Still work for bank to regain full health

BANK OF Ireland might be going in the right direction to a recovery but not as fast as it had expected.

The State’s least worst bank, the only lender in which the State is not a controlling shareholder, is lumbered with deposit rates and costs that are still too high and loan rates that are not high enough.

Then there is the costly guarantee that is still eating away at the bank’s net interest margin, the gauge of profitability and, in turn, the bank’s recovery.

An earlier plan to return to profitability by 2014 on a net basis after all the bad loans and one-off hits have been washed out now looks like a tall order for the bank.

The operating profit, before loan and other impairment charges, was a measly €58 million for the first six months and shows the work still to do to get back to full health.

The operating earnings were described as “disappointing” by analyst Stephen Lyons at stockbroking firm Davy who said low interest rates had “dragged down” revenues and left the bank unable to reprice down deposits.

These results come after the bank has already priced up loans and priced down deposits, has managed to reduce the amount of liabilities covered by the costly extended bank guarantee scheme and has seen 3,700 staff depart.

The bank’s hands are tied on the €17 billion of tracker mortgages in the €28 billion of Irish mortgages, 60 per cent of that book, as they follow the European Central Bank rate to a record low that bears no correlation to what the bank is paying to fund them.

It is not surprising, then, to hear chief executive Richie Boucher say further cost-cutting is required, loans rates must rise further and funding costs and deposit rates must fall further.

“It is a raw fact of business life that you go bust very quickly if you don’t cover the cost of your raw material,” Mr Boucher said.

Mr Boucher did not want to be drawn on the number of staff to go in the latest redundancy plan, but based around the target of a one-third cut in costs on their 2009 level there will be in the order of 1,000 to 1,500 additional employees going.

Rather than close branches as the likes of AIB and National Irish Bank are doing, Mr Boucher plans to reduce the cost of his branches rather than close them. He still believes the best way to sell loans and raise deposits is the bank branch, rather than over the internet, and so all 254 bank branches will stay open.

The bank wants to ease the squeeze from the cost of the Eligible Liabilities Guarantee further. The vice loosened a bit as UK deposits and liabilities were taken out of the scheme. Guarantee fees fell by €27 million in the half year.

There are still €36 billion of liabilities covered by the guarantee. Mr Boucher could not give a definitive date on when the bank would be fully weaned off the guarantee.

Stephen Lyons of Davy said an EU deal in the autumn to ease the bank debt burden “should be used as a springboard for the removal of the costly guarantee scheme”, which would help the bank.

In the meantime, the weak economy and demand for credit means the bank will struggle to reprice lending.

This will delay a potential return to the State on the €4.2 billion pumped into the bank.