BoI takes first step on road to self-funding

Bank of Ireland continues to make progress towards self-funding by issuing a €1bn unguaranteed three-year covered bond.

It was the first time in more than two years that the partly state-owned bank tapped the private markets.

The issue was 2.5 times oversubscribed, with interest from more than 200 investors.

Michael Noonan, the finance minister, said BoI’s return to public debt markets was a milestone on the path to full independence for Irish banks.

Moreover, the bank’s latest management update shows BoI is improving its net interest margin. During the boom years, Irish banks became heavily reliant on cheap short-term finance from wholesale markets for funding.

However, when the credit crisis erupted in 2008, these markets were gripped by panic and funding dried up.

Irish banks were particularly exposed. Now the pillar banks are faced with the same challenges. They have to pay a higher rate on deposits to attract customers. Moreover, because of the low official interest rate, the margin on many of their products, particularly mortgages, barely covers the cost of funding.

BoI’s interim management statement says the interest rate it is paying on deposits is coming down in both Ireland and the UK.

Moreover, the total amount of liabilities covered by the Government’s eligible liabilities guarantee scheme (ELG) fell from €36bn at the end of June to a current level of €28bn. Inclusion in the ELG is a major expense for the banks.

There is a reduction in the level of arrears forming in the mortgage book. Of the total number of mortgages that have been restructured, 86% are meeting the revised payments arrangements. The loan-to-deposit ratio has reduced from 136% at the end of June to 130% this month. Customer deposits have risen from €71.7bn to €74bn over the same period.

There was an €8bn reduction in wholesale funding between June and November. The bank now has €44bn in wholesale funding, although €21bn of this comes from Monetary Authority sources. Official wholesale funding stood at €28bn in June.

The group’s tier one capital was 13.9% at the end of October. Changes to accounting standards means that the bank’s pension deficit has increased from €600k to €1.6m.

Bank of Ireland says it is monitoring the likely impacts of the Basel III capital framework. Under new international banking regulations, banks will have to increase the level of capital they set aside for different assets.