Irish banks ‘face income downgrades’ as ECB continues rate cuts

Irish banks, among the most sensitive in Europe to moves in interest rates, will find themselves in focus on Thursday with the European Central Bank (ECB) widely expected to cut official rates for the third time in five months.
Analysts at RBC Capital Markets reckon that the market has got ahead of itself on Irish financial stocks, which have almost doubled in value since the ECB started to hike rates in mid-2022.
With rates on the way down, the Canadian investment bank says that this dynamic has not yet been fully reflected by analysts into their earnings estimates. “In our view, top line (total income) downgrades from here are likely,” RBC analysts said in a report published on Wednesday in which they initiated coverage of Irish banks.
While the consensus call among analysts is for Irish bank stocks to rise 20-26 per cent over the next 12 months, RBC’s number crunchers, led by Benjamin Toms, have set price targets for the three listed lenders which imply downside to their stock of 6 per cent (AIB) to 38 per cent (PTSB).
Still, while RBC is more cautious than most on Irish banks’ net interest income lines, it is more positive about the pace at which their loan books will expand over the coming years as the economy continues to grow, driven by mortgages.
Meanwhile, RBC has calculated that Bank of Ireland may have to take a €750 million provision over the next two years to cover costs stemming from a United Kingdom Financial Conduct Authority investigation into the motor finance industry over unfair commissions. Bank of Ireland has a 2 per cent market share of the UK motor finance industry.
RBC’s estimate for the cost for Bank of Ireland — including fines, redress and administration expenses — is a multiple of the consensus view that it will amount to a hit of less than €200 million. However, the Canadian bank said that it has applied the same methodology across lenders in this sector.