Bank of Ireland looks to slash costs amid growth phase

Bank of Ireland Group outlined its strategic plan focussed on “growth and transformation” an an investor day in London on Wednesday, with the company saying it expected loan book growth of around 20% by 2021.

The Dublin and London-listed firm said 65% of that loan book growth was expected to be in Ireland, with 35% through selective international diversification.

That loan book growth would be supported by a positive macro-economic outlook, the quality of the bank’s franchises and distribution, and its customer propositions, the board explained, adding that between 200 and 250 basis points of CET1 capital was indented to accommodate loan growth.

Bank of Ireland’s board said it had a “competitive edge” in risk management, with growth within risk appetite, and an expected impairment charge under IFRS 9 to be up to between 20 and 30 basis points per annum.

Its expected net interest margin would to be broadly in line with the year-end 2017 level of 2.24%, with a positive impact from loan book growth and modest benefits from higher interest rates “prudently assumed” to be offset by manageable competitive pressures, the board explained.

The company expected business income to represent between 20% and 25% of total income, and to increase on the back of economic growth and higher income from wealth management and insurance initiatives in Ireland.

At the same time, the group said it remained “committed” to the UK market, with a focus on increasing returns through investing in and supporting growth in businesses where it was generating above-hurdle returns; improving, through a range of actions, those businesses that had “good potential” but were currently below return hurdles; and repositioning businesses where there was less certainty on achieving hurdle expectations within a reasonable timeframe.

The group said it expected UK return on tangible equity to double from low single digit today to high single digit by 2021, with a continued focus on further increasing returns thereafter.

On the subject of its transformation, Bank of Ireland said it was “accelerating and broadening” its multi-year transformation programme to now encompass culture, systems and its business model.

Total investment would amount to €1.4bn over the 2016-21 period, comprising €0.25bn to deepen the transformation of its IT systems, supporting planned growth and additional to the €0.9bn core banking systems investment previously announced; and €0.25bn to broaden the extent of the transformation to deliver business model benefits and accelerate the reduction in the bank’s cost base.

Transformation investment would average €275m per annum in the 2018-21 period, equivalent to between 50 and 60 basis points of CET1 capital annually.

Bank of Ireland said the investment would support expected loan book growth and an increase in wealth management and insurance income; enable the group to reduce its absolute cost base from €1.9bn to around €1.7bn, including €0.1bn transformation investment costs, in 2021; enable it to reduce its costs every year between now and 2021 in absolute terms; and support the company in achieving a cost income ratio of around 50% in 2021, compared to 65% in 2017.

Looking at its financial targets, Bank of Ireland said it was targeting a return on tangible equity in excess of 10% by 2021.

In terms of efficiency, it was looking for absolute cost to decline every year from 2018 to 2021 inclusive, with a cost base of around €1.7bn in 2021.

It also wanted its cost-income ratio in 2021 to improve to around 50%, and it was looking to maintain a CET1 ratio in excess of 13% on a regulatory basis and on a fully-loaded basis by the end of the O-SII phase in period.

Dividends would increase on a “prudent and progressive” basis and, over time, build towards a payout ratio of around 50% of sustainable earnings.

To the extent the group had excess capital, the board said other means of capital distribution would be considered.

Bank of Ireland said at present it was trading in line with expectations, and with the guidance provided at its 2017 full year results in February.

“I am delighted to announce our strategic plan today,” said group CEO Francesca McDonagh, adding that the company’s strategic ambition was “clear - to be the National Champion Bank in Ireland, with UK and selective international diversification”.

After a period of restructuring, she said the group was in a “strong” financial position and had now entered a growth phase.

“We expect to grow our loan book by 20% by 2021, enabled by the strength of our franchises and a supportive economic backdrop in our main markets.

“We are also focussed on transforming our efficiency.”

McDonagh also noted that the group was targeting a reduction in its cost base to around €1.7bn by 2021, while delivering on its growth ambitions.

“I am confident in our ability to execute our plan, materially enhance the sustainable returns for our shareholders and deliver on our shared common purpose of ‘enabling our customers, colleagues and communities to thrive’.”