Bank of Ireland warned today that exposure to structured investment vehicles (SIVs), weak sterling and falling stock markets could cost it €70 million and reduce earnings growth.
The charges are about 3.5 per cent of the €1.96 billion pretax profit analysts expect for the year to the end of March and contrast with multibillion euro write-downs at some European banks due to their exposure to US subprime mortgages.
Bank of Ireland said in a trading statement that, excluding the anticipated charges, it saw full-year underlying earnings per share (EPS) growth in line with previous guidance for a high single digit percentage increase.
"The trading performance of the group is broadly in line with our expectations," the bank said. "The continuing volatility in markets is however impacting our financial performance and the outcome for the year is subject to change."
It cautioned that if factors such as sterling and stock market weakness did not improve between now and the end of its business year in six weeks' time EPS growth could be below guidance at between 3 and 5 per cent.
"The financial impact of the current market volatility is material," chief financial officer John O'Donovan told analysts during a conference call.
"(It) would impact our expected outcome by circa 4 per cent EPS resulting in EPS outcome for March 2008 of circa 3 to 5 per cent growth over March 2007," he added.
Ireland's second biggest bank by market value said it had increased provisions against its investments in SIVs by €15 million to 50 per cent of its total exposure of 85 million.
SIVs are funds that raise cash by issuing short-term debt and invest the proceeds in longer-dated, higher-yielding assets, including US mortgages, but have been unable to fund themselves normally for months due to the global credit crisis.
The bank also said it had taken a €40 million hit on investments at its life business due to weak stock markets and a further €15 million due to the impact of recent sterling weakness on the translation of profits from its UK businesses.
Looking ahead to the company's business year starting in April, the bank said it expected the more moderate level of activity seen in recent months to continue in 2008.
"The current volatility in financial markets may remain a feature well into this calendar year impacting on overall investment, business and consumer confidence," the bank said.
Shares in Bank of Ireland, which have lost about half their value since hitting a life time high 12 months ago, were down 0.7 per cent at €9.4 euros in Dublin earlier, underperforming a 0.1 per cent weaker Irish market.
Ireland's banking stocks have been hit hard over the last year as global market turmoil compounded domestic worries over an end to Ireland's decade-long property boom and the resulting slowdown in its once thriving economy.
"Growth in Ireland has slowed sharply in H2 with only modest profit growth expected for the year," analysts at NCB wrote in a research note following what they described as a cautious trading update.
"Overall, the slower than expected growth in Ireland is a concern," it added. "Our earnings forecasts are set to decline by 3 per cent at this stage."