Upgrades, updates and rebates – Investec Irish Economics & Financials weekly

Since Investec published their last ‘Weekly’ we’ve seen a welcome upgrade of the Sovereign by Moody’s, its second such move in four months.

This should help with new primary issuance, while in the secondary markets the NTMA has continued to buy back short-dated debt as part of moves to trim debt servicing costs. In the banking sector, ptsb revealed a good start to the year.

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Key stories from Investec this week:

PTSB update highlights growing market share, falling impairments 

Ireland’s third largest domestic bank says that it has been encouraged by its start to 2014, with strong growth in market share (Q1 new mortgage share estimated at 13%, up from the Q412 low of 1.6%) and evidence of a continuing recovery in its financial performance (upward NIM trajectory has continued into 2014). On the cost side, OpEx are expected to fall despite investments in new business initiatives and regulation, while impairments are expected to be “significantly reduced” in 2014 (from €0.9bn in 2012 and 2013), with total arrears (early and late) now c.10% below peak 2013 levels. ptsb says that it continues to maintain a significant capital buffer against regulatory requirements. The group is readying non-core Irish loan books for sale this year, with a disposal of the non-core UK book to follow thereafter. Another priority is a successful navigation of this year’s ECB’s Comprehensive Assessment. The group also reiterated that it plans to become an “investable entity” by 2016-17.

NPRF updates valuation on ‘Pillar Bank’ stakes 

The Q1 update from Ireland’s National Pensions Reserve Fund (NPRF) reveals that it valued its investments in BKIR and AIB at a combined €13.3bn at end-March. Stripping out the proceeds from the sale of BKIR preference shares and the market value of the State’s 14% stake in BKIR (€1.4bn at end-March) implies that the State’s investment in AIB is valued at €10.0bn, in line with the NPRF’s end-2013 valuation. This valuation compares with total shareholder’s equity of €10.5bn at end-2013, which grew over Q1 as AIB returned to underlying profitability and benefitted from certain one-off items (i.e. c.€210m uplift in the value of its NAMA subordinated bond holding).

NTMA cancels €650m of the 4.5% Treasury Bond 2015 

The NTMA announced the cancellation of €650m of the 4.5% 02/15 Treasury bond as part of normal secondary market operations. This follows a similar move on April 1, where €750m was cancelled. With the NTMA awash with liquidity (at end-March 2014 the agency had cash of €20bn, equivalent to 13% of GDP and enough to meet funding needs to end-2015), buybacks of short-dated debt are appropriate given the cost of maintaining this liquidity buffer and inflows from primary issuance (all of which has been targeted at the 10 year area) since the start of 2014. Following this latest move the total nominal amount outstanding for the 2015 Treasury bond is €2.23bn. The only other maturities next year are IMF borrowings of €707m and a €7m non-benchmark bond.

Moody’s upgrades Ireland to Baa1 

In a very welcome development on Friday evening, Moody’s upgraded Ireland’s rating by two notches to Baa1 from Baa3. The agency has changed its outlook on Ireland to Stable from Positive. Moody’s said that the three key drivers behind the upgrade were: (i) A step change in future debt levels as “the recent pick-up in Ireland’s growth momentum will speed up ongoing fiscal consolidation and put the government’s debt metrics on a steeper downward path than previously anticipated”; (ii) A sharp fall in government contingent liabilities, namely the successful IBRC loan book sales process and the faster-than-had-been-anticipated reduction of the NAMA portfolio; and (iii) An improved credit position relative to other Baa-rated Eurozone peers, with Ireland’s economic “dynamism” meriting a superior rating to Italy and Spain, both of which are on Baa2.

Trade Idea of the Week: Reiterate longs on DAAFIN 6.5872 07/18, AIB 2.875 11/16 and IRISH 3.4 03/24 

‘It has been an ugly week on the markets, with Irish yields drifting higher. In spite of that setback, Investec’s Philip O’Sullivan says that it retains their positive stance towards their three long positions, as see little reason to change course ahead of June’s all-important ECB meeting’.

Investec added the DAAFIN 6.5872 07/18 bond last week, on the grounds that it is a de facto government bond and it offers a decent pick-up over the only Irish Sovereign maturity that year (the 4.5 10/18 Treasury bond). While the spread over the IRISH 10/18 bond has narrowed over the past week, it still offers 49.5bps pick-up for three months less curve.

A similar case is made for the AIB 2.875 11/16 senior unsecured bond. Investec views the 23.7bps pick-up over senior unsecured issuance with a similar maturity (the 2.75 6/16 bond) from its fellow ‘Pillar Bank’, Bank of Ireland, as generous for less than 6 months of extra curve. Recent updates from AIB (see previous page) show an earlier than might have been expected return to profitability, which gives us greater comfort around the credit.

Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Emmet Gaffney | emmet.gaffney@investec.ie | +353 1 421 0494 To view the full range of Investec Research & Insights go to www.investec.ie/research