WHEN BANK of Ireland – the country’s largest bank – this week reported a pre-tax loss of €190 million for 2011 (down from €950 million in 2010) the results were greeted with general relief and a 4 per cent rise in the company’s share price. For the sole Irish bank not in majority State ownership, the results were encouraging: an indicator that, as chief executive Richie Boucher said, the bank was “moving towards a slightly more business as usual” mode.
Bank of Ireland has taken the necessary steps to restructure its balance sheet, by deleveraging its assets and controlling costs. But it has more to do.
Much of the uncertainty that surrounds the bank’s prospects in 2012 – and those of the other financial institutions operating in the domestic market – reflects a concern about the performance of the economy and its likely impact on the mortgage sector. A lower rate of economic growth is forecast this year and residential mortgage arrears are set to increase. All of which creates uncertainty for banks about the likely size of loan losses on their mortgage books, which account for much of their lending.
A sluggish economy means demand remains depressed, unemployment is unlikely to fall and house prices – which by last year had fallen 47 per cent from their peak – are likely to decline further. Last week figures from the Central Bank showed a sharp increase in the number of owner-occupier mortgages that are over 90 days in arrears. By year-end the number had reached 70,911 – or almost one in 10 of all residential mortgage loans outstanding. For the banks, one further uncertainty surrounds the new personal insolvency rules proposed by the Government, which are expected to pass into law later this year. These give borrowers in financial difficulty new options in managing their bad debts. How much this eases the position of distressed borrowers and how much it adds to the difficulties of banks remains to be seen.
For the Government, its role in monitoring the operation of the covered banks, which benefit from the State guarantee on loans and deposits, is a challenging one. The State is a major bank shareholder. It owns IBRC – formerly Anglo Irish Bank; has a shareholding of over 99 per cent in AIB and Irish Life Permanent; holds a minority (15.1 per cent ) stake in Bank of Ireland; and has committed some €64 billion towards the recapitalisation of the banks.
The Government has to reconcile and balance a number of conflicting interests. It acts as defender of the taxpayers’ interest in protecting the State’s huge investment in the banks. It seeks to address the problem of mortgage arrears by its proposed personal insolvency measures. And the Government is also pressing banks – who are lowering their loan to deposit ratios and are less anxious to lend – to increase the supply of credit to small and medium enterprises. The relationship between the banks and their largest shareholder – the Government – is likely to become increasingly strained.