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Bank of Irleand Back in Bond Market as Loan Losses Ease

Updated on
Bank of Ireland Returns to Bond Markets as Loan Losses Ease
A pedestrian pushes a bicycle past a Bank of Ireland automated teller machine outside a company branch in Dublin. Photographer: Aidan Crawley/Bloomberg

Bank of Ireland Plc, the nation’s largest lender by assets, sold its first public bond sale in two years after saying it’s ready to exit a state guarantee plan and reiterating it expects loan losses to decrease.

The bank sold 1 billion euros ($1.27 billion) of three-year, Irish residential mortgage-covered bonds, double its minimum target, the bank said today in a statement. The bonds will yield 270 basis points above the mid-swaps rate, a benchmark for fixed-rate debt, it said. A basis point is the equivalent of 0.01 percentage point.

“The return to the debt markets represents another step in the healing process for the bank, with the funding likely to replace existing European Central Bank drawings,” Eamonn Hughes, an analyst at Dublin-based Goodbody Stockbrokers, said in a note.

Irish banks had been out of the public bond market since Bank of Ireland sold 750 million euros of state-guaranteed notes in October 2010, a month before the nation sought an international bailout. The lender, which hadn’t issued an Irish covered bond in three years, said in a trading update today its reliance on ECB funding fell to 21 billion euros in November from 28 billion euros in June as deposits increased and the bank continued to shrink its balance sheet.

‘Important Step’

“This transaction marks an important step for Bank of Ireland in returning to a more sustainable funding position and reducing reliance on monetary authority borrowings,” Bank of Ireland said.

The bank said the issue attracted orders of almost 2.5 billion euros and was sold to close to 200 investors. German and Austrian investors acquired 37 percent of the bond, U.K. buyers 19 percent and Irish investors two percent, according to the Dublin-based bank.

Citigroup Inc., Morgan Stanley, Nomura Holdings Inc., Royal Bank of Scotland Group Plc and UBS AG were mandated to manage the transaction, the lender said yesterday.

Bank of Ireland rose 1.1 percent in Dublin trading to 9.4 euro cent today, giving it a market value of 2.8 billion euros. The shares are up 15 percent this year.

Bank of Ireland’s comments on exiting the guarantee plan follow recent statements from the Irish central bank and Finance Ministry that the government may be coming close to ending the support it extended after the collapse of Lehman Brothers Holdings Inc. in 2008. Irish banks have since received 64 billion euros of funding.

Margin Widens

Liabilities covered by the state’s so-called Eligible Liabilities guarantee fell to less than 28 billion euros in November from 36 billion euros at the end of June, the bank said. Covered bonds aren’t backed by the guarantee.

Separately, Bank of Ireland said its net interest margin is widening as the lender cuts rates it offers for deposits and increases charges for borrowers. Chief Executive Officer Richie Boucher said in August that the lender’s target of rebuilding its net interest margin to more than 200 basis points by the end of 2014 “looks very challenging” after it reported a 1.20 percent margin for the first half.

Today’s report gives “positive indications of an income recovery to complement balance sheet healing we’ve been witnessing for some time,” Stephen Lyons, an analyst with Dublin-based securities firm Davy, said by e-mail.

The pace of growth of home-loan arrears continued to ease since June, Bank of Ireland said. The nation’s banks are struggling with residential mortgages after the state-owned National Asset Management Agency took over most of its risky commercial real-estate assets in 2010.

“We maintain our expectation that impairment charges will reduce from the elevated levels experienced in 2011, trending over time toward a more normalized impairment charge as the domestic economy recovers,” Bank of Ireland said. The lender reported a 1.94 billion-euro impairment loss last year.

The bank had a 13.9 percent core Tier 1 capital ratio, a gauge of financial strength, at the end of October. It is “actively considering actions” to address its pension deficit, which increased by 600 million euros since June to 1.6 billion euros. The spokeswoman declined to comment on what measures the bank is weighing.

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