Goldman Sachs upgrade indicates more bullish take on BoI prospects

● Global investment bank’s analysts said underperforming shares at Irish lender offered an attractive entry point, writes Sean Pollock

Goldman Sachs has become more bullish on the prospects for Ireland’s banks after upgrading Bank of Ireland’s stock rating to buy.

The investment bank, one of the world’s largest by revenue, said the underperformance of Bank of Ireland’s shares offered potential investors an attractive entry point, especially after the “reset” in net interest income (NII) expectations in the last six months.

Goldman Sachs noted in its report on Bank of Ireland that its shares closed 11pc down on the day the bank released its results for 2023 in late February. It said this was due to a few factors, including guidance for the year that implied a 5pc cut to consensus NII.

The US-headquartered investment bank noted that Bank of Ireland shares had recovered since. At the time of writing, shares were trading at €9.88.

“One of the main factors contributing to Bank of Ireland’s underperformance versus the sector was the adjustment of rate expectation in December 2023 that resulted in a de-rating among rate-sensitive banks in the euro area, notably the Irish banks,” Goldman Sachs wrote.

Goldman Sachs said the “more benign competitive environment in Ireland combined with solid capital generation” offered the potential for above-sector capital returns between 2024 and 2026. This included the potential for earnings per share growth to outperform market expectations.

On the Irish banking landscape, Goldman Sachs said competitor exits had provided the potential for long-term positives. It said the share of assets among the largest five players in Ireland had “markedly increased in recent years”. It added there were no material signs of deposit competition to date, providing a benign operating environment for Bank of Ireland.

“Moreover, we highlighted in our deposit monitor that the overall customer deposit remuneration slightly decreased in February for the first time in the last 24 months, looking at the broader Irish market,” wrote Goldman Sachs.

“Also, we have seen no signs of intensified deposit migration into non-overnight accounts in the past months. As a result, we believe this could provide a supportive environment for solid long-term return on equity, enabling sustained capital generation and returns.”

Previous concerns Goldman Sachs had over Bank of Ireland’s higher exposure to the UK eased, with signs of the market steadying there. It cited Bank of England data showing deposit migration and mortgage pricing stabilising.

Around 60pc of Bank of Ireland’s UK loan book consists of residential mortgages.

Goldman Sachs previously cited concerns about intensified deposit pressures, shrinking mortgage margins, overall cost-of-living worries, and investor unease about commercial real estate (CRE).

Goldman Sachs noted that CRE remains a key investor concern. However, it noted that 9pc of Bank of Ireland’s lending is CRE-related and that only 21pc of the group’s €7.2bn exposure to the sector is within the UK.

The UK financial services watchdog probe into motor finance deals was flagged as a potential risk for Bank of Ireland, which is exposed through its Northridge business. However, Goldman Sachs believes this was a short-term risk and that Bank of Ireland’s exposure was relatively limited.

As a result, Goldman Sachs upgraded its stock rating for Bank of Ireland from neutral to buy, with a 12-month price target of €11.70. The price target is up from €10.70 previously.

The investment bank also marginally upgraded AIB’s 12-month price target from €5 to €5.30. It is currently trading at €5.