AIB raises earnings guidance and plans share buybacks

AIB has significantly raised its profitability target ahead of planned share buybacks, which will help reduce the state’s ownership of the bank to below 50 percent.

The bank said it will achieve a return on tangible equity (RoTE) – a measure of sustained profits – of more than 13 percent in 2024, up from its earlier forecast of over 9 percent for next year.

The improved performance history should allow the bank to increase cash distributions to shareholders, including dividends and buybacks, for years to come, according to a mid-term update released this morning.

A buyback program, combined with gradual share sales and opportunistic share placements, should reduce the state’s ownership to a minority position from its current 57 percent.

“The Irish economy continues to deliver economic growth and demonstrate resilience amid global economic headwinds,” said Colin Hunt, Chief Executive of AIB.

“Against this domestic backdrop, and in light of the changing banking landscape and evolving operating environment, we have revised our medium-term targets and now expect a RoTE of more than 13 percent in 2024. We are implementing our strategy to increase shareholder value and deliver sustainable returns away.”

The upward revision in profitability reflects a dramatically changed environment for the bank, with rapid rate hikes by the European Central Bank (ECB) adding hundreds of millions in loan and deposit income.

With more rate hikes due from the ECB this month and next year, AIB is exceptionally well positioned to benefit, making it a favorite of equity investors this year.

According to the bank’s own estimates, every 1 percent increase in interest rates in Frankfurt brings the bank more than 300 million euros in new net interest income.

As a result, AIB’s share price is up 39 percent this year, despite stock markets generally having performed poorly, as investors begin to understand how a rising interest rate environment translates into much stronger earnings.

Today’s solid update could therefore potentially spark another big sell-off in government stocks to meet growing investor demand after last month’s €400m market placement that reduced the government’s stake by 5 percent.

More liquidity in the stock would be welcomed by institutional investors clamoring for more access to ownership of the bank and potentially opening a window for a deal before Christmas, informed sources said.

However, analysts said there is still no clear view of returning capital to shareholders as the ECB worries about loan losses if a recession hits next year.

Additionally, higher future costs at AIB — confirmed in today’s update — could dampen enthusiasm for the stock and offset good news on profitability, they said. AIB raises earnings guidance and plans share buybacks

Fry Electronics Team

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