Belying its temperate climate, Ireland’s economy is prone to extremes. It had a terrible financial crisis and a bad pandemic. But it recovered strongly in 2022, a trend reflected in the fortunes of its banks. Higher interest rates, diminished competition and the activities of locally-based multinationals have driven a strong run.

Irish banks outperformed European peers in 2022. Bank of Ireland, which reported results on Tuesday, has done best of all. Its shares rose 80 per cent while rival AIB registered a 70 per cent increase. Both have added a further 15 per cent since the start of 2023.

Bank of Ireland produced underlying profits before tax of €1.2bn last year. Stronger net interest income played a part, rising by 12 per cent. The net interest margin in the second half was 2.2 per cent, some 47 basis points higher than in the first six months. Negative rates on €83bn of customer deposits still made a positive if shrinking contribution to NII during the second half. 

Limited “pass through” of higher rates to savers is one reason strong performance may continue. Irish banks have not been disclosing what proportion they have been handing on. Analysts estimate the number at 5 per cent, or about a third of the eurozone average. Limited competition in Irish banking should keep a lid on that figure as income from lending follows rates higher.

The bank is targeting a return on tangible equity of 15 per cent from now until 2025. The common equity tier one ratio ended last year at 15.4 per cent, which included €350mn of distributions. A target ratio of 14 per cent highlights €660mn of spare capital, equivalent to 6 per cent of the current market worth. Dividends will push the yield higher still.

Shares in Bank of Ireland were at a discount to book value of a half a year ago. Unusually for a European bank, they are now at a premium of a tenth. The rally may have further to run but watch out for economic weakening in the current half year.