Morning Wrap

Today ’s Newsflow Equity Research 29 Jan 2021 08:48 GMT Upcoming Events Select headline to navigate to article

Irish Economic View Sharp recovery in the mortgage Company Events market 29-Jan Paragon Banking Group; Q121 Trading Update 01-Feb Ryanair; Q321 Results Irish Mortgage drawdowns in Q4 and approvals data helpful for the banks Irish Banks Reports that PTSB has hired advisors to consider Ulster SME book Paragon Banking Group 1Q21 results, strong pipeline & significant capital generation Kerry Group Givaudan deliver in-line FY20 results

Economic Events Ireland

United Kingdom

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

Goodbody Stockbrokers UC, trading as “Goodbody”, is regulated by the Central . In the UK, Goodbody is authorised and subject to limited regulation by the Financial Conduct Authority. Goodbody is a member of and the 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

Irish Economic View Sharp recovery in the mortgage market

First-time buyers led the rebound in the mortgage market in the second half of 2020 and Dermot O’Leary contributed to a much better performance than expected. Mortgage approvals for house +353-1-641 9167 [email protected] purchase grew by 36% yoy in December, with first-time buyers (FTB) leading the way (+40% yoy) in December. Mortgage approvals for mover-purchasers also grew strongly (+31% yoy). Having been down by 58% yoy in Q2, mortgage approvals for house purchase staged a remarkable rebound in the second half of the year. The 27% yoy increase in Q4 is the largest since 2017 and points to further pent-up demand for house purchase.

Mortgage drawdown data were also published this morning, pointing to a much better than expected performance in Q4 2020. The volume of drawdowns fell by just 1% yoy in Q4, relative to a 31% yoy decline in Q3. By property type, the second-hand market outperformed (+7% yoy). FTBs led this trend, with the largest number of mortgages drawn down on second-hand homes in fifteen years in Q4. Drawdowns for the full year finished at €8.4bn (-12% yoy). The combination of this better outturn and the stronger momentum in approvals leads us to upgrade our forecast this morning

Like in other geographies, the pandemic has acted as a trigger for action to get on the housing ladder among those whose income situation has been relatively unaffected. While the current lockdown may delay completions somewhat, the surge in mortgage approvals in Q4 points to significant pent-up demand.

Home…

This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

Page 2 29 Jan. 21 Goodbody Morning Wrap

Irish Banks Mortgage drawdowns in Q4 and approvals data helpful for the banks

Our economist sent out an email earlier on the Q4 drawdowns and December approvals data Eamonn Hughes published by the BPFI this morning. To recap, mortgage drawdowns came in at €2.95bn in +353-1-641 9442 Q420, up 7% yoy, bringing the 2020 total to €8.365bn. Also, approvals for December rose [email protected] by a strong +40% yoy, which brings the overall Q4 approvals growth rate to +31% yoy. As Barry Egan our economist said, the strong Q4 outturn means 2020 mortgage drawdowns were 4-5% +353-1-641 6059 ahead of our expectations, so we are also raising our 2021 mortgage lending forecast from [email protected] €9.0bn to €9.7bn, a rise of +8%, and raising 2022 by €0.5bn to €10.8bn.

Against the backdrop of the Q1 lockdowns, this is good news for the banks. It

highlights that Q4 finished well on new lending and approvals, providing good opening momentum into 2021 and possibly providing some offsets to the Q1 lockdown induced weakness. We published on the banks on Monday in which we held the line on forecasts even against the backdown of what is going on in Q1 and the mortgage data further supplements that stance, indeed, maybe provides some upside. Simplistically, mortgage lending was €0.4bn higher than expected in 2020, is raised by €0.7bn in 2021 and +€0.5bn in 2022 – a cumulative increase of c.€1.5bn by end 2022. Split that c.30% for AIB, c.25% for BOI and c.15% for PTSB based on current market shares and that’s roughly new lending cumulative increases of €0.5bn, €0.4bn and €0.25bn respectively by FY22. Let’s say ballpark 2% spreads on that lending, so that equates to potential income uplifts of €9m for AIB, €8m for BOI and €4.5m for PTSB for FY22, which is +1.4%, +1.1% and +14% respectively of our current pretax profit forecasts. So, maybe some additional comfort on forecasts ahead of FY20 results in 4 weeks’ time. After this week’s volatility, AIB is now trading on 6.8x FY23 earnings, though just 5.5x stripping out excess CET1, whilst BOI is on 5.8x compared with the sector on 9x. So undemanding multiples and maybe a bit of reassurance on forecasts against all the Q1 lockdown concerns.

Home…

This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

Page 3 29 Jan. 21 Goodbody Morning Wrap

Irish Banks Reports that PTSB has hired advisors to consider Ulster Bank SME book

In another development on the Ulster Bank saga, the Irish Times this morning breaks the Eamonn Hughes story that PTSB has hired advisors to support it on a potential bid for Ulster Bank’s SME +353-1-641 9442 portfolio. However, the article suggests that it is not clear how much of the Ulster Bank [email protected] commercial book that PTSB has its eye on given the full commercial book incorporates Barry Egan property, corporate and asset finance loans in addition to SME loans. +353-1-641 6059 [email protected] The total commercial book is €4-5bn, but our best guess is that the SME part is half of that. In our view, this is well within the capital and liquidity capacity of PTSB’s

existing balance sheet (helped by the BTL disposal back in October) given it has

excess liquidity and CET1 end December estimated at 14.6%. However, the story also provides further evidence of the likely winddown scenario playing out for UB and comes after the story last weekend that Natwest was sounding out the main local banks on the mortgage book. As we have been noting for some time, a possible winddown scenario could see Natwest keep the corporate book, PTSB take the SME book (AIB & BOI would likely be restricted) and swathes of the mortgage book could be sold/securitised (tracker book for example) or picked up by one of the main banks.

Elsewhere, the Irish Times reports that company filings show that the Irish banks have committed an initial €5.9m of capital to their instant money transfer app joint venture. The JV hit a regulatory snag recently when the application to the CCPC (Competition and Consumer Protection Commission) didn’t provide sufficient information, so a new application is required which may delay timing a little (if and when approval is received).

The intention is that the app will allow the banks to compete with the likes of Revolut and N26 and we find it interesting that it comes just as the banks here have been nudging up fees for customers on free banking given the low rate environment and excess liquidity (FT runs a story today on the coming squeeze on free banking in UK market).

Home…

This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

Page 4 29 Jan. 21 Goodbody Morning Wrap

Paragon Banking Group 1Q21 results, strong pipeline & significant capital generation

Paragon Banking Group (PAG) published a 1Q21 trading update this morning to end-December Recommendation: Buy which reads encouragingly on several fronts. Consistent with previous PAG trading updates, Closing Price: £4.55 we don’t get any update on financial performance with the exception of a reference to stable asset quality. The main callouts were: i) On lending activity, net loans remained broadly in line John Cronin +353-1-641 9187 with FY20 numbers. Specialist buy-to-let volumes have remained robust during 1Q21 given [email protected] the backdrop, reaching £298.7m down 27% y/y, albeit PAG flagged that this was “reflective of the lagged impacts of the first lockdown on our pipeline and market wide challenges facing

the execution of housing transactions.” Total advances decreased 24% y/y in 1Q21 to £521.8 (split £304.1 in Mortgages and £217.7m in Commercial); ii) Despite this, the pipeline for BTL boasted growth of 15% on a y/y basis to £966.8m, with the expectation to convert at a faster rate over the coming quarter, given the concentration of completions arising from the stamp duty changes which impact from the end of March 2021. Furthermore, redemptions reduced by 21.5% to £169.2m, and continue to reduce and remain near historic lows; iii) Pipeline for the commercial segment remained ahead of 1Q20 numbers, aided by benefits of lending as part of the CBILS and BBLS schemes ; iv) Deposits were up c.9% y/y to £8.6bn; v) Arrears levels were broadly similar to those reported at FY20 and new take-up on payment holidays remained low; vi) PAG did exceptional on capital and generated 80bps of CET1 in the quarter, with the ratio standing at a very strong 15.1% at end-1Q21 (up from 14.3% at end-FY20). The beat here was calling its PM15 securitisation in December, which resulted in a favourable fair value position, reducing RWAs and enhancing capital; vii) PAG continues to engage with the PRA on Paragon's IRB application for its BTL book, with phase two of the process on the way.

Overall, another solid set of results from PAG, pipeline for 2Q20 is very strong, consist with recent record levels of approvals data recorded from the BoE in October & November. PAG generated a large amount of capital in the quarter, with the ratio now far above regulatory requirements at 15.1%.

Home…

This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

Page 5 29 Jan. 21 Goodbody Morning Wrap

Kerry Group Givaudan deliver in-line FY20 results

Givaudan reported 2020 results this morning with sales broadly in-line with expectations Recommendation: Buy driven by household/personal care products and snack sales. 2020 sales of CHF 6.32 billion Closing Price: €113.90 (consensus CHF 6.35 billion), grew 4.0% LFL with high growth markets (up 7.4% LFL). For 2020, EBITDA of CHF 1,397 million (consensus CHF 1.4bn) was up 9.6% YoY. On a Jason Molins +353-1-641 9141 comparable basis, EBITDA margin also increased to 22.8% from 21.5% in 2019. [email protected]

Within the Taste and Wellbeing division (main read-across for Kerry) sales increased 2.8%

LFL in 2020 driven by packaged foods, savoury, snacks and nutraceuticals. Q4 sales were up 2.1% LFL. The pandemic impacted demand in Food service and out-of-home food consumption categories through the year. Beverages, dairy, sweet goods, savoury and snacks drove positive sales growth due to increased demand for centre of store foods.

Kerry is due to reports its FY20 results on February 16th, and we would expect the business to deliver a more muted relative performance to Givaudan given its weighting to the Foodservice channel (c.30% of T&N revenue). That said, for the upcoming results of note for Kerry will be its Q4 outturn, given the expectation of a return in volume growth for the T&N division (GBY Q4f +c.0.5%, Q3 -1.9%, Q2 - 11.8%). Also of interest will be any further news on the speculation surrounding the potential joint venture agreement with Kerry Co-op.

Home…

This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

Page 6 29 Jan. 21 Goodbody Morning Wrap

Issuer & Analyst Disclosures

Analyst Certification The named Research Analyst certifies that: (1) All of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities and issuers. (2) No part of my remuneration was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this report.

Regulatory Information Goodbody Stockbrokers UC, trading as Goodbody, is regulated by the Central Bank of Ireland. In the UK, is also subject to regulation by the Financial Conduct Authority. Goodbody is a member of and the London Stock Exchange. Goodbody is a member of the FEXCO group of companies. This publication has been approved by Goodbody. The information has been taken from sources we believe to be reliable, we do not guarantee their accuracy or completeness and any such information may be incomplete or condensed. All opinions and estimates constitute best judgement at the time of publication and are subject to change without notice. The information, tools and material presented in this document are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities.

Conflicts of Interest Goodbody has procedures and policies in place to identify and manage any potential conflicts of interest that arise in connection with its research business. Goodbody analysts and other staff who are involved in the preparation and dissemination of research operate and have a management reporting line that is independent to its business. Information barriers are in place between the Corporate Finance arm and the Research arm to ensure that any confidential and or price sensitive information is handled in an appropriate manner.

Our Investment Research Conflicts of Interest Policy is available at Conflicts of Interest

Investors should be aware, that, where appropriate, research may be disclosed to the issuer(s) in advance of publication, in order to correct factual inaccuracies only and not to materially amend the research in any way. Goodbody is satisfied that it has operational procedures in place, which ensure that such disclosures will not compromise the report’s objectivity.

Goodbody has provided investment banking services to AIB Group, Applegreen, ARYZTA, Bank of Ireland, Cairn Homes, Collagen Solutions, Datalex, Draper Esprit, FBD Holdings, Flutter Entertainment, First Derivatives, Grafton Group, Greencore, Harworth, Hibernia REIT, ICG, Kingspan, Origin Enterprises, Playtech, Rank Group, Supermarket Income REIT, Total Produce and Yew Grove REIT in the past 12 months.

Goodbody Stockbrokers acts as corporate broker to AIB Group, Applegreen, ARYZTA, Cairn Homes, Datalex, Draper Esprit, FBD Holdings, First Derivatives, Grafton Group, Greencore, Hibernia REIT, ICG, Kingspan, Origin Enterprises, Playtech, Rank Group, and Yew Grove REIT The list of companies for which Goodbody acts as market maker and on which it provides research, is available at Regulatory Disclosures

This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

Page 7 29 Jan. 21 Goodbody Morning Wrap

Other disclosures

We would like to inform you that Eamonn Hughes holds shares in AIB Group

A description of this company is available at Company Descriptions

All prices used in this report are as at close of business of the previous working day unless otherwise indicated.

A summary of our standard valuation methods are available at Valuation Methodologies

A summary of share price recommendations and whether material investment banking services have been provided to these companies is available at Regulatory Disclosures

Other important disclosures are available at Regulatory Disclosures

Goodbody updates its recommendations on a regular basis. A breakdown of all recommendations provided by Goodbody is available at Regulatory Disclosures Where Goodbody has provided investment banking services to an issuer, details of the proportion of buys, holds and sells attributed to that issuer will also be included. This is updated on a quarterly basis.

The date on which stock recommendations were first released for all stocks mentioned in this report are available at https://www.goodbody.ie/assets/Reg_Disclosures.pdf. If a different recommendation has been made in the previous twelve months, this will also be disclosed here.

Recommendation Definitions Goodbody uses the terms “Buy”, “Sell” and “Hold. The term “Buy” means that the analyst expects the security to appreciate in excess of 10% over a twelve month period. The term “Sell” means that the security is expected to decline in excess of 10% over the next twelve months. The term “Hold” means that the analyst expects the security to neither appreciate more than 10%, or depreciate more than 10% over the next twelve months.

On 26th November, 2012, the terms “Add” and “Reduce” were removed from the Recommendation Definitions and both were replaced with the “Hold” recommendation. Any Previous Recommendation that refers to either an “Add” means that the analyst expected the security to appreciate by up to 15% over a twelve month period. Any Previous Recommendation to “Reduce” means that the analyst expected the security to decline by up to 15% over the next twelve months.

In the event that a stock is delisted the firm will automatically cease coverage. If however the firm ceases to cover a stock for any other reason the firm will disclose this fact.

Distribution of research to clients of Goodbody Securities Inc (GSI) in the US

GSI distributes third-party research produced by its affiliate, Goodbody GSI is a member of FINRA and SIPC GSI does not act as a market-maker.

This information was current as of the last business day of the month preceding the date of the report. An affiliate of GSI may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in this company. Investors should be aware that an affiliate of GSI may have provided investment banking or non-investment-banking services to, and received compensation from this company in the past 12 months or may provide such services in the next three months. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer. All transactions by US persons involving securities of companies discussed in this report are to be effected through GSI.

Disclaimer While all reasonable care has been taken in the production and dissemination of this report it is not to be relied upon in substitution for the This document is intended for the sole use of Goodbody Stockbrokers and its affiliates exercise of independent judgement. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.

Private customers having access, should not act upon it in anyway but should consult with their independent professional advisors. The price, value and income of certain investments may rise or may be subject to sudden and large falls in value. You may not recover the total amount originally invested. Past performance should not be taken as an indication or guarantee of future performance; neither should simulated performance. The value of securities may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities.

All material presented in this report, unless specifically indicated otherwise is copyright to Goodbody. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Goodbody.

Goodbody, Ballsbridge Park, Ballsbridge, Dublin 4, Ireland T (+353 1) 6670400 W www.goodbody.ie E [email protected] Page 8 29 Jan. 21