Share price gets a major boost as bank manages to avoid bombshells

ANALYSIS: The bank will attempt to buy back bonds from investors at significant discounts, writes SIMON CARSWEL.

ANALYSIS:The bank will attempt to buy back bonds from investors at significant discounts, writes SIMON CARSWEL.

BANK OF Ireland’s share price jumped 24 per cent not because the bank’s full-year results were packed with positives, but because there were no bombshells and the figures were better than expected.

The share price rose as profits (before bad debts, which came in at the bank’s February forecast) were higher than anticipated and the bank said it could bolster its capital reserves by buying back debt from investors in its bonds.

The bank – now the largest on the Irish bourse in terms of market value – also avoided the pitfall that caught Allied Irish Banks last week by not raising its stress scenario for anticipated long-term bad debts.

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Bank of Ireland finance director John O’Donovan said it was “more likely rather than less likely” that bad debts would hit €6 billion over three years to March 2011, the stress-test figure outlined by the bank three months ago.

Like most banks, given the rapid economic deterioration, worst case has become base case, though for AIB it was even worse.

Bank of Ireland did inject one caveat – that there was a “downside risk” of higher bad debts if there was further economic deterioration or “further prolonged low levels of activity in residential and commercial property markets”.

The bank’s decision to buy back debt could generate an estimated €700 million in the kind of loss-absorbing capital that investors are demanding within banks. The bank will attempt to buy back bonds from investors at significant discounts from the value at which they are sitting on its own books, netting a substantial gain.

The money will be moved to the capital reserves to provide more cover against rising loan losses.

Oliver Gilvarry, head of research at Dolmen Stockbrokers, said the move was not unexpected given that Barclays, Lloyds Banking Group, RBS and UBS had all repurchased debt.

The bank expects to pay between 38 and 50 cent in the euro for debt with a maximum face value of about €1.4 billion. “Assuming the buy-back is successful, it would reduce the potential need for additional external capital,” said banking analyst Sebastian Orsi at Merrion Capital.

Richie Boucher, presenting his first results for the bank since taking over as chief executive in February, said the bank had “sufficient capital to stabilise” itself. He didn’t expect to face further writedowns on loans when the bank’s €12.2 billion in development and land speculation loans – and other assets offered as collateral – are bought by the State under its “bad bank” plan, Nama.

“There are uncertainties about Nama – we are obviously making the best estimate we can based on the best assumptions we can make,” said Boucher who added that the bank would work with whatever form Nama would take.

He said that he didn’t see what nationalisation “would either do for the economy or the bank”.

The bank’s results coincided with the announcement that governor (chairman) Richard Burrows will resign at the annual general court (meeting) on July 2nd, making him the fifth chairman of a guaranteed lender to stand down. Only Gillian Bowler at Irish Life Permanent survives. Burrows is leaving over the collapse in shareholders’ returns. “Accountability . . . must be taken at the top,” he said.