BoI halves dividend, warns of 'difficult' market

Bank of Ireland has halved its dividend after warning this morning its first half profits would be lower than last year's due to “increasingly difficult” trading conditions and rising loan impairments.

As a result, in a pre-close trading statement for the six months to ending September 30th, the bank said it expects its financial performance to be lower than the same period in 2007

"We anticipate that the current difficult trading conditions will continue and will negatively impact our earnings for our financial year," said John O'Donovan, the bank's chief financial officer.

Bank of Ireland shares fell 12.3 per cent to €4.05 in the first hour of trading before rebounding somewhat to reach €4.25 by 11.25am, a fall of 8 per cent.

To preserve its capital reserves Bank of Ireland confirmed this morning it will halve its dividend, stating with its interim dividend, a move that may see the bank increase its cash reserves by around €315 million per year.

Although the bank expects income and costs to fall it has forecast an increase in its impairment charge "to an annualised mid-30s basis points".

For the current financial year Bank of Ireland said its impairment charge is expected to be "circa mid40s basis points". Previously, the bank had guided in the mid20s range.

The higher impairment charge reflects weaker consumer sentiment and "further declines in the property and construction sectors, particularly in recent months", according to Bank of Ireland.

"We expect the credit environment to continue to deteriorate and, on this basis, we anticipate our impairment charge will be circa mid 40s basis points for the year to March 31st, 2009", the statement said.

Looking ahead to March 2010, Mr O'Donovan said the deteriorating economic background means trading conditions are expected to remain challenging and the bank expects an impairment charge "in a range of 60 to 90 basis points for the year to March 31st, 2010."

In a conference call with analysts this morning Mr O'Donovan said the reasoning behind raising its impairment charge forecasts were property repricing in Ireland and the UK, lower economic growth in key and liquidity problems.

Deposit growth has grown 20 per cent compared with the same period in 2007 and the bank said it had imposed a "controlled slowdown" in lending.

"We are taking the right action on the basis of what we know today to protect the bank's capital position," Mr O'Donovan.

Questioned by analysts about the size of the bank's exposure to the UK buy-to-let market, Mr O'Donovan said the bank had been in the market since 1999 and credit was only extended to those with a strong, clean credit history.

Asked by brokers would the bank restrict lending growth to meet our capital targets, Mr O'Donovan replied 'Yes'. He said these were "turbulent times" and the bank would be managed "conservatively" and "prudently".