Bank of Ireland Plc said it probably won’t need more capital after stress tests this year, as mortgage arrears stabilize and lending margins rebound.
A fourth round of central bank tests “are nothing to fear from our perspective,” Chief Executive Office Richie Boucher told reporters in Dublin, as the bank’s 2012 underlying pre-tax loss, excluding loan-sale losses, narrowed to 1.45 billion euros ($1.89 billion) from 1.52 billion euros. Shares in the nation’s largest bank by assets rose.
“The recovery is beginning to take hold,” said Emer Lang, an analyst with Dublin-based securities firm Davy, who has a neutral rating on the stock. The lender “is starting to see the benefits flowing through from its focus on rebuilding profitability.”
Boucher, 54, cut his workforce 9 percent to about 12,000 last year as he shrank the bank’s loan book and reliance on central bank funding. Taxpayers have injected 4.8 billion euros into Bank of Ireland since 2009, as a collapse in real estate prices pushed the nation’s financial system close to failure.
“There are definitely signs that the economy is starting to grow again,” Boucher said. “There are signs in the bank that all the work we’ve been putting in over the last four years is starting to come through in the financial numbers.”
Bank of Ireland will eliminate more jobs this year after 1,200 staff exited last year, mainly through a redundancy program. Some 42 percent of a 135 million-euro charge taken last year to cover redundancies hasn’t yet been used, Chief Financial Officer Andrew Keating said. Executives declined to say how many more jobs may be lost.
The lender said today its net interest margin widened to 1.34 percent in the second half from 1.20 percent in the previous six months, as it cut deposit rates and raised borrowing costs. Deposits grew to 75 billion euros at the end of December from 71 billion euros a year earlier. The lender’s reliance on central bank funding fell to 12 billion euros from 23 billion euros.
Boucher said his aim of raising the net-interest margin to more than 2 percent by end-2014 remains challenging. Shares in 15 percent state-owned Bank of Ireland rose 3.8 percent in Dublin to 13.6 euro cents.
Bank of Ireland’s loan-loss charge fell to 1.72 billion euros from 1.94 billion euros a year earlier, marking a third straight year of decline. The impairment charges will continue to drop, the bank said.
The nation’s unemployment rate, at 14.1 percent last month, is at the lowest since August 2010. Dublin home prices, which have fallen 54 percent since 2007, rose 2 percent in January from a year earlier.
By value, 9.9 percent of the bank’s Irish owner-occupier mortgages were at least 90 behind in payments at the end of December, up from 9.2 percent in June and 7.40 percent a year earlier. Buy-to-let arrears rose to 23.4 percent in December from 20.8 percent in June and 16.8 percent a year earlier.
“We can be confident that we are seeing the situation stabilizing,” said Boucher, adding that writing off debt isn’t part of its policy. “This problem is manageable.”
Of the 10 percent of troubled owner-occupier loans, 15 percent are early-arrears cases, 40 percent of customers are in forbearance arrangements, 10 percent are subject to legal action, while the bank is in talks with most of the remaining 35 percent to restructure loans on a long-term basis.
Bank of Ireland sold its first public bond in two years on Nov. 13, raising 1 billion euros of three-year, Irish residential mortgage-covered debt. It returned to the subordinated bond market a month later, selling 250 million euros of junior debt.
Boucher said the bank is well-positioned to deal with medium-term international capital requirements with its core equity Tier 1 ratio, a measure of financial strength, at 8.5 percent under forthcoming Basel III rules, due to be implemented by the end of 2019. It expects the ratio to rise to 10 percent “on a phased basis.”
The bank’s capital level is buttressed by the government’s 1.8 billion euros of preference shares, which can only be counted until the end of 2017 under proposed new capital rules.
Bank of Ireland will owe the state 125 percent of the principal of the shares in just over a year if they haven’t been redeemed.
The so-called step-up is something “we’re looking at,” said Boucher. He declined to comment on speculation from analysts at banks, including at Nomura Holdings Inc., that the lender may sell shares to cover the redemption.
“In the past, we have dealt with capital and other related issues by a combination of initiatives and action,” he said. “That is how we’ll look at this issue as well.”