Bank of Ireland reserves £27m loss for UK credit card portfolio

The Bank of Ireland has set aside a £27 million (€31.5 million) provision for potential future losses on its UK credit card portfolio, which it has put up for sale, according to the recently filed annual report of the group's UK division.

Group chief executive Francesca McDonagh first signalled last June – as she unveiled her medium-term plan for the lender – that she had initiated a strategic review of the UK credit card business, which was largely expected at the time to result in a decision to sell this portfolio.

The company confirmed a month ago, as it unveiled full-year results, that this loan book was being put on the market.

The annual report for Bank of Ireland (UK) shows the gross value of the UK credit card portfolio amounted to £564 million. However, it also disclosed that the bank had booked a £27 million provision against the portfolio, known as an impairment loss allowance, to cover potential future bad loan losses.

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Group chief executive Andrew Keating told analysts the sale of the credit card business would squeeze Bank of Ireland’s net interest margin (NIM) – the difference between the average rates at which it funds itself and lends on to customers.

However, the transaction will also free up committed capital within the group. Banks must hold higher levels of capital in reserve against unsecured credit card lending than for residential mortgage lending, which is secured against a house or apartment.

Rates competition

The wider Bank of Ireland group saw its NIM narrow to 2.2 per cent from 2.29 per cent over the course of last year, driven by “intense and persistent” mortgage-rates competition in the UK. It has forecast its NIM will tighten further to 2.16 per cent this year.

Meanwhile, Bank of Ireland (UK)’s annual report disclosed the division paid £70 million to its parent in Dublin last August. It marked a 56 per cent drop from a £160 million dividend paid the previous year.

Net profit in the UK division rose by 16 per cent last year to £151 million, driven by an 8 per cent increase in net interest income, to £508 million. Bank of Ireland (UK)’s chief executive, Des Crowley, said last August he was planning to retire after more than three decades with the group. He has served as head of the UK operation for the past seven years.

Bank of Ireland’s £24.4 billion UK loan portfolio accounts for more than 37 per cent of the group loan book, making it the most directly exposed Irish lender to Brexit.

Ms McDonagh’s medium-term targets for the bank include a plan to increase the size of the UK loan book by 10 per cent and double its profitability – measured as return on equity – by 2021, driven by an increased focus on higher loan-to-value mortgage offerings to first-time buyers and equity-release loans to seniors.