Bank of Ireland shares soared 7 per cent on Thursday as news that the European Central Bank has set a lower minimum regulatory capital requirement for the lender next year reignited speculation that it may restart dividend payments next year.
Bank of Ireland said before the stock market opened that the ECB had informed it that it must hold common equity Tier 1 capital, a buffer against unexpected losses, equivalent to 8 per cent of risk-weighted assets from January. This compares to a minimum target of 10.25 per cent that was set for 2016 under the ECB’s last annual supervisory review and evaluation process (Srep) for banks.
The lower figure is largely down to the ECB easing the terms of its capital targets for euro area lenders in its most recent review. Bank of Ireland has easily met the new requirement, as its capital ratio was 13 per cent at the end of September.
"At the margin, we believe that the requirement is positive towards equity investors' hopes for the restoration of the dividend with the full-year results," said Stephen Lyons, an analyst with stockbrokers Davy.
Brexit effect
Bank of Ireland's chief executive Richie Boucher said in July the company's previous plan of returning to shareholder payouts next year for the first time since 2008 could be affected by Brexit and the bank's widening pension deficit. The bank's latest figures show the pension gap almost doubled in the first nine months of the year to €1.45 billion. However, this would have narrowed somewhat since then as the market interest rate, or yields, on European bonds have risen since September.
Goodbody Stockbrokers analyst Eamonn Hughes also said the ECB's new capital target for the bank "may bring forward considerations of dividends". He currently expects the lender to pay a dividend in early 2018 on the back of its earnings for next year.
A key difference between in the past year between the ECB’s capital target for Bank of Ireland is that a non-mandatory part of the previous target, known as Pillar 2 guidance (P2G), has now been carved out of the headline Srep requirement set for banks.
"As expected, Bank of Ireland has not revealed any information on what sort of P2G level it has received from the ECB, although we expect this to be broadly similar – maybe slightly lower – to the total requirement received from the ECB last year," said Owen Callan, an analyst with Investec in Dublin.
Shares in Bank of Ireland rose 7 per cent to 21.5 cent in Dublin.
