B of I says 2010 profits could be 30% lower

BANK OF Ireland expects its operating profit for 2010 to be 25-30 per cent lower than the €1.4 billion it achieved the previous year.

A trading update issued yesterday by the bank indicates likely operating profits of approximately €1 billion. It says it expects its impairment charge for 2010 to be lower than it was for 2009.

The bank announced it had sufficient distributable reserves to pay dividends on its preference shares, including a €214.5 million payment it intends to make to the National Pension Reserve Fund on February 21st.

The bank was prevented from paying a dividend last year by a one-year prohibition from the European Commission on such payments.

The Government, through the pensions fund, injected €3.5 billion into Bank of Ireland in 2009 by means of preference shares with an 8 per cent rate of interest.

Last year the bank paid the dividend by way of ordinary shares as it was prohibited from issuing a cash dividend. If it was not now capable of issuing a cash dividend, it would have had to issue further ordinary shares to the State.

Minister for Finance Brian Lenihan welcomed the fact that the bank was to make the cash payment. “This payment will bring the cash return to the State from its investment in Bank of Ireland to over €757 million,” he said.

Last year the pensions fund was paid €543 million by Bank of Ireland for the cancellation of warrants and fees.

The bank said its retail deposits were broadly stable but that the intense competition for deposits had adversely hit interest income. Interest income was also affected by the higher cost of wholesale funding. It said it was increasingly reliant on funding from monetary authorities.

The outflow of ratings-sensitive deposits, mainly from its capital markets division, had led to an increase in its loan to deposits ratio, notwithstanding the transfer of loans to the National Asset Management Agency (Nama) and reduced advances to customers.

The bank wrote off €100 million as a result of a discount being applied to subordinated bonds it held from another Irish institution, understood to be AIB.

It also wrote off €70 million arising from subordinated Nama bonds it holds “following the decision by the board of Nama not to pay the discretionary coupon due on March 1st, 2011”.

It is understood the agency is not paying the interest on the bonds because the value of the properties backing the loans bought by Nama has fallen since the loans were purchased in 2009.

The bank said that during 2010 it transferred loans with a book value of €9.4 billion to the agency, which applied a 44 per cent discount. It said the discount was greater than had been indicated by the Minister for Finance last year as he had based his views on a forecast provided to him by the agency. The bank expects a further €5 billion in assets to transfer to Nama.

The bank released unaudited figures for 2010 for Bank of Ireland – the bank, not the group – in order to demonstrate it had adequate distributable reserves to allow it pay dividends. These accounts showed the bank had deposits from banks, including the ECB and the Irish Central Bank, of €87.9 billion at the end of 2010, and customer deposits of €50.6 billion.

Stephen Lyons of Davy described the bank’s trading update as encouraging, noting it was standing by its previous assertion that loan loss charges had peaked in 2009 and that customer deposits were broadly stable since the EU-IMF bailout in November 2010.

The payment of the dividend on the preference shares was facilitated by the decision of the High Court in December to allow the bank to reclassify reserves, Mr Lyons said.