Profits slump by 67% at Central Bank

The Central Bank of Ireland will report on Wednesday that its profit slumped by 67 per cent last year, leading to its exchequer dividend falling at the same rate, to €665.7 million, the lowest since the onset of the financial crisis, according to sources.

The bank, led by governor Gabriel Makhlouf, will reveal in its annual report that profit fell to €829.6 million last year from €2.56 billion in 2019, they said.

A sharp decline had been well flagged by the Central Bank in recent years, as an era of super profits stemming from the organisation’s involvement in shoring up the State’s banking system draws to a close.

The Central Bank has generated total profits of €20.5 billion over the past decade. With the bank obliged to transfer 80 per cent of its earnings to the exchequer, the latest dividend will bring the total transferred over the space of 10 years to €15.8 billion.

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In the early years of the crisis, the Central Bank made large profits from interest paid by lenders for emergency liquidity to prevent their collapse.

In the past eight years, earnings have largely stemmed from bonds received by the Central Bank in 2013 as part of the restructuring of the State's bailout of the now-defunct Anglo Irish Bank and Irish Nationwide Building Society (INBS).

The Central Bank received €25 billion of government bonds in February that year as Anglo Irish Bank and INBS's successor company, Irish Bank Resolution Corporation (IBRC), was put into liquidation. The bonds replaced so-called promissory notes that IBRC had been using as collateral for emergency funding.

Inverse relationship

The extraordinary profits over the past eight years have been driven by the rising value of the bonds as the State’s borrowing costs declined, and as the Central Bank sold most of the IBRC-linked bonds at a profit. Bond prices have an inverse relationship with market interest rates, or yields, which means that as interest rates fall, bond values rise.

The Central Bank has been under pressure from the European Central Bank to sell the IBRC-linked bonds at pace in recent years, to ease concerns that the situation amounts to monetary financing, which is prohibited in the EU.

The National Treasury Management Agency (NTMA) has been the buyer of the IBRC-linked bonds from the Central Bank since 2014. As of the end of last month, the Central Bank had sold 74 per cent of the €25 billion of nominal-value bonds to the NTMA, with the debt agency duly cancelling the notes immediately after the each transaction.

Although the Central Bank has been able to make large profits selling the bonds at a premium to the price at which they were issued, the NTMA has had to raise borrowings in global markets to finance the purchases. Still, the debt agency’s borrowing costs are much lower than where they were a decade ago.

The yield on the Government’s benchmark 10-year bonds currently stands at 0.2 per cent, compared to a high of more than 14 per cent in 2011.