ANNUAL REPORT:BANK OF Ireland plans to buy back debt from bond investors in a move that could generate €700 million in capital to absorb against rising loan losses after the bank posted a full-year pretax loss.
The bank’s share price rose 23.7 per cent to €1.33, valuing the bank at €1.3 billion, after the debt buyback plan was unveiled. AIB rose 7 per cent amid expectation that it will follow with a similar plan. Bank of Ireland said that it will offer a maximum tender value of €1.4 billion for bonds with nominal values of about €3 billion.
Stockbrokers Davy and Goodbody estimated the move could generate a gain of €700 million.
The bank reported a pretax loss of €7 million for the year to March 31st, 2009, compared with a profit of €1.9 billion the previous year, as loan losses increased to €1.4 billion from €227 million a year ago.
Chief executive Richie Boucher said the bank made mistakes in its view of the economy: “In light of the figures, mistakes were made.”
Asked if he viewed Bank of Ireland as the “least bad bank” across the banking industry, he said: “It’s not a proud mantle to wear.”
Responding to criticism of the appointment of an insider as chief executive, Mr Boucher said he was working on stabilising the bank and had made progress in the job.
He later said that he has had talks with financier Dermot Desmond, a shareholder in the bank who opposed his appointment.
Mr Boucher said that he was confident the purchase of the bank’s €12.2 billion in development and landbank loans by the State’s “bad bank”, Nama, will not lead to nationalisation or further capital requirements for the bank.
He said nationalisation would not increase the bank’s capital and could constrain access to funding.
The bank expects loan losses to increase to the stress case outlined last February – €6 billion over the three-year period to March 2011.
However, the bank said there was “a downside risk” of higher losses if the economy deteriorated further and there was prolonged low activity in the property sector.
Finance director John O’Donovan said if the consensus economic forecasts “get worse”, loan losses will rise accordingly.
Mr Boucher said the bank stress tested for larger losses and would still be “adequately capitalised”.
Asked why he was confident that the State would not end up with a large equity stake in the bank after Nama, Mr Boucher said: “I can’t take a crystal ball and look into the future – I look at what is in front of me.”
Bad loans may be moved to Nama on “a phased basis”, said Mr O’Donovan. “It’s very unlikely that you are going to find that all the assets will go over at one time.”
Denis Donovan, head of the capital markets division, said that the EU had set guidelines for valuing impaired assets based on “an economic value” over time rather than at distressed prices and that this had guided the bank’s view.
“If the writedowns are extremely severe way beyond what we expect them to be, then that will be an issue,” said Mr Boucher.
Bank of Ireland said that “challenged” loans, including “impaired” loans, totalled €15.7 billion of the overall €136 billion loan book at March 2009, compared with €4.1 billion a year earlier.
Mortgages in arrears of 90 days or more rose to 1.9 per cent from 0.7 per cent.
Mr O’Donovan said that with house prices down by an average of 25 per cent from their peak, €355 million in mortgages of a total Irish book of €28 billion were in negative equity – where the loan is higher than the property’s value.
He said that about 12,000 of the bank’s total 195,000 home loans were in negative equity, including about half of the 100 per cent mortgages sold to first-time buyers.
Mr Boucher said that 4,000 of 5,000 business loan applications were being approved every month, which would not have changed “dramatically” since last year.
