BOI cautions on profit pressure

BANK of Ireland is warning that operating profits will remain under pressure due to continuing weak loan demand and the high cost of wholesale funding.

In its interim management statement yesterday, the bank said it expects to have clarity on its fundraising exercise available to the markets within the next three weeks.

Under tougher stress-testing scenarios carried out by the Central Bank, the group is under pressure to raise €5.2bn through the sale of assets and other mechanisms.

The state holds 36% of the bank’s stock.

The bank is under significant pressure to raise sufficient funding to keep it majority owned by the private sector.

In that context, Bloxham Stockbrokers said the bank hinted strongly in its trading statement that it aims to raise significant amounts in what is described as a “material” debt-for-equity swap with subordinated bondholders.

The brokers noted the bank’s reference to Finance Minister Michael Noonan’s comments on subordinated debt-holders who said recently such parties were expected to make a “significant contribution to incremental equity capital”.

That reference was the clearest signal yet of the likelihood of a “material debt/equity swap” in the weeks ahead as the bank moves to strengthen its capital base, they said.

BOI has to raise €4.2bn of equity and €1bn of convertible funds to bring its Tier 1 ratio up to 15% to bring it into line with the stiffer guidelines set out by the regulatory authorities after comprehensive stress testing carried out on Irish banks at the end of March.

The trading update noted the bank’s loan to deposit ratio has reduced 10% to 165% since the beginning of the year, driven by higher deposit levels and muted demand for new loans.

Though new lending margins have improved, BOI said net interest margins will be impacted by higher deposit rates, dearer wholesale funding costs in the second half and increased guarantee fees that were up so far this year by €58m to €145m.

Non-NAMA loan impairments charges continued to decline in 2011 after they peaked in 2009, the statement said.

Bank of Ireland added its voice to the growing view that the economy has stabilised.

It highlights the strong performance of the export sector in contrast with domestic demand, which is being hit by low levels of investment, “weak consumer sentiment and elevated unemployment.”


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