Irish banks: a classic turnaround tale... and opportunity
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Irish banks: a classic turnaround tale… and opportunity

At a Glance

  • Over the past 15 years the sector has metamorphosed from being one
    of the riskiest in Europe to among the safest
  • Columbia Threadneedle Investments was invested in the bonds of Irish banks throughout this period, seeing a credible balance sheet improvement journey not yet reflected in credit spreads
  • This is an excellent example of the types of situations we look for, and that our deep research and bottom-up approach allows us to seek out
    and benefit from

All that falls, rises; all that is lost, finds its way back; all that is forgotten, is remembered again

James Joyce, Finnegans Wake, 1939

In April, with little fanfare, AIB (Allied Irish Bank) became the first Irish bank to issue a 10-year dollar senior benchmark bond1.It was popular with investors: the bank borrowed $1 billion with orders of $7 billion. It was priced at 160bps over Treasuries – a similar level at which we would expect the larger UK and French banks to issue. This confirms that Irish banks are back to their rightful place in the eyes of credit investors.

This hasn’t always been the case: in late September 2008, Irish banks were shut out of the credit market. In an attempt to restore confidence the then finance minister, Brian Lenihan, announced a blanket guarantee of the banking sector’s deposits and debt. Two years later, the only lender left was the European Central Bank (ECB). The ECB’s then president, Jean-Claude Trichet, wrote to Lenihan saying that further emergency lending to Ireland’s banks could only be extended if the Irish government submitted a request for financial support to the Eurogroup, a group of finance ministers from the eurozone countries. An €85 billion support package followed days later, with €50 billion committed to the banking sector2. The Irish sovereign posted an annual budget deficit of 32% of GDP3, and AIB offered subordinated bondholders 25 cents on the euro for their bonds4.

From that point, Ireland embarked upon a remarkable period of deleveraging. Since the nadir in 2009, household and sovereign debt have fallen by around 90 percentage points of GDP to 26% and 39% respectively. The country now has the lowest levels of leverage in Europe – and there is ample room for growth. Simultaneously, the banking sector went through a metamorphosis from being one of the riskiest in Europe to among the safest.

At Columbia Threadneedle Investments, throughout much of this period of improvement we have invested in the bonds of Irish banks. We now think the fundamental improvement story has played out and is fully reflected in credit spreads. Let’s look at why: 

Business model

We like simple business models. Banks are leveraged entities – the more complex the product, the more scope for mistakes. Irish banks are simple retail banks, which make money by lending to the local economy, principally through loans secured on residential property, with low loan to value (around 50% in Ireland). It is difficult to make a mess of this situation: in simple terms, if borrowers are employed, they will meet the mortgage payments, and even in periods of financial stress those payments are typically prioritised over discretionary spending.

Liquidity

The Irish banking sector is now awash with liquidity. Back in the dark days of the noughties, the system-level loans-to-deposits ratio peaked at more than 200% (in excess of 100% is generally considered weak and lower numbers are better). It is now the lowest in Europe at around 70%5;  the European average is around 90%. What’s more, Irish banks boast liquidity coverage ratios (liquid assets held against short-term liabilities) and net stable funding ratios (a measure of the funding supporting loans made by the bank) that are among the best in the sector.

Earnings

International competitors such as NatWest and KBC have retreated from Ireland. That leaves a duopoly in commercial banking (Bank of Ireland and AIB) and an oligopoly in mortgage banking (PTSB is the third player). This has resulted in reduced competition on loans and deposits. Deposit beta (the percentage of an ECB rate hike which gets passed through to depositors) is less than half the European average at around 10%6.All of this is great for profitability: net interest income at the three Irish banks increased by a staggering 85% from the end of 2021 to end 2023. The European average was around 30%7

Asset quality

We will never forget Anglo Irish, the bank with around two-thirds of its loan book in non-performing loans. It didn’t survive. With the help of the National Asset Management Agency (NAMA), the state sponsored bad bank, the other Irish banks steadily worked through the asset quality problem over a decade. Non-performing loans are now down by more than 90% to acceptable levels8.While the banks still make commercial real estate loans, concentrations are now much more in line with the broader European sector. We expect bad debt charges for coming years to be in line with larger UK and French peers.

Capital

Like us, the regulators have not forgotten the events of the past. Capital ratios are optically good relative to peers, but digging a bit deeper we think they look great. Banks are required to hold capital relative to risk-weighted assets. Irish risk weights are higher, so its banks hold around 50% more capital than the European average for a given loan type. Are Irish loans 50% riskier? We don’t think so. In fact we think this is regulatory conservatism – which is great for bondholders.

Conclusion

More than a decade after emergency lending from the ECB, Irish banks have simplified their business models, shored up their balance sheets and become safter businesses.

This is a good example of the types of situations we look for: we can see a credible balance sheet improvement journey not yet reflected in credit spreads. As the company’s balance sheet improves, its borrowing costs fall, credit spreads tighten, bond prices rise and our portfolios and clients reap the benefits.

Irish banks have now found their way back to their rightful place in the perceptions of investors, so it’s time for us to move on to the next opportunity – something else which may have fallen but we think will rise again!

9 May 2024
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Irish banks: a classic turnaround tale… and opportunity

1 AIB, AIB Group raises €625m in new capital amid strong investor demand, 24 April 2024
2 The Irish Times, Ireland to receive €85 billion bailout at 5.8% interest rate, 28 November 2010
3 The Irish Times, Deficit confirmed at 32%, 4 December 2010
4 The Irish Times, AIB plans to impose 90% loss on its junior bonds, 12 May 2011
5 Aggregate figure, as of April 2024, for the three main domestic banks: AIB, Bank of Ireland and Permanent TSB Group
6 European Central Bank/Columbia Threadneedle analysis, April 2024
7 Columbia Threadneedle estimates based on company reports, 2021-2023
8 Columbia Threadneedle estimates based on company reports, 2010-2023

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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