Bank of Ireland stock sinks as provisions for commercial real estate rise

By Barbara Kollmeyer

Bank of Ireland became the latest to flag worries about commercial real estate as it announced higher provisions linked to the sector, and saw its shares tumble on Monday.

Alongside annual results, Bank of Ireland (IE:BIRG) reported that its underlying net credit impairment charge climbed to EUR403 million ($436 million) in 2023 from EUR187 million in 2022.

"This charge reflected loan loss experience in the period; and additional management adjustments to address potential risks, primarily in commercial real estate," said Myles O'Grady, the bank's group chief executive, in a statement. The bank expects an impairment charge in thelow 30s basis points for 2024.

Bank of Ireland shares slumped 11% and are now down 21% over the last 52 weeks. It was the worst performing component of the Stoxx Europe 600 XX:SXXP on Monday.

The commercial real estate sector has been increasingly in focus since New York Community Bancorp (NYCB) in January signaled problems in the office-space sector, which has been dogged by inflation, higher interest rates and post-COVID 19 work-from-home trends.

U.S. regulators deemed the sector a top financial risk to the U.S. economy in 2024, while the European Central Bank earlier this month cautioned lenders that capital requirements would rise if they do not keep a lid on CRE, Bloomberg reported.

Shares of Germany's Deutsche Pfandbriefbank AG (XE:PBB) have slumped 37% so far this year, amid concerns over its own exposure to the U.S. commercial real-estate sector.

The Bank of Ireland breaks its investment property exposures down as follows: 69% Ireland, 21% U.K. and 10% U.S. A spokesman from the bank noted that total property & construction lending is just 9% of group lending overall.

"We have a small U.S. CRE book which accounts for less than 1% of total Group loans and is prudently provided for," said Chief Financial Mark Spain, in Monday's results.

Citi analyst Borja Ramirez Segura flagged disappointment around higher-than-expected loan loss provisions and weak guidance on net interest income for this year, in a note to clients. The analyst rates Bank of Ireland a buy.

Bank of Ireland said net interest income rose 48% between 2022 and 2023, but said this year's would be 5% to 6% lower than the fourth quarter of 2023 due to anticipated lower rates.

Bank of Ireland reported a 42% climb in pretax profit to EUR1.9 billion in 2023, lifted in part by interest rates for the euro area that have soared. It announced a EUR520 million share buyback program for 2024 and proposed a dividend of 60 cents a share.

"The higher impairment charge was used to increase coverage ratios on portfolios, including CRE. This comes despite no deterioration in asset quality and is proactive given some of the uncertainties related to the CRE sector at present," commented Diarmaid Sheridan, analyst at Davy Group, in emailed comments.

-Barbara Kollmeyer

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02-26-24 0743ET

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