Bank’s latest results underline pernicious nature of banking crisis

Bank of Ireland’s 2012 financial year results underline the extent of the Irish banking crisis.

It is by far the most robust of the three covered institutions yet it still made a pre-tax loss of €2.17bn.

Moreover, its chief executive Richie Boucher, declined to say when the bank will return to profitability or when loan losses will return to normal levels. It had an impairment charge of €1.7bn last year compared with a target of 55-65 basis points of its entire loan book.

There are 17,000 customers in mortgage arrears. This is one-third less than the industry average in the country.

Moreover, the mortgage arrears position is stabilising, according to Mr Boucher.

Legal proceedings against 1,700 are under way; forbearance measures had been introduced for 4,250 customers; 2,550 customers are in early stage arrears and the bank has entered into negotiations with the remainder in an effort to find a solution.

Of the mortgages that have been restructured, 86% are meeting their new terms.

The governor of the Central Bank, Patrick Honohan, has said that banks will have to consider long-term debt modification and debt forgiveness as part of the solution to mortgage arrears.

Mr Boucher ruled out granting debt forgiveness to its distressed customers.

“It is not our policy. We have a responsibility to our shareholders and our depositors,” he said.

Bank of Ireland has presented the Government with a transparent set of targets in terms of how it will deal with its mortgage arrears and how it will achieve this target, he said.

Just over €17bn of its total mortgage book is in tracker mortgages. Because the official interest rate is at an historically low level and the cost of funding is still elevated, many of these tracker mortgages are loss-making. Mr Boucher said he is not in discussions with the Government about hiving off the tracker mortgage book into a special purpose vehicle.

However, if there was an industry-wide solution on offer he would consider it, depending on what the capital impact would be for the bank.

The net interest margin is 1.25%, which is well below its target of 2%. The cost of deposits continues to reduce and it is taking further measures to trim its cost base, noted Mr Boucher. However, the bank would not meet its net interest margin target until there is an increase in the official interest rate and that is unlikely before the end of 2014, he added.

The Bank of Ireland chief executive declined to say whether there would be an increase in the standard variable rate mortgage product over the course of 2013.

The Government has €1.8bn preference shares in Bank of Ireland. The bank has an option of redeeming the preference shares at par next Mar 31. If the Government still holds these shares after this date, then there is a “step up” of 25% in value to €2.25bn.

Investors in Bank of Ireland, Wilbur Ross, Kennedy Wilson and Fairfax, would like Bank of Ireland to redeem the shares next March, although it is currently looking at all options and what the implications would be for its tier one equity capital, said Mr Boucher.