Bank of Ireland Group PLC (BKRIF) (H1 2026) Earnings Call Highlights: Profit Soars 36% as ...

Negative Points

• The company faces an uncertain geopolitical backdrop, which could impact the Irish economy and the bank's performance, despite current resilience.

• Net interest income growth in H1 was modest at 2%, with balance sheet growth and hedge rollovers only partially offsetting the impact of lower rates and planned deleveraging.

• The UK lending book reduced by 2% as part of a disciplined strategy focused on optimizing returns over volume, which may limit growth in that segment.

• The full-year cost of risk guidance was improved to mid-to-high 10s basis points, but this still implies a significant step-up from the H1 charge of 8 basis points, reflecting a cautious outlook.

• The company expects continued deleveraging in international corporate portfolios, with 1.2 billion remaining, which will reduce NII and require careful management.

• Average salary per employee increased by 6-7% annualized in H1, partly due to insourcing and hiring skilled staff, which could pressure cost growth.

• The savings and investment account initiative is still pending government details, and the company's readiness may require significant lead time, creating uncertainty.

• Competition in the Irish mortgage market is evolving, with potential pressure on margins from non-bank players, though the company maintains discipline.

• The NII outlook for 2028 is heavily dependent on the structural hedge repricing, with about 60% of the upgrade driven by rates, which could be volatile.

• The company's cost-to-income ratio improvement was only 0.8% in H1, which is modest relative to the 600 basis point target by 2028, requiring sustained execution.

Q & A Highlights

Q: Could you provide more color on the credit performance in the period and the eight basis points, what it would look like excluding the insurance credit and recoveries, and how are you thinking about developments into the second-half and next year? A: Mark Spain (CFO): We've had a really strong outturn in asset quality in the first half. Our NPE ratio at 2% is at multi-year lows, and our customers are weathering the uncertain geopolitical environment very well. The H1 charge was eight basis points, which included a EUR30 million benefit from credit insurance and about EUR30 million in recoveries, primarily in our corporate portfolios. For the full year, we've taken a balanced approach by applying our original guidance to the second half, leading to a revised cost of risk guidance of mid-to-high 10s basis points, an improvement from the previous low-to-mid 20s guidance.

Q: You've upgraded your full-year guidance for net interest income, asset quality, RoTE, and capital generation. What are the key drivers behind this upgrade, and what are your updated expectations for 2026 and the outlook to 2028? A: Mark Spain (CFO): We've upgraded our FY26 NII guidance to around EUR3.5 billion, up from EUR3.4 billion, and we now expect NII of around EUR3.75 billion in 2027 and greater than EUR3.95 billion in 2028. This is driven by higher interest rate expectations, a larger structural hedge, and strong balance sheet growth. We now expect statutory RoTE of greater than 14% for 2026, up from 12.5%, and EPS growth of greater than 35%. We also see capital generation of around 270 basis points, up from 250 basis points previously.

Q: You increased the structural hedge by EUR8 billion in July. Can you explain the rationale behind this decision and whether there is more scope to increase the hedge further? A: Mark Spain (CFO): The EUR8 billion increase, which takes the total hedge to about EUR77 billion, was based on analysis of the performance and behaviors of our Irish deposit base over the last cycle. We put it on at an average yield of 2.96% with the same duration as the existing hedge (three and a half years). This decision enhances our NII resilience and has reduced our sensitivity to interest rates by approximately a third. From here, the hedge will grow in line with deposits, and this was the material intervention.

Q: Could you provide an update on the progress of deleveraging portfolios and when you expect this to be largely completed? A: Mark Spain (CFO): We had EUR1.8 billion of deleveraging portfolios at the end of December, which has now reduced to EUR1.2 billion, covering US LAF, corporate GB, and US CRE. We're making good progress, slightly ahead of pace in the first half. We've allowed for this in our NII guidance for this year and out to 2028, and broadly, these portfolios will be fully run down by the end of 2028.

Q: What are you seeing in terms of competition on the ground, particularly with international players entering the market, and how do you view the opportunity and risks around the savings and investment account? A: Myles O'Grady (CEO): We're very pleased with the performance of our deposit book, with everyday banking balances up 3%. We're very supportive of the savings and investment account initiative, as it aligns with our strategy to grow our affluent and mass affluent wealth business. We have a unique wealth business with two strong brands, New Ireland Assurance and Davey Wealth, and our AUM has grown to an all-time high of EUR65.5 billion. We're working hard to be ready for this product and see it as an opportunity to deepen and expand our franchise.

Q: Your staff numbers are down 2% since December, which is running ahead of your previous guidance of about 3% per annum. Can we expect this to accelerate, and how should we think about average salary per employee increasing? A: Myles O'Grady (CEO): Our strategic intent is to achieve a cost-income ratio in the mid-40s by 2028, which requires an improvement of 600 basis points. This is driven by average income growth of 4% per year and average cost growth of around 1%, including a gross cost reduction of EUR250 million, of which we've secured EUR41 million in H1. We expect an average FTE reduction of about 3% per year, mainly through natural attrition. On average salaries, we're making a conscious choice to insource capabilities previously outsourced, particularly in technology and cyber protection, which impacts the average salary metric.

Q: On the NII trajectory, it seems like the growth is coming primarily from the hedge repricing. Would you consider the 2027-2028 NII guidance to be conservative given volume growth and the higher ECB rate assumption? A: Mark Spain (CFO): Our NII trajectory from 2025 to 2028 shows about 40% coming from balance sheet growth driven out of Ireland and about 60% from the repricing of the hedge. We're upgrading our 2028 NII guidance to greater than EUR3.95 billion from greater than EUR3.85 billion. About 60% of that delta is due to the higher ECB rate assumption (2.5% vs 2.25%), with the balance from hedge-related factors, including the EUR8 billion increase. At greater than EUR3.95 billion, we're within a stone's throw of EUR4 billion.

Q: The mortgage volumes are very strong, but at the sector level, mortgage margins appear to be under pressure relative to swap rates. Are we going to see increasing pressure from non-bank players, and is the current level sustainable? A: Myles O'Grady (CEO): Our mortgage business has delivered a really strong performance, with the book growing 6% on an annualized basis while maintaining strong pricing and risk discipline. We don't see pressure on margins. Our pricing strategy for mortgages is always related to our deposit book pricing, as the Irish franchise funds our mortgage book. We've seen the asset yield expand in H1 versus H1 of last year, which is an example of that discipline coming to life.

Q: On the savings and investment account, how ready are the two platforms across New Ireland and Davy? Will it need a long lead time before it's ready?<

For the complete transcript of the earnings call, please refer to the full earnings call transcript .