DON’T blame me, blame the accountants. These were not Richie Boucher’s exact words, but the chief executive’s frustration was obvious when explaining why Bank of Ireland has delayed the resumption of dividends for another year.
Brexit uncertainty provides an obvious excuse to hoard cash, with the UK contributing about 20% of the bank’s income. Boucher was clear, however, that wild swings in how the deficit on the staff pension scheme is measured was the main reason why there would be no payout for shareholders until 2018.
According to the bean-counters, the pension deficit was €740m at the start of 2016. By mid-year it had ballooned to €1.2bn. Now the reported deficit is down to €450m, according to 2016 results issued on Friday. “This is due to an accounting convention,” said Boucher. “It has nothing to do with the underlying economics of the pension scheme.”
The wild gyrations may be questionable but, unless accountants can be persuaded to check their figures, Bank of Ireland’s pension woes will continue to have very real consequences for shareholders.
“Although it is disappointing that the bank did not report a dividend, as had been the chief executive’s guidance, the quality of the financial result continues to improve,” said Merrion Private in a note for clients. These results included underlying profits of almost €1.1bn for 2016, a healthy net interest margin of 2.19% and a reduction of €4.1bn in non-performing loans.
Ulster Bank’s 2016 results, also issued on Friday, allowed it to steal a march on Bank of Ireland. Having returned €1.5bn late last year to its UK parent RBS, Ulster could claim to be the first big bank in Ireland to pay a dividend since the crisis.
A return to the broker market during the year helped to fuel a 48% increase in mortgage lending to more than €1bn, boosting Ulster Bank’s share of the market from 14.5% to 18.5%. “For a bank our size, with 110 branches, the broker channel provides a great way of getting in front of more customers,” said chief executive Gerry Mallon. He declined to quantify how much more of the market Ulster Bank had in its sights, adding that he did not want to limit the lender’s ambitions by setting targets.
Some of this growth came at the expense of Bank of Ireland, whose mortgage lending grew by only 2% in 2016 to €1.4bn, resulting in its market share slipping to 25%.
This could have something to do with Bank of Ireland’s refusal to distribute through brokers, which sell about one in five mortgages. According to Boucher, this is unlikely to change. It seems plausible, though, that Bank of Ireland might be persuaded to end its isolationism if it could extract a better deal on commissions from brokers.
Apart from turning the bank around from near extinction, Boucher’s other legacy will be his decision to dump its outdated IT systems and start again. Up to €1bn has been earmarked for the project over the next four years.
When Boucher used the term “spending” at a media briefing on Friday, finance director Andrew Keating interjected that “investing” might be a more accurate description.
The aim is to help reduce Bank of Ireland’s cost-to-income ratio to less than 50%. Based on the 2016 results, the new IT system cannot come soon enough, because the ratio edged up to 58% last year from 53% in 2015.
Once in place, Boucher said the system should help to slash the €400m a year that Bank of Ireland currently spends on IT, much of it dedicated to patching up outdated legacy systems rather than helping to exploit the opportunities offered by technology to grow the business. “These old legacy systems are costly to run,” he said.
The investment will reduce the need for outsourcing, and for paper-pushing by Bank of Ireland’s staff. They are being encouraged to upskill, but not everybody might feel at home in the tech-heavy bank of the future.
The changes will not be obvious to those outside the bank until the end of 2018 at the earliest, when the banking platform is due to be opened to new business, to be followed eventually by existing customers.
Boucher foresees revenue opportunities as new technology increases customer satisfaction levels. The resumption of dividends is sure to have the same effect on shareholders.