Allied Irish: Better Credit Quality But Dividend Step Change May Temper Any Tightening

Allied Irish (AIBG ID) 1H23 results beat on operating metrics with better credit quality likely driving an FY24 upgrade, in our view. However, CET1 has missed on a step change in the dividend payout and cash bond spreads have tightened c.20-40bp in the last month, which is tough to see going further.

• Key credit metrics: credit losses have dropped to c.25bp (from 30bp at 1H23) and non-performers are down to 2.96% (c.30bp better than Jun-23). So credit quality is improved. CET1 is 15.8% (cons 16.2%) up 10bp since Jun-23. The bank has moved the dividend up more than expected we feel, moving to an 82% payout ratio which will temper any credit positives, in our view.
• Revenues beat consensus by 3.4%, driving a 5.4% pre-tax profit beat with a similar metric at the net profit level.
• Outlook: revenues look set to be above EUR4.35bn (cons. is 4.50bn) with credit losses at the lower end of 20-30bp range (consensus is >30bp). So there's perhaps a small overall upgrade here but this is positive on credit quality.

Conf call is 0900 (London time) at https://channel.royalcast.com/AIB/#!/AIB/20240306_1