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Irish Housebuilders Irish construction PMI contracts Company Events amidst lockdown but a sense of optimism on the longer- 09-Feb Bellway; Q221 Trading Update term outlook 10-Feb Redrow; Q221 Results ; FY20 Results

Irish Economic View rental market underperforming, but stock levels remain low Irish Lone Start to enter UB fray? / Covid business supports to continue FBD Holdings BI test case loss: cost within range of considered outcomes

Economic Events Ireland

United Kingdom

United States

Europe

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Irish Housebuilders Irish construction PMI contracts amidst lockdown but a sense of optimism on the longer-term outlook

It will not come as any surprise to hear that amidst level 5 lockdown restrictions (akin to Robert Eason restrictions in April/May) in Ireland, the Irish construction PMI contracted in January. Whilst +353-1-641 9271 the pace of contraction was not as severe as the initial lockdown in April/May 2020, the [email protected] index still plunged to 21.2 in January, from 52.3 December. Each of the three sub-categories David O’Brien witnessed sharp declines in output with housing activity seeing the steepest decline with a +353-1-641 9230 reading of 19.0 in January from 56.2 in December. Commercial & Civil Engineering output david.a.o’[email protected] was not much better with readings of 24.2 and 19.7 respectively. The new orders index also fell to an 8-month low of 29.4. The report also notes that suppliers lead times have Dudley Shanley +353-1-641 9174 lengthened to the greatest extent in more than 20 years with both COVID and Brexit [email protected] contributing to the longer delivery times. This is having an impact on cost input inflation with

a number of respondents flagging “higher cost burdens to Brexit, while general increases in Shane Carberry raw material prices were also mentioned”. Despite all of that, construction firms remain +353-1-6419118 optimistic. Spurred by hopes that COVID will be brought under control as the vaccine begins [email protected] to be rolled out, has meant that on a 12-month view, sentiment is only slightly lower then Decembers 10-month high.

Overall it will come as no surprise to see such a contraction in the Irish construction PMI in a month where the sector was unable to do a meaningful amount of work (essential construction only). We can expect a similarly bleak set of numbers next month too with the sector under the same restrictions until March 5th (at least). It is comforting however to see that firms are still optimistic that 2021 can be a prosperous year once the pandemic is brought under control.

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Irish Economic View Dublin rental market underperforming, but stock levels remain low

The Dublin rental market suffered most from both the supply and demand effects of the Dermot O’Leary pandemic last year, with rents falling by 3.3% for the year according to the new daft.ie +353-1-641 9167 [email protected] rental report this morning. In contrast, rents rose by 5.4% on average outside the capital.

Dublin experienced a large increase in the supply of properties for rent (from 1,600 to 2,600), whereas supply fell sharply in the rest of the country (from 2,000 to 1,100) over the past twelve months. A shift of short-term rental properties into the long-term rental market is partly to blame for the large increase in available rental properties last year. This is further supported by the geographical pattern of rental declines in the capital. The biggest decline in rents in Dublin was close to the city centre, where rents fell by up to 7%. Demand has also clearly been curtailed by the migration out of the city due to an inability to work in city centre offices. This is a factor that will also remain for much of 2021.

While the percentage increase in available properties for rent in Dublin is large, the stock available remains low. As a comparison, the stock of available properties for rent nationally rose to 27,000 in 2008, but currently stands at c.4000. In Dublin, the stock of available properties to rent rose to c.8,000 during the GFC, three times the current level. While there are clearly short-term issues with certain markets, the low level of stock overall is likely to put a lid on the extent of rental declines in the city, while shortages continue to push rents up elsewhere.

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Irish Banks Lone Start to enter UB fray? / Covid business supports to continue

Bloomberg ran a story over the weekend that Lone Star is among private equity firms lining Eamonn Hughes up for all or parts of Ulster Bank, according to people familiar with the matter. The PE firm is +353-1-641 9442 working with advisors to study a bid for the assets, according to sources. [email protected]

Barry Egan With Natwest due to update investors on its strategic review of Ulster Bank at its +353-1-641 6059 FY20 results on February 19th, the article suggests another player is considering [email protected] entering the fray after recent media articles aligning some of the domestic banks with the mortgage book and PTSB considering the SME book. The story probably

adds to the growing speculation that winddown is looking more and more like the

most likely option. Whilst another potential bidder entering the fray may crowd out opportunities for the domestic banks in terms of the current UB stock of loans, there is always the potential pick-up from the flow of new business going forward, if winddown is where we end up with this story.

Elsewhere, we note an interview with the Tanaiste over the weekend in the Irish Times confirming that the government plans to extend the Covid Restrictions Support Scheme (CRSS), the Employment Wage Subsidy Scheme (EWSS) and the commercial rates waiver beyond the end of Q1 to continue to support companies impacted by Covid. The Tanaiste noted that they have been running the numbers on the cost, “but should be able to confirm something on it around the middle of the month”.

Whilst hardly unexpected, it is nonetheless reassuring that the government is moving soon to continue rolling the financial supports in place for businesses into Q2. This liquidity support has proved vital in recent quarters in keeping businesses alive and containing business failures, important for the impairment figures for the banks (and new lending potential in the future). Confirmation of the extension of the support will come just before the banks are due to report FY20 results where we recently retained both our revenue and impairment guidance for the banks notwithstanding the Q1 lockdown.

Finally, with markets still showing green for the day, it is interesting to note that the US Treasury Secretary Yellen is calling the US back to full employment in 2022 and the ECB sees a summary recovery.

So yields are ticking up and the US 10 again up this morning, so the reflation trade This document is intended for the sole use of Goodbody Stockbrokers and its affiliates is continuing. The US 10-year swaps is now up 13bps over the past week and just <8bp in the euro area, potentially helpful for future NII at the banks.

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FBD Holdings BI test case loss: cost within range of considered outcomes

The High Court delivered a 214-page judgment on FBD’s business interruption (BI) test case Recommendation: Buy on Friday. largely finding in favour of the plaintiffs. In reaction, FBD noted that it will now Closing Price: €7.50 commence a process of settling claims for the customers involved which will include interim payments in the short term. FBD will now be working with its reinsurers and indicated “it will Eamonn Hughes +353-1-641 9442 revert to the market shortly on the estimated net cost” of the pandemic-related BI claims. [email protected] However, importantly, FBD said that it “expects this cost to be well within the range of considered financial outcomes, with FBD remaining strongly capitalised”.

In H120, FBD took a €30m provision for potential liability arising from BI claims. After a similar text case result in the UK, we flagged a possible liability for FBD that could be c.2x what it had taken to date. Discussions with reinsurers will progress now that the judgment is published. Reinsurance cover is typically for a finite number of events in any one period, so interpretation of what is a lockdown and/or an extension and/or a new lockdown period are critical in the discussions. FBD’s SCR was 186% in June (after accruing a €35m FY19 dividend). Referencing FBD’s comment about the range of outcomes and remaining strongly capitalised and we know they have agreed with the Central Bank for the SCR to not go below 170%, then on face value, solving back for that would mean, generates a range of outcomes that could be c.€30-75m. As such, our prior estimate of a possible c.€60m+ cost sits in the upper half of that range.

Our current PT of €9 on FBD reflects the €30m provision taken to date. Every additional €10m would pro forma take c.20c off that PT (we value capital above target at just 0.7x) and cost 4ppts on the solvency capital ratio. Greater clarity will likely emerge at the FY20 results as FBD will need to update its provision estimate for the FY20 balance sheet, meaning investors are getting close to visibility on this issue and a more normalised assessment of the business going forward.

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We would like to inform you that Eamonn Hughes holds shares in AIB Group We would like to inform you that Dudley Shanley holds shares in Cairn Homes We would like to inform you that Dudley Shanley holds shares in Glenveagh Properties

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