Varadkar meets banks on Covid-19 as BoI takes €21m hit
Lender says it has extended loan breaks to 86,000 customers in Ireland and Britain
Bank of Ireland slid into a loss in the first quarter as it accounted for the impact of Covid-19
Taoiseach Leo Varadkar met the heads of the State’s banks yesterday to press home how the industry must support households and businesses during the Covid-19 pandemic – on a day when Bank of Ireland reported a substantial quarterly loss as it begins to count the cost of the crisis.
The bank revealed in a trading update that it had booked €421 million of charges in the first quarter, mainly to cover an expected surge in bad loans and a drop in life insurance and investment fees as a result of the economic shock.
It also warned that new lending may slump as much as 50 per cent this year, while business income could drop by up to 40 per cent and loan impairment provisions will continue to rise as the UK and Irish economies contract and uncertainty reigns over the pace at which coronavirus restrictions will ease.
The company swung into a pre-tax loss of €241 million in the quarter from a profit of €123 million for the same period last year. Shares in the bank dropped 14.9 per cent in Dublin.
Mr Varadkar emphasised in his meeting with the chief executive of the five retail banks that the sector has an important role in “supporting the gradual re-opening of the Irish economy by ensuring a flow of credit to businesses as they begin to trade again,” a spokesman said.
He welcomed the industry’s provision since March of loan payment breaks for customers hit by the crisis. Minister for Finance Paschal Donohoe and the Minister for Business, Enterprise and Innovation, Heather Humphreys, also attended the meeting yesterday afternoon.
Bank of Ireland’s statement and the Government meeting marked the start of a busy week for Irish lenders, with AIB, Permanent TSB and KBC Bank Ireland each set to report on the initial impact of Covid-19 on their figures over the coming days. Ulster Bank has already reported that it took a €32 million net loan impairment charge for the first three months of the year.
“The economic outlook for our core markets in Ireland and the UK has deteriorated, with reduced levels of activity across our businesses,” Bank of Ireland chief executive Francesca McDonagh said. “The economic effects will have a material impact on the Group’s 2020 financial performance. The full impact remains uncertain and will be driven by the duration of Covid-19 restrictions and the successful reopening of the Irish and UK economies.”
First-quarter charges were driven by a €266 million loan impairment provision as the bank expects a surge in bad loans from the sharp deterioration in the economy in recent months. The bank also took a €120 million hit as market volatility affected customer’s life and pension portfolios and forced to mark down expected future fees. In addition, it took a €35 million charge as Covid-19 impacted the value of financial assets on its books.
Bank of Ireland has extended loan payment breaks to 86,000 customers affected by the Covid-19 crisis in Ireland and the UK since the middle of March. While the industry agreed two weeks’ ago to extend initial payment relief from three months to six, lenders will begin to assess over the coming months which borrowers will not be able to return to scheduled payments after that period and will need to restructure their loans.
Ms McDonagh told The Irish Times that 97 per cent of Irish mortgage holders who have sought payment breaks had been meeting their lending terms before the crisis. About 10 per cent of the bank’s home loans are out to people who were working in hospitality, transport, retail and construction – among the most exposed sectors to the Covid-19 shock.
Put the funds aside
The bank’s deposits rose by €1.8 billion to €85.8 billion during the quarter as nervous customers increased savings and businesses drew down lending facilities and put the funds aside.
The bank’s net interest margin – the difference between the average rates at which it funds itself and lends on to customers – contracted by 0.03 percentage points to 2.07 per cent as the European Central Bank charged lenders negative rates of as much as minus 0.5 per cent for excess funds placed with it.
The bank’s loan book grew by €100 million to €79.6 billion, with net lending growth of €1.5 billion largely offset by currency movements.
The bank’s actual non-performing loans (NPLs) level fell by €100 million to €3.4 billion over the course of the first quarter, resulting in an NPLs ratio of 4.2 per cent.
The bank’s common equity Tier 1 capital ratio, a keenly-followed gauge of reserves that are there to withstand a large shock loss, fell by 0.3 percentage points to 13.8 per cent during the quarter on account of the bank falling into loss-making territory and continuing to grow its assets base through new lending.
Still, the bank’s minimum regulatory capital requirements have fallen by 2.15 percentage points to 9.27 per cent as regulators in the UK, Ireland and the ECB eased rules for banks to help them navigate the economic shock brought on by the coronavirus pandemic.