Bank of Ireland Says Margin Goal ‘Challenging’ as Loss Soars

Bank of Ireland Says Margin Goal ‘Challenging’ as Loss Soars
The Bank of Ireland Plc has completed 16 billion euros of a 24 billion-euro target of shrinking its loan book over three years through 2013. Photographer: Aidan Crawley/Bloomberg

Bank of Ireland Plc Chief Executive Officer Richie Boucher said his 2014 target of rebuilding margins from lending “looks very challenging” as the nation’s largest lender reported its first-half loss more than doubled.

The pretax loss widened to 1.26 billion euros ($1.55 billion) from 556 million euros in the year-earlier period, the Dublin-based lender said in a statement today. That was worse than the 899 million-euro median estimate of three analysts surveyed by Bloomberg. The lender’s shares declined.

While the bank’s medium-term aim to shrink its balance sheet and cut loan-loss provisions and costs is on track, its goal of raising net interest margin to more than 2 percentage points by the end of 2014 is being hampered by low interest rates and “intense competition” for deposits among banks, Boucher said to reporters. The margin, the difference between the rate at which Bank of Ireland borrows and lends to customers, fell to 1.20 points in the first half from 1.33 points a year earlier.

“We have to call those parts of the targets that we think remain very much in our control,” Boucher said. “The net interest margin is a challenge because there are factors outside our control such as the absolute level of interest rates and the competitive dynamic in the deposit markets.”

Shares in Bank of Ireland fell as much as 6.1 percent in Dublin trading and were down 5.2 percent at 9.29 euro cents at 9:30 a.m. local time.

‘Disappointing’ Figures

“These results are disappointing, highlighting the extreme pressure on pre-provision profits in a very weak environment despite bank action on margins and costs,” said Emer Lang, an analyst at Dublin-based securities firm Davy.

While provisions for bad loans rose by 12 percent to 941 million euros from the year-earlier period, Boucher said they should decline as the economy recovers. The charge for troubled Irish home loans doubled to 291 million euros.

Ireland’s banks, which have received 64 billion euros of bailouts since the implosion of a property bubble in 2008, continue to struggle with residential mortgages after the state-owned National Asset Management Agency took over most of their risky commercial real-estate assets in 2010. The unemployment rate was 14.8 percent in June, while home prices have been cut in half from 2007, according to the Central Statistics Office.

By value, 9 percent of the bank’s Irish owner-occupier mortgage book was at least three months in arrears at the end of June, up from 7 percent in December, the bank said. Arrears in the buy-to-let portfolio rose to 21 percent from 17 percent.

Loan Impairments

Still, Bank of Ireland today echoed comments in the past two weeks by Allied Irish Banks Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc that the rate of increase in Irish home-loan arrears has slowed.

Loan impairments “are above the base case but within the stress-case numbers” that the country’s central bank forecast in 2011 for three years through 2013 as part of an assessment of the banking industry, the lender said.

The bank has completed 16 billion euros of a 24 billion-euro target of shrinking its loan book over three years through 2013. Boucher said it’s “very realistic” that the lender’s costs will be about 1.5 billion euros in 2014, down 500 million euros from their peak.

The first-half figures were reduced by a 206 million-euro loss on loan sales. The net loss widened to 1.1 billion euros from 507 million euros for the first half of last year, Bank of Ireland said.

“Lower revenue and higher costs than envisaged will see us pare our forecasts,” said Eamonn Hughes, an analyst at Goodbody Stockbrokers in Dublin, who has a sell recommendation on the stock. “We continue to retain our cautious stance and would see more value in the stock” if it falls below 8 cents, he said.