Interest margin pressure continues - B of I

PRESSURE ON interest margins will continue throughout 2010, Bank of Ireland said in an interim management statement yesterday.

The trading update, circulated in conjunction with the announcement of the bank’s €3.4 billion “capital raising programme”, states that the “low interest rate environment” together with continued competition for deposits was placing pressure on deposit margins, while the cost of wholesale funding was also affecting net interest income.

Low levels of new business activity means the bank is not benefiting from the strong lending margins available on new business, the statement added.

Earlier this month, Bank of Ireland increased variable rates for owner-occupiers by half a percentage point and raised fixed rates for new customers. Yesterday, the bank said there were no imminent plans to further increase interest rates.

The issue of interest rate margins was also highlighted in yesterday’s capital-raising announcement, which stated that “margin expansion is a key management priority”.

While predicting that “net interest margin attrition” will continue to be a trend in the short term, “anticipated increases in base interest rates” as well as lower wholesale funding costs would improve the bank’s margins “over time”.

The group is targeting a net interest margin in excess of 175 basis points (1.75 percentage points) for the year to the end of 2013.

Yesterday’s trading update stated that trading conditions in the first quarter of 2010 “remained challenging” although there were signs of a stabilisation in economic conditions.

The demand for new lending is “muted” according to the bank, with customer deposits marginally lower at the end of March compared to the end of December 2009, when taken on a constant currency basis.

The interim management statement also confirmed that losses on loans not destined for Nama would be within the previous estimates of €4.7 billion for the three-year period to March 31st 2011.

In line with the bank’s announcement last month, Bank of Ireland contends that losses on non-Nama-bound loan portfolios have peaked and the impairment charge will reduce progressively.