Bank of Ireland expresses concerns about the commercial real estate sector, leading to a significant drop in shares. Regulatory issues and global impact discussed. Analyst reviews and financial highlights provided.
Bank of Ireland became the latest financial institution to express worries about the commercial real estate sector as it revealed higher provisions linked to this particular area, leading to a significant drop in its shares on Monday.
In its annual results, Bank of Ireland (BIRG) disclosed that its underlying net credit impairment charge surged to €403 million ($436 million) in 2023, compared to €187 million in 2022. According to Myles O’Grady, the bank’s group chief executive, this charge was driven by loan loss experience during the period and additional management adjustments aimed at mitigating potential risks, particularly in the commercial real estate segment. The bank anticipates an impairment charge in the low 30s basis points for 2024.
Following the announcement, Bank of Ireland shares experienced an 11% decline, contributing to a 21% decrease over the past 52 weeks. This made it the poorest performing constituent of the Stoxx Europe 600 index on Monday.
The commercial real estate sector has been under growing scrutiny since New York Community Bancorp (NYCB) highlighted issues in the office-space category back in January. Factors such as inflation, elevated interest rates, and the shift towards post-COVID 19 work-from-home practices have impacted this sector significantly.
In the United States, regulators have identified commercial real estate as a top financial risk for the economy in 2024. Moreover, the European Central Bank recently warned lenders that capital requirements would increase if they fail to manage their exposure to commercial real estate adequately.
Shares of Germany’s Deutsche Pfandbriefbank AG (PBB) have declined by 37% since the beginning of this year due to concerns regarding its own involvement in the U.S. commercial real estate market.
The Bank of Ireland's investment property exposures are diversified across various regions. As of the latest data, the breakdown is as follows:
According to a spokesman from the bank, the total property & construction lending represents just 9% of the group's overall lending portfolio.
Chief Financial Mark Spain mentioned that the bank has a small U.S. Commercial Real Estate (CRE) book, accounting for less than 1% of total Group loans, which is prudently provided for.
Citi analyst Borja Ramirez Segura expressed disappointment over higher-than-expected loan loss provisions and weak guidance on net interest income for the current year. Despite this, the analyst rates Bank of Ireland as a buy.
Bank of Ireland reported a 48% increase in net interest income between 2022 and 2023. However, the bank anticipates a 5% to 6% decrease in this year's net interest income compared to the fourth quarter of 2023, mainly due to expected lower rates.
In 2023, Bank of Ireland witnessed a significant 42% climb in pretax profit to reach €1.9 billion. This increase was partially driven by soaring interest rates in the euro area. The bank also announced a €520 million share buyback program for 2024 and proposed a dividend of 60 cents per share.
Diarmaid Sheridan, an analyst at Davy Group, emphasized that the higher impairment charge was aimed at increasing coverage ratios on portfolios, including CRE. Despite no deterioration in asset quality, this proactive approach reflects uncertainties in the CRE sector currently.
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