Ireland’s banking system has gone through a correction which has seen a number of players leave the market. Allied Irish Banks (ALBK) is now in a dominant position and is also the ‘most profitable bank in the eurozone’, according to investment bank Berenberg.

It holds the number one position in the Irish mortgage market and the small-to-medium size enterprise loan market. Ireland, once known as the ‘Celtic tiger’ due its exponential GDP growth from the mid-1990s to the mid-2000s, is a now country in recovery mode.

Berenberg views the economic backdrop to Ireland as ‘positive’. It says: ‘While Ireland’s economic growth figures have come under scrutiny after growing real GDP by 25.6% in 2015, a look at tax receipts confirms the good economic environment.’

Banks are at the mercy of the economies in which they operate and they are cyclical stocks. A collapse in the housing market, for example, would severely impact the banking sector as it did in 2008. On the flip side, a buyout Irish market bodes well for its largest banks.

Quality of assets

While Allied Irish may be profitable with leading positions in certain banking sectors, it does have a non-performing exposures (NPE) ratio of 19%. Berenberg, which gives the bank a ‘buy’ rating and a €5.90 target, says this is too high.

An NPE could be a loan on the bank’s balance sheet where the borrower is not making interest payments or repaying any of the debt.

There is upcoming banking regulation, Basel IV, which will further clarify when debts and exposures become bad or ‘non-performing’.

However, Berenberg is pleased that Allied Irish agrees its NPE ratio is too high. The Irish bank intends to move this ratio down towards its European peers at around 5% by 2019. It plans to do this via a mix of restructuring and securitisation.

Allied Irish is forecast to have a return on assets of around 1% for the next three years. This for Berenberg makes it ‘a very profitable bank’. It has a 1.0 times price-to-book ratio. We expect good dividend growth in the medium term.

A 16.6% common equity tier one (CET1) capital ratio puts Allied Irish in the top quartile of European banks in terms of capital buffers to defend against unexpected events.

Brexit uncertainties remain for the Irish economy which is a major trading partner with the UK but Allied Irish looks to set to further cement its position as Ireland’s top bank. (DS)

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