Financials Unshackled Specials: UK & Irish Results Season Recap (Issue 55)

The INDEPENDENT voice on banking developments - No stockbroking, no politics, no nonsense!

The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer

Welcome to Financials Unshackled Issue 55. Following a short break from writing, the purpose of this note is to flag some key take-aways following the recent round of listed UK and Irish banks’ results - it is not a granular line-by-line analysis and, instead, focuses in on what I thought was most interesting within the updates. Rather than the usual bias of these notes towards the UK, the UK bank pieces are crisper given how much time has passed since some of the updates (the Irish banks’ updates are fresher). My writing break is over and Autumn 2025 is set to be hectic! The usual weekly note will be back in your inboxes on Sundays going forward and will be relabelled ‘The Financials Unshackled Weekender’ - which will continue to be supplemented with occasional ‘Financials Unshackled Specials’ notes.

Photo by Ben Moreland on Unsplash

The note is structured as follows:

1. Listed UK Domestic Banks (LLOY, NWG, BARC, PAG) Results Review

2. Listed Irish Banks (BIRG, PTSB, AIBG) Results Review

1) Listed UK Domestic Banks (LLOY, NWG, BARC, PAG) Results Review

Prelude - motor finance and other talking points

1. A word on motor finance given subsequent developments (of most relevance to LLOY of the four listed UK domestic banks discussed in this section - and, to an even greater extent, Close Brothers Group (CBG) and Secure Trust Bank (STB)): It is worth noting that banks’ results were published prior to the Supreme Court judgment of Friday last on three linked appeals (Hopcraft, Wrench and Johnson) in relation to cars purchased on credit. The Supreme Court upheld the appeals over finance options arranged by lenders, judging that the dealers did not owe the customers a fiduciary duty - meaning that the banking sector can breathe a sigh of relief as the worst case scenario has not manifested (worst case estimates had been for a total compensation bill for the banking industry in the region of £40-50bn). However, the Court determined that, in the Johnson case, the appeal was not allowed - and that Johnson was entitled to succeed in his claim because of an unfair relationship between Johnson and the lender. The unfair relationship was based on three factors: i) the size of the commission paid by the lender to the dealer; ii) the failure to disclose the commission; and iii) the concealment of the commercial tie between the dealer and the lender. The FCA confirmed on Sunday that it will consult on an industry-wide redress scheme (the consultation is set to be published in October) to compensate motor finance customers who were treated unfairly. While we will have to wait until the Consultation Paper publication in October to learn of the proposed parameters, it has been received as reassuring news that the FCA estimates that most individuals will probably receive less than £950 per agreement and thinks the cost of the scheme (including operational costs) is likely to be in the £9-18bn range, although the language used in Sunday’s press release indicates it expects that it will be at the lower end of that range - and possibly even below £9bn: “The FCA thinks it unlikely the cost of the scheme, including to run it, would be much lower than £9 billion. And it could be higher, up to £18 billion in some scenarios though the FCA doesn’t believe these are the most likely. A total cost midway in the range, as forecast by some analysts, is more plausible.”. While it is natural to prudently assume the midpoint of the £9-18bn range and work back from there to what the cost could be at an individual lender level (especially given what some will see as the FCA’s quasi-validation but “plausible” is categorically non-committal language), my own gut view would be that a range of ‘just’ £8.5-11.0bn could be a more realistic assumption. Time will tell.

2. Could we see reduced minimum capital requirements arising from the Capital Framework Review? I issued the following view in Financials Unshackled Issue 53 here on 13th July last (which seemed to be the thinking at the time) but, suffice to say, that lots of excitement has built since then around potentially lower capital requirements: “It will be interesting to see how the approach to capital buffers evolves - and what that could mean for bank capital flexibility. A push for simplification is growing internationally. Indeed, one might recall Bundesbank Executive Board Member Michael Theurer’s recent comments “If it was up to the Bundesbank, we could radically simplify the different capital buffers, ideally in a releasable and a non-releasable buffer” and, given these comments, together with Breeden’s remark to the effect that international regulators should have a debate over the best usage of banks’ capital buffers based on the experience of the COVID-19 pandemic, one wonders whether there is already some ‘behind-the-scenes international coordination’ underway in a capital buffers context. There are lots of permutations in relation to possible changes of the capital framework - for example: i) simplification of the buffer stack (reducing the number of distinct buffers / clarifying the interaction between different buffers / a push to make the rules more principle-based); and/or ii) refinement of Maximum Distributable Amount (MDA) rules. In practice, the markets see the CCyB as the only truly releasable buffer given its design specifies that it is intended to be released by authorities through a downturn. While I wouldn’t go so far as to suggest that simplification could drive lower minimum capital requirements (indeed, on a separate but related note, PRA CEO Sam Woods reportedly commented to reporters this week that the FPC has “no intention” of reopening discussions on Basel 3.1 implementation), to the extent that a larger portion of capital were too become held in clearly defined releasable buffers, there would be greater certainty of flexibility in a downturn - which would likely be welcomed by investors and stakeholders more broadly.”.

3. Are bank taxes going to be jacked up in the Autumn Budget given the well-documented pressures on the fiscal finances? As a quid pro quo for potentially lower capital requirements, ringfencing loosening, mortgage affordability rules loosening, etc.?

4. Will MTRO and OSB find their way out of the need to issue MREL debt and get to retire their existing MREL issuance? (I wrote about this in detail in a MTRO context in Financials Unshackled Issue 54 here).

5. Will the PRA’s Discussion Paper (published on 31st July here) to explore different options that affect how firms can determine capital requirements for residential mortgage loans under the IRB approach pave the way for faster IRB accreditation for lenders like PAG, OSB, and others? MTRO anyone?! Or, indeed, would banks like Aldermore and Shawbrook reconsider going down the IRB accreditation route as a result? For LGD (loss given default) the PRA is considering a ‘foundation IRB approach’. This would allow firms to use PRA-prescribed values for loss given default instead of estimating their own. Firms would still need to model probability of default but the PRA is also considering amendments to address challenges faced by firms in estimating this.

Lloyds Banking Group (LLOY) 1H25 Results (Thu 29th Jul) Review

Overall Synopsis:

A very strong and reassuring update. Significant beat to consensus in 2Q but it didn’t culminate in improved guidance for FY25 or for medium-term targets (all of which were reaffirmed) and we didn’t see much of a share price reaction. Overall, in the absence of any significant surprises, this was always going to be a dull update (reassuring for shareholders I would argue) - as it was going to be hard to get the market excited as investors became increasingly angsty coming into Friday’s Supreme Court judgment. The reality is that FY25/26 consensus has drifted up quite a lot and the key delta between management guidance for FY25 RoTE of c.13.5% and the 12.0% consensus expectation relates to motor finance redress & operational costs provisioning (pre-results cons was for a FY25 remediation charge of £1,022m; the 1H25 print was just £37m) - a number of the questions on the earnings call and the subsequent sell-side roundtable just focused on seeking to unbundle 3Q and 4Q-specific movements from the implied 2H25 guidance. Indeed, FY26 consensus RoTE is now 15.5% (that’s up a lot from 14.2% in January) versus management’s >15% target. The excitement came in the aftermath of the results - with the stock price up a whopping 9% today in the wake of Friday’s Supreme Court judgment.

2Q25 Results versus Consensus:

A strong beat with u/l PBT of £2,029m 13.6% ahead of consensus, attributable to: i) a marginal 0.3% income beat (notably, management appears to have delivered in reducing OLD volatility); ii) a 0.6% u/l opex beat (but FY25 guidance was retained); iii) significantly lower remediation charges of £37m versus cons for £136m; and iv) a significantly lower impairment charge of £133m versus consensus for £282m (I suspect the market was looking for a lower print than cons here anyway given CFO commentary at 1Q and in subsequent conferences). This culminated in a RoTE of 15.5% versus cons for 13.1%. The CET1 capital ratio of 13.8% (post-interim dividend, which was +15% y/y) was in line with cons.

Other Key Take-Aways:

A few other notable points:

• Structural hedge income contribution likely to be more muted in 3Q but will strengthen significantly in 4Q - but NIM still expect to accrete q/q through the remainder of FY25.

• Mortgage completion margins in 2Q were c.70bps, a few bps tighter than in 1Q, and are expected to remain stable at the c.70bps level through 2H.

• Deposit churn is expected to flatten off going into FY26, i.e., less of a headwind for FY26.

• CEO and CFO both emphasised confidence in hitting the <50% FY26 CIR target (cons is for 51.2%), with the CEO talking in some detail about the efficiencies LLOY is focused on generating to achieve costs stabilisation (and, notably, addressed the ‘elephant in the room’ remarking that that the COO is “…really one of the best CIOs and COOs in the world”!) and the CFO cautiously, yet firmly, noting that “we will not meet the cost income ratio guidance by much, this is going to be a fairly close thing, but nonetheless we do expect to meet it, to be very clear, and we will make sure that we meet it”.

• There was a question on the Fixed Income Investor call this time on why LLOY is not looking to navigate to the 13% CET1 ratio target sooner - in terms of my own reflections on this, I think it is notable that the end-FY25 cons CET1 capital ratio is 13.8% but this will surely come down now given: i) the ‘motor finance blow’ is not expected to be so bad; and ii) there will presumably be improved clarity by early 2026 on what the ultimate costs hit will be giving management more confidence to push towards that target sooner.

• The CFO made some strong remarks at the sell-side analyst roundtable on 29th July around how the target CET1 capital ratio level of 13% is set for independent reasons and that the results of the Capital Framework review would not necessarily lead LLOY to revise this target - also noting that LLOY is not “banking on the output” (notably, these points were made subsequent to the NWG CFO’s remarks on that bank’s openness to revisiting its own target (which is effectively higher given it’s a range by the way) on the NWG 1H25 earnings call on 25th July - see below). Valid points undoubtedly but sensibly sufficiently caveated - particularly noting that nominal capital levels have increased, the management buffer has remained unchanged, and LLOY derives a lot of confidence in a capital replenishment capability context owing to its strong capital generation (note that I do appreciate the point that the CFO was making on the management buffer interplay with nominal levels was to exhibit pre-existing caution, i.e., LLOY didn’t take the buffer down when the absolute quantum of capital within the buffer rose by virtue of RWA density expansion but I think you can look at these comments through a couple of different lens).

• Finally, it is worth noting that, very helpfully, LLOY has decided to issue preliminary FY results going forward ahead of the full Annual Report & Accounts publication. So, we will get the FY25 preliminary results on 29th January 2026 followed by the fuller update on 18th February 2026. Now the question is will peers follow suit?

NatWest Group (NWG) 1H25 Results (Fri 25th Jul) Review

Overall Synopsis:

A strong and reassuring update. Decent beat to consensus in 2Q, leading to improved FY25 guidance on two fronts: i) income (excl. notable items) now expected to be >£16bn (up from upper end of £15.2-15.7bn); and ii) RoTE now expected to be >16.5% (up from upper end of 15-16%) - though there was arguably more propensity for an upgrade here relative to LLOY given the arguably relatively conservative guidance (indeed, a question surfaced on this very point on the earnings call). FY27 targets were reaffirmed - and, in response to the analyst question on conservatism, there was no strong pushback to the consensus FY27 RoTE 17.2% view (relative to the >15% target).

2Q25 Results versus Consensus:

A decent beat with u/l PBT of £1,773m 7.5% ahead of consensus, attributable to: i) a 1.3% total income beat (NII 0.4% below cons, OOI 7.3% above cons); ii) a strong 2.6% opex (excl. litigation & conduct charges) beat (but FY25 guidance was retained and it was explicitly noted on the 1H25 Fixed Income Investor call that 2H25 costs will be higher than 1H25); and iii) a lower impairment charge of £193m versus consensus for £226m (notably, this implies a 19bps CoR but only 11bps if you strip out the Day 1 ECL charge related to Sainsbury’s Bank). This culminated in a RoTE of 17.7% (18.1% for 1H25) versus cons for 15.8%. The CET1 capital ratio of 13.6% (post-interim dividend of 9.5p and a fresh £750m buyback announcement) was in line with cons.

Other Key Take-Aways:

A few other notable points:

• Some helpful product gross structural hedge income guidance for FY26/27 was set out on Slide 12 of the results deck (FY25 guidance was reiterated) and it was noted that the product hedge notional is expected to remain broadly stable in FY25.

• The CFO noted there is more to do in a liquid assets recycling context.

• There was a question on the potential risk of structural hedge income growth ‘givebacks’ (as an aside I am always amused when these ‘fancy themes’ become key talking points in the market - this basically means, given the structural hedge income tailwinds for the sector, is there a risk that competition drives NII down to a level consistent with more normalised returns - which basically translates into mortgage flow spread risk and/or deposit spread/churn risk, which are constant questions everyone asks about anyway but it’s all about the ‘packaging’ I guess!). The answer was basically no; competition is strong in the mortgage market anyway and while NWG has been originating mortgages at spreads of <70bps, spreads do appear to be stabilising around that c.70bps level (consistent with LLOY’s messaging). A separate - entirely related - question surfaced at the sell-side analyst roundtable (which I attended on Wednesday last and I suspect a transcript will be posted to the website later this week) on deposit competition, with NS&I’s recent moves in particular focus. The CFO noted sterner competition (ISA season) in 2Q (albeit deposit margin expansion was the main underpin for the 1bp of q/q NIM expansion in 2Q as NWG did not compete as aggressively as some peers for ISA monies, maintaining stable share). NS&I’s moves were acknowledged though it was highlighted that there is no surprise here given NS&I’s known higher funding target for 2025/26 (of £12bn, up from £9.75bn last year). Indeed, I would add we have seen larger y/y increases in NS&I’s annual funding targets in the past (pre-Covid, for example) - though the outturn often far surpasses its target so it absolutely makes sense to watch its price moves very closely.

• The CFO made it clear on the earnings call that there is no skimping on investment despite the substantive cost reduction achievements, which have been remarkable - especially relative to where expectations were a few years ago. A number of reasons for this view were articulated, including the recently announced strategic collaboration with AWS and Accenture to accelerate the use of data and AI.

• The 2Q25 CoR print (excl. Sainsbury’s Bank Day 1 ECL charge) was just 11bps, prompting a question on the earnings call around whether the historically indicated 25-30bps through-the-cycle CoR guidance would be recalibrated. The CFO indicated that management will reflect on this, indicating an openness to doing so.

• In relation to potential changes to the capital framework (i.e., potentially lower minimum capital requirements), the CFO gave a sense of more openness to reviewing the CET1 capital ratio target than the LLOY CFO did (though one suspects their philosophies are not too far removed when it comes to the crunch…). Indeed, the language prompted a question as to whether the target range is under firm review - which, the CFO reassuringly noted, is something “we’ve talked about quite a few times…we’re always alive to how these things look and what's happening in the market”, noting the increase in nominal capital levels in recent years too.

• The Treasurer noted on the Fixed Income Investor call that NWG is running at excess levels of headroom in AT1 and Tier 2 relative to minimum requirements having taken advantage of positive market dynamics in FY24 - noting that this is expected to normalise in time (and mentioned potential for a clean-up AT1 trade later this year or in early FY26).

• The CFO noted at the sell-side analyst roundtable that NWG typically uses a CoE of 11-12% in its evaluation of investment (e.g., M&A) opportunities. However, she also noted that, given NWG is delivering a RoTE of >15%, no acquisition would be completed that would be a drag on group-wide returns for some time.

Barclays (BARC) 1H25 Results (Tue 29th Jul) Review

Overall Synopsis:

Another very strong update. Material beat to consensus in 2Q but FY25 guidance unchanged. Management also re-emphasised that the FY26 targets were never said to be a resting place - and that BARC is expected to grow further from there.

2Q25 Results versus Consensus:

A very strong beat with u/l PBT of £2,484m 11.1% ahead of consensus, attributable to: i) an impressive 2.5% total income beat (NII 1.1% above cons, OOI 4.3% above cons) - however, within this, there was a miss on BUK NII though largely related to accounting timing in relation to swap maturities recognition and there clearly is strong NII momentum in the business from an overall perspective owing to hedge income, loan growth, and maturation of USCB card balances; ii) a marginal 0.3% opex (excl. litigation & conduct charges) beat; and iii) a lower impairment charge of £469m versus consensus for £558m. This culminated in a RoTE of 12.3% versus cons for 11.0%, with all divisions generating double-digit RoTE in 2Q25 (notably, FY26 consensus RoTE still sat below the >12% FY26 target pre-results but results like this are likely mildly constructive in this vein). The CET1 capital ratio was 14.0% prior to accounting for the fresh £1bn buyback announcement (13.7% post-buyback).

Other Key Take-Aways:

A few other notable points:

• Structural hedge income - c.97% now locked in for FY25 and c.80% for FY26 (£11.1bn in totality locked in versus £10.2bn at end-1Q25).

• Structural cost actions will be skewed towards 2H and will be towards the top of the normal £200-300m annual range.

• RWAs were broadly flat q/q and the Investment Bank proportion of Group RWAs remained stable at 56%. No more detailed questions on this on the earnings or Fixed Income investor calls but it will remain a topic of focus in the context of the end-FY26 c.50% target. Positive messages conveyed in relation to BARC’s ability to deliver c.£30bn UK RWA growth by end-FY26 (£17bn delivered thus far, £10bn o/w via organic growth) but it feels like more M&A may be necessary to get there (could a specialist lender slot into Kensington, perhaps?).

• Further on Kensington, it was interesting to learn that it has moved up the risk curve - leaning into the UK macro. High LTV mortgages now represent c.25% of flow versus 15% a couple of years ago - this seems worth pursuing given management commentary to the effect that mortgage margins are c.4x that of BUK, provided the economy doesn’t take a nosedive. Indeed, I have argued for a very long time that the risk-adjusted returns available on specialist mortgage lending significantly exceed those on mainstream mortgage lending (assuming same RWA densities, capital requirements, etc.). BARC clearly recognises this too. So, I ask again, could it be tempted to buy another specialist lender (despite the fact that the main motive underpinning the Kensington deal was to acquire its platform capabilities) - serving a dual purpose to drive margin (and RoTE) enhancement as well as address the RWAs proportionality conundrum. It would surely be congruent with Venkat’s strategic objective to ‘deliver’ a bank that generates structurally higher returns from a more diversified business model.

• A question was asked on the earnings call about how BARC feels about its competitive position in the IB in the event that US competitors ‘have more leverage handed to them’ by virtue of US Enhanced Supplementary Leverage Ratio changes (Paul Davies at Bloomberg penned an interesting piece on this a few weeks ago here). I felt that the Finance Director’s comments in response to the effect that management is confident in its ability to compete effectively (with some detail) were not enormously convincing and that this is a competition risk. Venkat didn’t elaborate.

• A further interesting strategic question arose on the Fixed Income Investor call on the strategic significance of USCB and it is worth quoting the Finance Director’s high conviction remarks on its centrality to the BARC business: “…it's important to understand that we see this because it's a partnership business – it's not a direct-to-consumer business in the same way as our UK business is. We really see this as a business with 20 million customers, yes, of course, but it's actually 20 significant corporate clients. And we see ourselves as providing consumer credit to those largely IB clients. So that's really what's different about that part of the bank. So, you can see the nexus that it's got to the IB, but it's also important to just stress the amount of connectivity between the two cards businesses on either side of the Atlantic. So, we share modelling and capital approaches, and we also are able to use the capability that we have in the US to bring across to Barclays UK. You can see it increasingly running a partnership model – not just with Tesco, but with Amazon and with Avios. All of that capability and attitude comes from the US. So, there's quite a connectivity here…”.

• BARC continues to be very comfortable operating towards the upper end of its 13-14% target CET1 capital ration range (noting that this denotes capital management flexibility) - given its MDA level of 12.2% and given the Pillar 2 that it is carrying ahead of the US model being implemented. Management welcomes the Capital framework review without specifying whether it would be prepared to operate below its current target range given various regulatory uncertainties - though it clearly would take into account any downward movements in minimum requirements in the future calibration of its target range.

Paragon Banking Group (PAG) 3Q25 Trading Update (Tue 29th Jul) Review

PAG issued a customarily short trading update for 3Q25 (the three months to 30th June) on 29th July and the share price took a nosedive in response to: i) slightly more cautious FY25 loan growth guidance; and ii) impairments commentary.

Specifically, on loan growth, PAG revised down its FY25 mortgage lending advances growth of £1.6-1.8bn to c.£1.6bn - despite the fact that this was caveated with strong BTL pipeline commentary (which grew by 27.6% from its end-2Q level), with the statement noting that the downward revision to lending volumes was because the growth in the pipeline was skewed towards the end of the period.

On impairments, there was a 3bps q/q increase in 3M+ arrears in the BTL portfolio to 54bps at end-1H25 (which was up from 38bps at end-FY24), the main concern was related to the following commentary in a development finance portfolio context: “…the work out of the cohort of development finance loans from early 2022, impacted by the step-up in interest rates and inflation, continues to generate impairment requirements” - though the statement did note that there were no new development finance default cases in the quarter.

The CET1 capital ratio of 13.6% was -60bps q/q compared with a 20bps q/q reduction in 3Q24. Half of the assumed final dividend and the full £100m buyback for both financial years were felt in 3Q25 and 3Q24. The statement noted that this print was in line with management’s expectations.

It seems that the market is very sensitive to any slightly disappointing commentary.

2) Listed Irish Banks (BIRG, PTSB, AIBG) Results Review

Bank of Ireland Group (BIRG) 1H25 Results (Tue 29th Jul) Review

Key Take-Aways / Perspectives:

• All-in-all it was a solid financial performance on most metrics in 1H25 - with adjusted RoTE coming in at 14.8% - but u/l PBT of €804m was 5.2% (€44m) below consensus, largely reflecting the net impact of: i) a c.1.5% miss on income (€30m lower than cons); ii) a decent c.1.5% beat on opex incl. regulatory charges (€13m below cons); iii) higher impairments than cons (€23m above); and iv) a lower share of associate income. Non-core costs came in at €83m, well above consensus for €62m.

• While BIRG maintained its guidance for a FY25 adjusted RoTE of c.15% and reiterated its expectation for adjusted RoTE to build to >17% by FY27, components of the FY25 guidance were changed as follows: i) NII guided up from >€3.25bn to c.€3.3bn; ii) Levies and regulatory charges expected to be c.€130m versus previous guidance for “broadly stable” versus FY24 charge of €123m (you could argue this is not a downgrade to be fair); iii) impairment charge now expected to be c.30bps up from low to mid-20’s; and iv) non-core costs expected to be broadly similar to 1H25 outturn of €83m, implying FY25 non-core costs of c.€166m versus previous guidance of €100-125m.

• The stock was hit hard relative to the sector on the day of the results. A multitude of factors appears to explain the relative underperformance.

  • Firstly, the unexpectedly sharp increase in provision charges within the bank’s US leveraged acquisition portfolio received a lot of attention. Specifically, BIRG recorded a net credit impairment charge of €137m (annualised CoR: 33bps), split into a net portfolio charge of €97m and a €40m charge for additional management adjustments to reflect the evolving macro outlook. The 1H25 Report notes that the specific €97m charge primarily reflects case specific loss emergence mainly on defaulted cases in the corporate portfolio (primarily US Acquisition Finance) partly offset by credit protection. The CEO sought to characterise this as “pre-emptive” a number of times on the earnings call. While the €40m of additional management adjustments can, most likely, be characterised as such, this explanation is harder to fully subscribe to in relation to the portfolio charge which is described as relating to “loss emergence” and “loan loss experience”. However, the CFO did also comment that it doesn’t represent actual losses so let’s wait and see - and BIRG has traditionally been conservative in a guidance context in this vein. That said, the revised guidance for the FY25 impairment charge implies a high-20’s CoR for 2H25 (i.e., above prior FY25 guidance) and the CFO noted on the earnings call that management assumes a similar level of portfolio loss activity in 2H to that experienced in 1H25. The CFO went on to note that, moving out to FY26 and FY27, he would see a normalised CoR somewhere in the mid-20s - which is broadly in line with consensus. While FY25 guidance may be conservative and it is notable that almost one-third of the 1H25 impairment charge related to management adjustments (and it is also important to note that this comes despite a 50bps reduction in non-forborne Stage 2 loans h/h as well as an outright reduction in forborne loans (albeit notable adverse credit migration trends were observed in the €3bn forborne portfolio)), the market will remain attentive to trends in the c.€1.5bn Acquisition Finance portfolio over the coming reporting periods. Indeed, it was interesting to read a Bloomberg report last week here, which noted that PE-owned companies drove an 80% q/q increase in defaults in 2Q25.

  • On the non-core costs, BIRG management is now guiding to charges of c.€166m for FY25 (versus previous guidance for €100-125m) and a broadly similar level for FY26 before materially reducing in FY27. The CFO sought to characterise this as an acceleration in restructuring activity rather than an increase in the overall restructuring costs envelope - but, naturally, some scepticism prevails given that the expected reduction is long-dated and outer year exceptional costs have a habit of creeping up. Indeed, many investors prefer to focus on an ‘all-in’ costs number (like what NWG does) as much restructuring activity can be considered to be akin to ‘maintenance capex’. While BIRG is meeting its cost targets thus far - seeing c.3% y/y growth in u/l opex in 1H25 and preserving guidance for FY25 (as well as medium-term cost targets, which consensus hasn’t fully subscribed to), the problem with having both above-the-line costs and below-the-line costs means it can be somewhat murky trying to disaggregate both and there is clearly considerable managerial judgment applied to determine what sits where.

  • A factor which seemed to receive less attention was the marked slowdown in assets under management (AUM) growth to just 1.5% h/h (€0.5bn 1Q, €0.3bn 2Q) – putting market movements aside, it was notable that net inflows were down materially relative to recent experience. This is not altogether surprising given market volatility but a decent pick-up in h/h growth is required to deliver the c.5% growth in AUM expected in FY25. One worth watching, especially as competition in New Ireland and Davy’s markets is strong. P.S.: It also feels like ‘cross sell’ of life and pension product into BIRG’s customer base (high by international standards although this is reflective of a very high c.40% mortgage market flow share) could come under pressure if mortgage flow share falls - and, perhaps, more importantly, as intermediaries continue to strengthen their presence in the Irish mortgage market.

  • On NII, an upgrade is always welcome - though this upgrade was marginal, moving from guidance of >€3.25bn to c.€3.3bn for FY25 NII - and consensus was already half-way between the two anyway. The CFO further noted on the earnings call that NII is expected to be >€3.3bn for FY26 (cons: €3.29bn) and >€3.5bn for FY27 (cons: €3.46bn), indicating some upside to consensus on this line. This is supported by continued deposits growth (Ireland particularly) and slowing churn (‘flow to term’), strong structural hedge contribution, and favourable mix shift in liquid assets (moving from cash to bonds with more to go here - which seems sensible given liquidity strength, and could be more ambitious than what is indicated). In overall terms, the messaging here - together with slightly improved deposits growth expectations - likely provided a partial positive offset in investors’ minds against the above matters.

• BIRG’s decision not to distribute surplus capital (CET1 capital ratio of 16.0% at end-1H25) beyond an interim distribution of 25c per share came in for questioning. My own sense was that management was inclined to be conservative given: i) a potential top-up to the motor finance provision in the coming quarters (but see below); and ii) macro uncertainty. That said, this is an understandable significant frustration for shareholders (if my thesis is correct then provisioning should just be higher) especially considering BIRG’s reported RoTE calculation reflects a normalised capital position (i.e., 14.0% CET1 capital ratio) and, ceteris paribus, it is mathematically undeniable that BIRG should trade on a lower multiple than UK / European peer banks who distribute excess capital with more frequency. So, shareholders suffer.

• Friday’s Supreme Court judgment in a motor finance redress-related context undoubtedly comes as good news for BIRG. The bank had, at end-1H25, provided €167m for redress and compensation costs as well as any costs that may be incurred in connection with an FCA redress scheme and/or legal proceedings.

PTSB 1H25 Results (Thu 31st Jul) Review

Key Take-Aways / Perspectives:

• All-in-all it was a weak financial performance relative to peer banks - but not unexpected by investors in Ireland’s challenger bank, with progress being made on several fronts and some reassuring messages in an outlook vein. It is difficult to get an accurate gauge on consensus, but, from what I have received: i) total income was marginally ahead (NII in line, €3m beat on OOI); ii) costs of €271m came in slightly below cons (marginal beat on both u/l and regulatory costs); and iii) impairments were broadly in line with cons - translating into an u/l PBT (actual: €51m) beat versus consensus (€42m). However, exceptional costs of €29m were significantly ahead of consensus.

• Reassuringly, FY25 guidance remains unchanged (save for a guided exceptionals charge of €32m (up from €25m) and medium-term targets were reaffirmed - and management’s expectation that PTSB will return to making shareholder distributions in FY26 was reinforced.

• The stock price mildly outperformed the wider sector on the results day following strong relative performance over recent months - and the following factors appeared to be the driving forces of that outperformance on the day:

  • Better-than-expected results versus consensus - perhaps somewhat moderated by higher exceptional costs guidance - as well as: i) preservation of u/l FY25 guidance and medium-term targets; and ii) reaffirmation of management’s determination to recommence distributions in FY26, supported by a stronger-than-expected end-1H25 CETI capital ratio print of 15.5% (notably, reduced RWAs owing to CRR3 implementation drove a better-than-expected 120bps of CET1 ratio uplift in 1H25) and further prospective capital benefits (see below).

  • Confirmation that PTSB’s IRB mortgage model application was submitted to the Central Bank of Ireland (CBI) on 30th May and that engagement with the relevant teams has begun (though, the prospective benefits are less than they were prior to the aforementioned CRR3 implementation adjustment to RWAs).

  • Other positive soundings in a capital context, namely: i) potential for 14.0% CET1 ratio target to be revisited in time (PTSB’s CET1 SREP requirement is 10.83% so that’s a buffer (excl. P2R) of 317bps; notably AIBG and BIRG report MDAs of 11.30% and 11.38% respectively compared to their CET1 ratio targets of 14.0%); ii) some capital structure optimisation is in focus (PTSB AT1 and Tier 2 ratios were an elevated 3.4% and 2.7% respectively at end-1H25 so this isn’t surprising) with PTSB “considering options in respect of instruments with upcoming call dates” (a 7.875% €125m AT1 instrument is callable from 25th November 2025 and a 3% €250m Tier 2 instrument is callable from 19th May 2026); and iii) there is potential to secure IRB accreditation for the Ulster Bank mortgage portfolio instead of using standardised credit risk modelling though this is likely to take two to three more years, according to the CFO on the earnings call.

    • As an aside in relation to this latter point, Ulster Bank accounted for these mortgages using internal risk models (see Ulster Bank 2021 Pillar 3 Disclosures here). PTSB applies IRB credit risk modelling to its own mortgage portfolios. I appreciate that IRB approvals are granted to banks on the basis of their specific internal models, data, risk management, and governance processes - with each portfolio considered independently. Indeed, the supervisors clearly need to be sure that the acquirer’s own models are capable of accurately and reliably assessing the risk of the newly acquired portfolio(s). But two or three more years (it is already more than two years since deal completion on 24th July 2023) when PTSB’s own mortgage portfolios already have attained IRB accreditation (indicating a level of comfort in relation to risk management and governance processes et al.) - really? It’s not clear whether this is because PTSB management may have been solely focused on the existing IRB review project or whether a logjam at a supervisory level means the regulator can only turn its attention to one thing at a time in the case of PTSB or indeed if there are complexities in integrating the management of the Ulster Bank back book with the existing PTSB mortgage portfolios but, commercially, it feels like a very long timeframe.

    • As a further aside, in relation to the target CET1 capital ratio level of 14.0%, the answer to a question on the call seemed to indicate that a revision is not entirely at the Board’s behest. 14.0% is an enormous target for a bank of the size of PTSB relative to peers in the Western World - not to mention its nominal capital strength, as its 6.8% leverage ratio (for a mortgage bank!!) attests to. It seems that Irish banks just cannot hold enough capital (the theme of the 1H25 earnings season more broadly, perhaps…). I suppose that’s ok if we’re going to have what is effectively a three-bank market for the foreseeable future - indeed, the three listed banks commanded >92% of mortgage flow share in 1H25. However, there is a lot of what economists would call deadweight loss.

  • Indication that deposit costs have broadly peaked (reinforcing FY25 NIM guidance of >2.0% following the 1H25 2.02% NIM print) and reiteration of favourable asset repricing dynamics outlook (maturing fixed rate mortgages) in the coming reporting periods.

  • CEO comment on the earnings call to the effect that PTSB conservatively modelled a scenario that was worse than the US/EU trade deal terms to inform provisioning - and ongoing recalibration work on IFRS 9 models is taking place, which PTSB is hoping to complete by year-end.

AIB Group (AIBG) 1H25 Results (Fri 1st Aug) Review

Key Take-Aways / Perspectives:

• All-in-all it was, once again, a strong financial performance, with u/l PBT of €1.07bn coming in 0.6% ahead of consensus. The key constituents of the beat were: i) total income was 0.9% below cons (marginal beat on NII though OOI was €24m, or 6.2%, behind); ii) costs (including bank levies and regulatory fees) of €1.09bn came in an impressive 2.2% below cons (marginal beat on both u/l and regulatory costs); and iii) impairments were broadly in line with cons. Below the line exceptional costs of €4m were well below consensus for €29m.

• AIBG made some changes to its FY25 guidance - namely: i) RoTE is expected to be >20% (versus previous guidance for meaningfully ahead of 15%); ii) customer loan growth expected to be c.3% (previous guidance for +c.5%); and iii) exceptional gains of €100m expected (versus previous guidance for exceptional costs to be immaterial). Additionally, AIBG noted that deposits are expected to grow by c.3% in FY25 following 2.4% growth YTD, i.e., €2.6bn growth in 1H25 (all in 2Q) - indeed, the CFO remarked on the call that FY25 growth could be stronger than c.3% (which stands to reason given the 1H25 experience as well as the latest Central Bank statistics, which show that Irish market-wide total deposits growth accelerated m/m in June). Management also reaffirmed its medium-term targets.

• Some other key notables were:

  • AIBG finished 1H25 with a very strong CET1 capital ratio of 16.4%, which does not include interim profits - which AIBG noted in its results report would contribute a further c.150bps to the CET1 ratio pre-distributions (I get to 163bps using end-1H25 post-tax profits and end-1H25 RWAs so I’m assuming this is a rounded number (or may reflect a few minor incremental regulatory adjustments); stripping out the announced interim dividend implies an end-1H25 CET1 ratio of 17.6% on my calculations), positioning it strongly for another bumper surplus capital distribution in early 2026. While, similar to the case for BIRG, a question on whether AIBG would be prepared to do (another) >100% payout for FY25 wasn’t answered explicitly, the language used by the CFO indicated that this shouldn’t be a problem if the Board determines that’s what it wants to do.

  • AIBG has taken action to reduce rate sensitivity and increase duration by upsizing its structural hedge significantly in 1H25 by €15bn (€10bn in January, €5bn in June). The CFO indicated that he is very confident in achieving the guided >€3.6bn of NII in FY25 (notably, AIBG is assuming a year-end ECB Deposit Facility rate of 1.75%) - with pre-results consensus already at €3.67bn. He also noted that consensus NII for FY27 of €3.61bn looks too low - which, mathematically, stands to reason given AIBG’s Deposit Facility rate assumptions, swap maturities, deposits growth & pricing experience and indicated outlook, and liquid assets recycling trends). AIBG has considerable capacity to opportunistically upsize its euro hedge (€49.1bn at end-1H25) further given the quantum of equity and non-interest-bearing liabilities sitting on its Balance Sheet (though its also considers fixed rate mortgages a natural hedge too).

  • On OOI, the CFO noted on the earnings call that those areas that were weaker in 1H25 are expected to outperform in 2H25, which is reassuring in the context of the retained c.€750m FY25 target. Elsewhere, costs appear to be under control (though consensus is for FY26 costs of €2.1bn, which is above the €2bn stretched target) and credit quality is resilient with the CFO remarking that no deterioration in asset quality has been observed.

  • On capital, the CFO pointed to prospective CET1 capital ratio benefit of 20-30bps from an upcoming SRT transaction and indicated that management is keen to see the 50% of RWAs that are subject to standardised credit risk modelling move to IRB credit risk modelling by 2030 and that it should be a fairly linear progression to that objective (he also noted that a number of projects are close to finalisation in this vein, i.e., the EBS mortgage portfolio and a project finance portfolio).

• Yet the stock underperformed the broader market on Friday and was the weakest performing Irish bank again in trading today. Why?

  • The positive points above are, arguably, no great surprise (many have been flagged already in broad terms) and the upgrade to FY25 RoTE guidance was not underpinned by any u/l profitability upgrades so was arguably just a tightening of language as the year-end comes closer. The exceptional gain quantification is helpful but not a huge surprise in the wake of the 6th June announcement here in relation to the sale of its minority shareholding in AIB Merchant Services - and is a one-off in any event.

  • Some evidence that investors often pick either AIBG or BIRG as a way to play Irish banks - with BIRG’s strong sell-off last week and the Supreme Court judgment on Friday potentially relevant factors here.

  • Disappointment with the FY25 loan growth downgrade from +c.5% to +c.3% with lower new lending levels in its climate capital unit appear to be partly responsible for the guidance downgrade. Interesting to read the following extract from a Reuters report on Friday last here: “AIB finance chief Donal Galvin said the bank "read the mood music" and had already pared back its expectations for activity in the U.S. in the first half. It will look to invest in solar, but wind projects no longer look feasible, he said. Instead, the bank will look to pivot to projects in mainland Europe, Ireland and Britain, a market Galvin said was really active but very competitive. He added that he expects to see a pick up in small and medium-sized business lending in Ireland following Sunday's U.S.-European Union deal on tariffs. "The worst-case scenario has been avoided so at least now they have a reasonable amount of certainty to push ahead with their business plans," Galvin told Reuters.”. However, I would add a final point here which is that it is low cost deposits that provide the most important underpin for NII resilience, i.e., loan growth is very much secondary - especially given liquid assets recycling capability and risk-adjusted returns considerations.

  • Last but not least, AIBG’s decision to retain surplus capital (apart from its interim dividend announcement) received much attention on the earnings call. Indeed, I opined in an article in the Business Post (on Saturday here) that “AIB management reiterated its commitment to bring its CET1 capital ratio down to target levels but indicated that this may take longer than had been expected. My observation is that the vast majority of peer UK and European banks distribute excess capital to their shareholders on a multi-annual basis. Operating with extreme prudence costs shareholders money. Capital allocation is a central and fundamental role of bank management. So, unless there is an ‘invisible hand’ at play in the background that is forcing these decisions or management teams are concerned about risks to capital that they have not articulated, there is no good reason whatsoever to hoard capital in my view.”. My own sense is that this is just conservatism on the part of management (on its decision not to do a special divi / buyback and on CET1 trajectory comments) and, given that 1H25 represented the inaugural post-GFC interim distribution, management potentially felt that this was enough to maintain momentum in investor sentiment before, perhaps, seguing to an interim buyback / special dividend in FY26 or later. This seemed to be the most important factor that drove selling pressure on Friday - but it is also important to remember, as noted above, that AIBG’s relative share price performance was stronger than its domestic peers in the lead-in to its interim results.

⚠️ Disclaimer ⚠️

The contents of this newsletter and the materials above (“communication”) do NOT constitute investment advice or investment research and the author is not an investment advisor. All content in this communication and correspondence from its author is for informational and educational purposes only and is not in any circumstance, whether express or implied, intended to be investment advice, legal advice or advice of any other nature and should not be relied upon as such. Please carry out your own research and due diligence and take specific investment advice and relevant legal advice about your circumstances before taking any action.

Additionally, please note that while the author has taken due care to ensure the factual accuracy of all content within this publication, errors and omissions may arise. To the extent that the author becomes aware of any errors and/or omissions he will endeavour to amend the online publication without undue delay, which may, at the author’s discretion, include clarification / correction in relation to any such amendment.

Finally, for clarity purposes, communications from Seapoint Insights Limited (SeaPoint Insights) do NOT constitute investment advice or investment research or advice of any nature – and the company is not engaged in the provision of investment advice or investment research or advice of any nature.