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Morning Wrap Today ’s Newsflow Equity Research 05 May 2021 08:38 BST Upcoming Events Select headline to navigate to article Permanent TSB Q1 IMS; NIM weaker, but CET1 and Company Events market share better; Net positive overall 06-May AIB Group; Q121 Trading Update Air France-KLM; Q121 Results Irish Banks BOI issues T2 Green bond, pricing at Derwent London; Q1 Update Glanbia; Q1 update MS+165bps; UB & KBC loan sales HeidelbergCement; Q121 Results Virgin Money UK PBT beats on lower impairments but Mondi; Q121 Trading Update 11-May IRES REIT; AGM costs materially higher OSB Group Issues upbeat 1Q trading update Smurfit Kappa Further progress on sustainability targets C & C Group Ireland to introduce minimum unit pricing from Jan 2022 Playtech Announces more extensive deal with Holland Casino in advance of regulation Irish Economic View Flagship housing plan approved by Economic Events Ireland cabinet 06-May Industrial Production Mar21 Irish Economic View Lockdown has little impact on credit United Kingdom demand & supply in Q1 06-May CIPS Services PMI Apr21 BoE Official Bank Rate 07-May CIPS Construction PMI Apr21 10-May Halifax House Prices Apr21 12-May Construction Output Mar21 GDP Mar21 Industrial Production Mar21 Trade Balance Mar21 United States Europe This document is intended for the sole use of Goodbody Stockbrokers and its affiliates Goodbody Capital Markets Equity Research +353 1 6419221 Equity Sales +353 1 6670222 Bloomberg GDSE<GO> Goodbody Stockbrokers UC, trading as “Goodbody”, is regulated by the Central Bank of Ireland. In the UK, Goodbody is authorised and subject to limited regulation by the Financial Conduct Authority. Goodbody is a member of Euronext Dublin and the London Stock Exchange. Goodbody is a member of the FEXCO group of companies. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate, Goodbody Stockbrokers Goodbody Morning Wrap Permanent TSB Q1 IMS; NIM weaker, but CET1 and market share better; Net positive overall PTSB has published a slightly mixed Q1 IMS this morning, but on balance it is positive, in our Recommendation: Hold view. PTSB notes that the Q1 NIM was 1.56% (vs our 1.63% expectation) but this looks to Closing Price: €1.38 be excess liquidity driven. However, its mortgage market share in Q1 was 17.9% vs our 17.5% expected and the pro forma CET1 ratio of 15.6% CET1 (+50bps in Q1) compared our Eamonn Hughes +353-1-641 9442 15.0% forecast, so both better than expected. Elsewhere, performing loans and NPEs were [email protected] flat and deposits rose €0.3bn in the quarter. In terms of details, NIM was 1.56% in Q1 vs our 1.63% expectation as PTSB was impacted by liquidity build-up – its calls out c.20bps impact from excess liquidity from deposit build-up and cash from the Glenbeigh loan portfolio sale. PTSB expects NIM in excess of 1.60% for the full year which compares our 1.66% forecast, but our sense is the NII impact is immaterial, its more excess liquidity driven. PTSB notes cost trends were in line with the prior year and it continues to focus on cost saving but notes the recent uplift in its digital investment (from €100m to €150m). We don’t note any specific comments on impairments other than it maintains its prudent approach in light of the material level of government supports still in place for the economy. Moving to the balance sheet, new lending was up 22% in Q1 to €0.4bn. Mortgage lending ytd was up 30% at PTSB which compares to +7% for the market so PTSB’s mortgage market share at 17.9% ytd (17.5% expected and 15.3% last year) is a strong outturn. PTSB notes that the performing loan book was flat at €13.8bn. Customer deposit volumes were c.€18.3bn (c.€18.0bn in December). NPEs have remained flat at €1.1bn (organic cures offset new defaults). PTSB notes only 5% of customers on payment breaks last year needed additional forbearance and it anticipates a further 4% of expired mortgage break customers are likely to require additional measures. It will review its macro models at the half year. PTSB’s fully loaded pro-forma CET1 ratio was 15.6% at end-March, up c.50bps from end FY20 which it attributes to the benefits from prudential addbacks on intangibles. Overall, lower NIM guidance is lower than previously guided but that looks more excess liquidity driven in our view, so we are more sanguine, whilst the market share and CET1 are better than expected. So overall, a reasonable IMS showing PTSB’s market position already starting to gain from recent exits. Home… This document is intended for the sole use of Goodbody Stockbrokers and its affiliates Page 2 05 May. 21 Goodbody Morning Wrap Irish Banks BOI issues T2 Green bond, pricing at MS+165bps; UB & KBC loan sales Bank of Ireland yesterday priced up a €500m Green T2 10.25NC5.25 bond at MS+165bps. Eamonn Hughes The deal priced c.20bps tighter than the original IPT and generated €1.7bn of gross orders +353-1-641 9442 (3.4x oversubscribed). In BOI’s last debt investor presentation, it noted a T2 shortfall of [email protected] 0.2% and that its overall MREL ratio in December was 24.6% compared with an interim Barry Egan binding target of 24.95% by 1 January 2022. The T2 issue broadly equates to 1ppt of capital, +353-1-641 6059 so more than fills this bucket, though the benchmark size of the transaction will have helped [email protected] provide better liquidity with the new issue. It is worth making the point that the additional capital will presumably provide additional capacity for any potential acquisition of KBC Ireland’s mortgage portfolio. In addition, BOI also noted that its 2024 (January) expected MREL requirement is anticipated to increase to 27.8%. Whilst it had previously suggested senior debt issuance of €1-2bn annually was anticipated, clearly the T2 issue will also help it fill out its requirements. A well-timed debt deal, coming as it did after a positive trading update last week and the Green bond credentials will also be supported by its improving ratings profile on ESG matters. The coupon cost is c.€7m per annum, equating to <1bp on the NIM. The Irish Independent reports that private equity funds will be looking for steeper discounts than normal on NPE sales from Ulster Bank and KBC Ireland as returns on prior transactions haven’t delivered sufficient returns. The article notes that private equity bidders are expecting Natwest to prioritise the sale of Ulster Bank’s NPEs this year ahead of potential deals with AIB and PTSB as NPE sales will release more capital for the parent. The speculation around the potential scale of discounts on NPE sales might all be part of the “cut and thrust” of negotiation with the departing banks but we are more intrigued by the reference that the NPE sales will be prioritised ahead of potential deals with AIB on PTSB. Having said that, our base case has been that AIB’s deal with Ulster Bank closes at the start of next year, absorbing around 100bps of CET1 and would still be comfortable with this timeline. The likely more complicated nature of any transaction with PTSB – taking assets, liabilities and potentially large levels of costs, plus its likely need for an equity raise to fund the transaction - may take longer to execute. Home… This document is intended for the sole use of Goodbody Stockbrokers and its affiliates Page 3 05 May. 21 Goodbody Morning Wrap Virgin Money UK PBT beats on lower impairments but costs materially higher Virgin Money UK (VMUK) has today reported interim results for the six-month period to 31st Recommendation: Hold March. In overall terms, VMUK has reported PBT of £72m, which is ahead of consensus Closing Price: £2.01 expectations for £49m but behind Goodbody’s £93m forecast. The reason for the beat versus consensus is predominantly due to lower impairment charges (CoR came in at just 11bps John Cronin +353-1-641 9187 versus consensus for 33bps and Goodbody for 20bps) due to changes in macro assumptions [email protected] as well as limited specific provisions or changes in asset quality. However, exceptional costs came in at a whopping £173m (versus consensus for £130m and Goodbody for £140m), offsetting much of the impairments beat – and explaining why PBT came in below Goodbody expectations. Elsewhere, there was a marginal beat on income, supported by NIM of 156bps (consensus: 154bps; Goodbody: 155bps) but on lower AIEA. Importantly, VMUK has upped its NIM guidance to c.160bps (from 156bps) – we were already at 160bps (with the reinstatement of the structural hedge a likely helpful underpin here). On the lower AIEAs point, we are likely to see further downward revisions to loan growth forecasts following this update – with net loans coming in at £72.0bn versus consensus for £72.7bn (Goodbody: £72.5bn). Core opex came in at £460m in 1H21, well above consensus expectations for £443m (Goodbody: £445m) and VMUK is now guiding to FY21 costs of <£890m, which is worse than prior guidance for <£875m – so, there will be some analyst downgrades here. Separately, the exceptional charges of £173m are very high and we will need to push up our FY21F exceptional charges (currently forecasting £224m) as a result – PPI was a key disappointment but the company is also calling out higher investment spend in 2H.