Bank's recovery may prove costly for mortgage holders

ANALYSIS:PRESENTING BANK of Irelands 2011 results yesterday, chief executive Richie Boucher expressed hope the bank was "moving towards a slightly more business as usual" mode.

Yesterday’s 2011 results suggest the bank – which holds the somewhat dubious accolade of the only Irish bank to escape majority State control – may be turning a corner. Losses fell to €190 million last year, down from €950 million in 2010, as the bank increased deposits, deleveraged its balance sheet and reduced reliance on wholesale funding.

While the bank may be getting itself back in shape in terms of its financial performance, there were intimations this may come at a cost for mortgage holders.

Net interest margin – the difference between what the bank pays for deposits and charges for loans – fell to 1.33 per cent from 1.46 per cent the previous year. It is a key figure for banks, and with interest rates set to remain low and intense competition for deposits continuing, it will remain an ongoing issue.

While Boucher did not give specific commitments on possible moves on interest rates, he said it was in the State’s interest that the bank is profitable. “The State has a vested interest in making profit on a sensible basis,” he said, pointing out that it had made its funding position clear to the Government.

Boucher suggested the Government’s proposed personal insolvency regime, which would allow struggling homeowners to restructure their mortgages with their banks outside the formal court system, could have an impact on pricing. While there was some “upsides” to tackling the issue of unsecured and secured debt, he pointed out that banks use mortgage as collateral to raise funding in the markets. If the nature of the mortgage contract was to change, it could change the risk profile and lead to increased rates.

While the 10 per cent reduction in the size of the bank’s loan book last year may be good for the bank’s deleveraging requirements, some of the decrease reflects a reduction in new lending, not a good sign for consumers or businesses seeking loans.

Nonetheless, the increase in impairment charges sustained last year is indicative of the dilemma that faces Irish banks, who, on the one hand are mindful of taking on risky loans after years of reckless lending, but who are under pressure from Government to increase lending to businesses and would-be house buyers as a way of reigniting the economy.

BY THE NUMBERS:

BANK OF IRELAND RESULTS

PRE-TAX LOSS

€190 million

2010: €950 million

NET INTEREST MARGIN

1.33%

2010: 1.46 per cent

UNDERLYING LOSS PER SHARE

9.6 cent

2010: 83 cent

LOAN TO DEPOSIT RATIO

144 per cent

2010: 175 per cent

TOTAL ASSETS

€155 billion

2010: €167 billion

IMPAIRMENT CHARGES

€1.94 billion

2010: €1.86 billion