of course, with greater intensity given the backdrop. And we remain very close to our customers. And by that, I mean, from my own perspective, I have been meeting our foreign direct investment customers. I know our corporate banking team have also been reaching our to our large corporate customers. And our sectors team in the context of the domestic economy, we got very strong coverage on the ground. My colleagues have also been reaching out. And the overall view right now is, as you would expect, there's a little bit of caution in the system. And I think that's entirely reasonable. So for example, possibly if our -- some business were willing to make an asset investment in quarter 1, pretty much on a short-term basis, they are just pausing a little bit and maybe waiting until quarter 2 or later in the year to see how things play out, particularly as news emerged. And I note that even overnight, there has been positive soundings coming out in relation to China commenting on willing to negotiate. There was commentary on the EU willing to buy more U.S. goods and also some relief for pharma as well in relation to tariffs. So as time progresses, it feels like there is good news coming out generally. We're still in a period of one to be very mindful of, but it does feel like the environment is manageable. And certainly our customers, I would say, remain optimistic but are being appropriately cautious right now in the very short term.

All right. Great. Sanjena, so maybe just in terms of net interest income overall, so firstly, in the first quarter very much performed in line with our expectations. We're reiterating our guidance for this year of NII to be greater than EUR 3.25 billion. That's notwithstanding slightly lower rates. As you'll recall, at the full year results, we've provided the outlook into 2027. At that stage, our expectation in NII was, in 2026, a little bit higher than EUR 3.3 billion and 2027 of the order of EUR 3.5 billion. I'd say the key drivers underpinning that trajectory, so loan growth, deposit growth and the benefits of the structural hedge, those remain very much intact. If I look at the delta today versus where we were 2 months ago, so the only delta is that rates in 2026 are slightly lower than were projected 2 months ago. So the impact of that are about 40 bps lower, so about 1.60% with the ECB deposit rate versus the 2% assumption we had 2 months ago. I'd say that the impact of that is partially offset by some treasury actions that we've taken, let's say, business momentum. So if I was trying to mark-to-market today, I'd say that NII is probably closer to EUR 3.25 billion in 2026. But then if I think about the rates impact in 2027, that's much more modest. So I think the EUR 3.5 billion to 2027, that's very much still achievable.

Our next question comes from Chris Cant at Autonomous.

Just to follow up on that previous question, really. I guess this is the key thing people want to understand today. Thinking through the shape of the progression of ECB rates, how do you think your deposit pricing dynamics are likely to work as we go through '26 and '27? So with ECB rate -- I mean the market is pricing for rates to come down and then go back up again. So do you look through that period and potentially take additional pain in '26 by not passing on cuts aggressively? How should we think about how that development might play through just in terms of how you think about managing the customer relationship through deposit pricing?

Thanks a lot, Chris. And I mean our overall consistent approach, commercial approach and our strategy to maintain pricing discipline on both sides of our balance sheet, both in the context of mortgage pricing and in the context of deposits, remains unchanged. That -- we feel that strategy has worked very well for us. It worked well where rates were increasing steeply and our approach to how we adopted a balanced approach to applying higher rates to mortgages but rewarding deposit customers more, a similar approach as rates gravitate down. And so certainly, in all of the guidance that Mark has provided and, indeed, in the outlook that I've offered on overall returns, the fundamental drivers supporting net interest income remain unchanged. Of course, they are a growing loan book, growing deposit book underpinned by pricing discipline and, of course, also the positive benefit of our hedging strategy. But certainly, a very well disciplined margin management will continue to be a priority for us, Chris.

Chris, maybe I'll just add. If I look at the flow-to-term, that's, in Q1 this year, very much playing out in line with our expectations, trending lower. And then if I look at some of the weekly trends, you will see sort of weekly flows just moderating. So very much playing out in line with expectations. And therefore, as you mentioned, that rate curve inverts. ECB is projected to go back up to 1.75% in September 2026. If I think about the cost of those term deposits, that becomes much less of a factor in our development as we go forward.

Just in terms of thinking about how quick the term book churns, what's the sort of average tenor, I guess, of your term deposit customers? They're fairly short.

Yes. Yes. So Chris, there's a mix in there. But certainly, the most popular product over the last 12 months or so would have been our 2-year term product, which were paying 2.5%.

Our next question comes from Borja Ramirez from Citi.

I have 2. Firstly, on the NII, I would like to ask if you could give a bit more details on the gearing to the steeper yield curve. So you -- I understand that the structural hedge is a positive benefit, over EUR 100 million per annum for the next 3 years. But then I think you have also opportunity to reinvest your excess liquidity into the bond portfolio. So I would like to ask if you could please give a bit more indications on the potential upside to NII. So that would be my first question. And then I would like to ask, related to the asset, if you could comment also on the overlay provision. I think it's EUR 57 million as of 2024. I think it's related to CRE. So if you could kindly provide a bit more indications there.

Borja, thanks for those questions. Mark, do you want to grab this?

Yes. Absolutely. So Borja, absolutely, within the context of the yield curve, that presents opportunities as well. I alluded to that earlier. So just on the second part of your NII question, we've been quite conservative in terms of our approach on liquid assets. It's a lot of cash at the ECB. And obviously, over the last number of years, I would say, spreads on bonds have been quite compressed. That's obviously changed over the last 6 months or so. So that presents opportunities. And we've taken advantage of some of that already year-to-date. We've reinvested about EUR 3 billion of cash into bonds. That's yielding a spread of somewhere around 50 basis points. There's a little more to go on that as well. But again, as I mentioned earlier, that provides some offset to some of, let's say, the rate impacts versus 2 months ago in 2026. On the hedge, again, a key driver of NII trajectory out to 2027, as I mentioned at the full year results, may have been a little bit underappreciated by the market. And I suppose the key point there is the gross received fixed leg of that, it's not priced at market. So the average yield last year was about 1.70%. That will move to 2.20%, 2.30%, 2.40% levels over the next number of years. So that's going be a positive for us in terms of our NII development. If I look at Q1, the reinvestment yields in Q1 were actually a little bit better than planned. Again, that provides a benefit -- a modest benefit going forward. If I look at the projected yields in terms of reinvestment rates over the next period of time, they are now in line with plans. So I don't need any further delta there based on rate curves right now. And then finally, on the PMA. Yes, we have a PMA of just under EUR 60 million. It is CRE related. Already put that in place at the end of 2023. We expect that to be incorporated into models this year. And again, similar to the comments earlier in terms of the macro assessments, we look at all those items on a semiannual basis, but nothing to say right now. I mentioned overall, asset quality, very, very robust.

Our next question comes from Andrew Stimpson from KBW.

Andrew, we can't hear you, just in case you're talking.

Sorry. Can you hear me now?

Yes, loud and clear.

I'll get used to it one day. Two for me, please. One on credit and one on customers, please. Appreciate the NPE ratio is definitely still at a very low absolute level. But nevertheless, it did increase in the quarter, and there wasn't really a comment, unless I missed it, on how provisions are going so far in the first quarter. So just wondering if you could tell us, what caused that increase in the NPEs, please? And maybe whether that's Ireland or U.K. or elsewhere, and maybe how coverage levels have changed, please. And then secondly, as you said, you changed the GDP assumption. I don't think there was too much of a change in the unemployment numbers, which I think is roughly what we've seen from lots of other economists. So I just wanted to ask, with those conversations that you've been having with the corporates, Myles, I appreciate the comments you made on the volumes already. Has there been any indication from those corporates that they're looking to make any headcount adjustments yet or anything that could inform us about the outlook for unemployment, please?

Yes. Certainly, Andrew. Thank you for that. And the reason why -- so this may be obvious to say, but the reason why we called out those 2 metrics because from a bank borrowing and balance sheet perspective, GDP and employment probably are the 2 most important factors. And that's why we are encouraged by -- that the levels of employment continue to remain strong. Again, as you say, not significantly changed from kind of pre-2nd of April tariff communications. So the answer to your question, Andrew, is no. Certainly from an Irish perspective, we do know that globally, we've seen some communications. For example, Intel have announced, globally, a reduction in headcount. And of course, Intel has a significant operation in Ireland. So we can expect that, that may have some impact. But again, nothing coming out at this point regarding any initiatives to reduce headcount. And just to put that into context for you. If we look at the overall employment levels in Ireland, about 11% of total employment is from foreign direct investment sectors. So whilst it's certainly big, for sure, but in the context of an overall employment base, where 89% is from the domestic economy, I think that offers a level of confidence. And maybe also just on a related point. Earlier, I spoke about our mortgage book and, on an annualized basis, grew by 3.5% in the quarter. And certainly, when I speak with the mortgage team and we look at the pipeline of applications, in particular, that remains very strong. I think, again, that's a good proxy for confidence regarding employment. And also to say, as a metric, like less than 2% of our mortgage applications are from employees in pharma, which one might say is one of the sectors that is potentially impacted by the current trade negotiations. So again, at this point, Andrew, no communication to me in relation to headcount reductions for Irish operations from foreign direct investments. Mark, on credit?

Yes. So just the NPE ratio, Andrew, you asked about the tick-up in Q1. Obviously, very low levels, really, so 2.2%, 2.5%. And that's just a number of particular specific case developments in the corporate space. So -- and that's not unusual. That's sort of, I'd say, BAU. Maybe just speaking about NPE overall, we do mention in the release that we continue to progress reductions through organic and inorganic means. And certainly, we're looking, from an inorganic perspective, at a further transaction in H2 of this year.

Our next question comes from Jordan Bartlam at Mediobanca.

I had a quick one on the term piece. So you said it's kind of all running broadly in line with expectations. I think it's about EUR 0.6 billion last quarter -- sorry, 4Q. I think you'd also kind of guided towards maybe about EUR 1 billion over the course of '25. So the EUR 0.7 billion does sound like it might be running a little bit above that run rate. You did say it seems to be tapering towards the end of the quarter. But I wonder if maybe while it's broadly in line with expectations, whether it's maybe a little heavier than you previously anticipated? And then maybe one other one, if possible. In terms of -- you said that 11% of employment relates to FDI industries -- dominated industries. In terms of the amount of deposits and banking services that you're providing to those types of industries, particularly on the deposit base, is there a risk that there is some redomiciling primarily to the U.S., whether you could see deposit outflows? Or is that not really a risk that you're aware of?

Jordan, thanks for that. Let me take the second question first, and then Mark can respond on term. I mean, generally, from a positive perspective, Bank of Ireland banks about 60% of foreign direct investment into Ireland. So those relationships are hugely important and actually particularly helpful now as we get a sense of their understanding of the global events. But actually, it's far more biased towards a banking operational relationship, banking services for employees in particular, and less biased towards either lending or deposits. There are some deposits, Mark. But I think it's not material. It's more about the broader banking operations relationship rather than balance sheet activity. On the term, Mark?

Yes. On the term, so just maybe to provide context on that. So last year, flow-to-term was EUR 3.2 billion. So EUR 1 billion wasn't our expectation for the year, just to be clear on that. We did guide at the full year that we expected the flow-to-term to reduce from last year's level. And let's say, basically, we see Q1 very much trending in line with that expectation.

Our next question comes from Diarmaid Sheridan at Davy.

Just one question, please. Just on capital, obviously, very, very strong. And I appreciate there is that little bit of uncertainty in the market, but you've talked previously about getting back down to just over 14%. Just wondering if any of your kind of thoughts have changed as to the timing or how you might affect that, just given where capital is at Q1.

Diarmaid, thanks for that. So maybe just to reaffirm, our business model continues to be highly capital generative, so 50 basis points in the quarter, and overall outlook for the year remains strong as well. So in summary, Diarmaid, the distribution policy and the distribution approach that I would have communicated back on the 24th of February in a positive way remains unchanged. We expect the distribution this year to be a combination of a progressive DPS on earnings and, of course, the return of surplus capital, which will be a decision we expect to take on an annual basis. So very much consistent with previous guidance on that point. But I'd reiterate the strong capital generation capability as we're seeing -- as the year progresses.

Our next question comes from Sheel Shah at JPMorgan.

Just a question around sentiment again. We've spoken a lot around potential balance sheet impact and maybe the reduced demand for lending for either corporates or -- I mean, the mortgage area seems to be holding up strong. But can I invite you to speak around the other income line and how you think that would be impacted in an environment where sentiment remains a little low? I know Wealth has held up quite strong, but are there other areas within other income that are a bit more sentiment geared rather than maybe market geared?

Well, it's a strong performance in the first quarter on business income, Sheel. That's the first point. And the fundamentals here from a retail fee perspective and with a growing customer base, customer acquisitions, that continues to offer growth in business income and, most definitely, Wealth and Insurance. And of course, we have seen given the market volatility in the first quarter, clearly that's had an impact from market valuations. But actually, very confident by the fact that that's been offset by net inflows, and therefore, confidence on Wealth and Insurance fee income. I would have said before, I expect that to grow faster than the economy. We gave a guidance of, I think, between 7% and 8% overall. So again, sitting here today, feel very good about those 2 parts of our business to support business income.

Our next question comes from Denis McGoldrick at Goodbody.

Two, please, if I may. Firstly, just on the corporate deposits, so they came down by about EUR 300 million in the quarter. Just wondering, is this linked to the exiting of the noncore Corporate and Commercial portfolio? Or is there something else you're seeing there? And then secondly, just to quickly clarify a previous point on the PMA. So EUR 57 million, all of which is related to CRE, what would you expect to be incorporated into the models. Is it later this year? Just if you could clarify that point for me, please.

Great. Thanks for that. Do you want to grab...

Yes. I'll take those. I mean the corporate deposits actually, Denis, we spoke last year, with a very strong deposit performance, particularly in Q4 last year, and corporate was up quite a bit in that. And we flagged at the time in terms of our outlook for this year, there's a potential for a little bit of that to come back. So actually, no surprise. It's not linked to the sort of rundown or exit of the corporate GB book. So just, I would say, just BAU customer behavior there. And the PMAs, EUR 57 million predominantly relates to CRE. And Denis, my expectation right now is that they get incorporated into the models by the end of the year.

Our next comes from Seamus Murphy at Carraighill.

Yes. Sorry, can I just ask about just a follow-on on deposits? So like when we look across Europe, obviously, deposit growth has been really, really strong in a lot of regions like Portugal, plus 7%; Austria, Germany, picking up basically. But it's just kind of unusual about AIB and yourselves are seeing limited deposit growth or 0 deposit growth. So can you just talk about that in the context of what's actually going on just in terms of -- because if you are so bullish on loan growth or the pickup in loans, then the fact that deposits are lagging so much, it just seems a bit of a surprise. So just in terms of what's actually happening in the deposit market in Ireland, please.

Mark?

Yes, Seamus, I don't think it's anything unusual. And you'll know that quarter-to-quarter deposits can be quite volatile, particularly in the NFC space, if you look at the system now. Overall, I think if you look over the last number of years, it is difficult to absolutely triangulate because they have a lot of moving parts in terms of COVID, in terms of players exiting the market, et cetera. But seasonally, Q1 typically tends to be the weakest quarter. So actually, if we look at our plans for the year and how things have actually played out in Q1, I'd say we're in line, at least in line, if not a little bit ahead in terms of how our deposits performed in Q1.

[Operator Instructions] As we have no more raised hands at this time, this concludes the Q&A session. And I will hand back to management for closing remarks.

Great. Thank you very much for that. And just to say to everyone on the line, thank you very much for taking the time to be with us this morning. I know it's a busy -- particularly busy weekend with various banks coming out across the system. So thank you for your time. And of course, the Investor Relations team, and indeed, Mark and I are available if you have any follow-up questions. So thank you very much, and have a very good day. Thank you.