AIB shares Europe's best performer as Ulster Bank exits

Shares in AIB are up 36pc and BoI has gained 31pc this year

Jose Manuel Campa, chairman of the European Banking Authority. Photo: Luke MacGregor/Bloomberg

Sarah Collins and Jon Ihle

April 01 2021 02:30 AM

AIB was the best-performing bank stock in Europe in the first quarter as investors welcomed the departure of Ulster Bank from the Irish market and the prospect of improved revenue trends in 2021.

Shares in AIB surged 36pc in the first three months of the year - more than twice the gains for a benchmark European bank index - as CEO Colin Hunt announced deals with Irish Life and Goodbody, as well as a possible bid for Ulster's corporate portfolio.

Bank of Ireland was also among the top bank shares with a 31pc rise since the beginning of the year, with investors taking comfort from better impairment news and the prospect of a capital distribution next year.

However, both banks were among the least profitable in Europe at the end of 2020.

Irish banks’ return on equity (ROE) - a key measure of profitability - was -3.3pc in the fourth quarter last year, compared to +2pc in the EU as a whole, data from the European Banking Authority (EBA) show.

ROE was negative in three out of four quarters last year, and barely above zero in January 2020.

Despite the bad news from last year, shareholders have responded positively to forward-looking news in 2021, including NatWest's decision to close Ulster Bank.

"The Ulster Bank exit is seen as bad for Ireland but it does mean fewer players in the market," said Eamonn Hughes, senior financials analyst with Goodbody. "That business will get divvied up which is good for everybody else."

The market's positive outlook on Irish bank stocks contrasts sharply with negative news for consumers on branch closures, persistently high interest rates and reduced competition in the market.

Irish banks have staged a major turnaround since last May when they were among the worst stocks in Europe.

Positive announcements since then, however, has brought investors back, despite a combined loss of €1.5bn at the big two banks.

With a recovery likely in the second half and the possibility of writebacks on impaired loans, both banks are talking about dividends in 2022.

However, high-levels of non-performing loans could scupper those plans.

EBA chairman José Manuel Campa, told the Irish Independent that banks should be prudent over dividends ahead of expected Covid-19 losses.

“Prudence is really important and banks need to remain prudent in the distribution of capital because those capital buffers are there to be used, for sustaining the recovery and for absorbing losses, if needed.”