Bank of Ireland today reported underlying pre-tax profits of €650m for the six months to the end of September, a fall of 32% from a year earlier.
The bank said it had increased its Tier 1 capital ratio - a key international indicator of financial strength - to 8.7%. It said it planned to strengthen its capital base using a range of options, including the sale of non-core assets.
Underlying earnings per share were down 31% to 55 cent and the bank has decided not to pay a dividend this year. It said it would not resume paying dividends until "more favourable" conditions returned.
Profits in the Republic retail division plunged 25% to to €286m, while Bank of Ireland Life profits tumbled from €72m to €3m, badly hit by financial market turmoil, which affected the value of its investments. Capital markets profits dropped 8% to €283m and UK profits dipped 38% to €148m.
The capital markets division took a €40m charge from the collapse of US bank Washington Mutual and a charge of €267m was made for losses on bad loans, an increase of €188m from the same period last year. This represented 0.38% of average loans. The bank said that this reflected the impact of the severe economic downturn, particularly on the property sector. The bank also said it expected the charge to be at the lower end of a 0.6% to 0.75% range for the full year.
BoI said whilst there is a degree of uncertainty to this outcome, "we expect underlying EPS for the second 6 months of our financial year to be marginally better than breakeven."
BoI's breakdown of its loan book, showed that €63.4 billion - or 44% - was linked to residential mortgages, while €36.4 billion was to business. €38 billion was linked to property and construction.
Brian J Goggin, Bank of Ireland Group Chief Executive, commented: “Turbulence in financial markets and adverse economic conditions generally, present significant trading challenges as reflected in our earnings for the 6 months ended 30 September 2008. The immediate outlook is more challenging and against this backdrop our priority remains to manage the bank safely and effectively. We believe this focus will deliver tangible financial returns for our shareholders in the medium term.”
Goggin said only €13 billion, or less than 10% of its total loan portfolio, linked to property development, was causing the bank problems.
Richard Burrows, Governor, Bank of Ireland Group, commented: “As recession impacts our main markets, Bank of Ireland, in common with other financial institutions, faces the inevitable consequences of lower income and increasing loan impairment losses. In this much more challenging environment, we have clear strategies to manage and improve our position in the key areas of capital, funding, asset quality and costs. While stockholders have seen a painful fall in the value of their holdings in Bank of Ireland, and regrettably the necessary elimination of dividends, they can be assured that this institution is being managed in a way that has their interests at heart. Our strategy in managing our way through this difficult time will ensure the future of the Bank and our ability to continue to support our customers and provide a meaningful return to our stockholders in the medium term.”
Results detail
Davy analyst Emer Lang commented today: 'One-off' charges weigh on H1, but no dividend keeps core equity Tier 1 at 6.3%: "Bank of Ireland (BKIR) has reported underlying PBT of €650m (-32%) for H1 to September, €88m below our €738m forecast, as it suffers a number of 'one-off' hits. These include €40m in relation to WAMU debt held in its liquid asset portfolio; a €32m hit in the asset management business arising on Lehman; and €38m in relation to a UK property investment trust (although minority interest absorbs €20m of this below the line). A €63m negative investment variance in the life business also weighed in the half.
Underlying EPS of 55c (-31%) compares with our forecast of 57.6c, helped by a lower-than-anticipated tax charge. The absence of a H1 dividend and a marginal reduction in Risk Weighted Assets (by €1bn to €116bn) keep the core equity Tier 1 ratio at 6.3%. The group cites a range of options to further strengthen capital including controlling RWAs, selective deleveraging, some non-core asset disposals and earnings retentions (?).
The H1 impairment charge (on loans) is an annualised 38 basis points (34bps specific), in line with September guidance, but FY guidance has been increased to 60-75bps (from mid-40s). This implies a sharp increase from the H1 level to 82-112bps annualised in H2. Taking into account the €27m exposure to Icelandic banks that will be provided against in H2 and the fact that elevated funding costs are persisting, underlying EPS in H2 is expected to be only 'marginally better than breakeven', implying a significant downgrade to our existing 103.4c FY forecast.
This also implies an extremely weak run-rate going into next year (March 2010), and the bank has also raised its impairment guidance from a range of 60-90bps to 90-110bps, the higher end implying very modest profits unless the funding cost picture improves.
As we noted in Starting Points yesterday (November 12th), if we simply apply the charges we assume in our Allied Irish Banks' model (gets us to 130bps in aggregate for ALBK in 2009) to the components of BKIR's loan book we get a charge of c.104bps (in the upper half of BKIR's range). We will firm up on our estimates after this morning's briefing. "
Goodbody analyst Eamonn Hughes commented today:"BOI has reported headline PTP of €650m vs our €600m estimate. Adjusted EPS was 55.0 cent vs our 49.5 cent forecast. BOI had guided mid-30bps on the credit charge in its IMS, though we had suspected recent events may see a chunkier IBNR, which we pencilled in at 25bps. The actual IBNR was just 4bps. Saying that, backing out the IBNR, the figures would still have been €90m odd lower than us on the Operating Surplus side, due to lower non-interest income. There was no dividend, as anticipated. Income & Costs: Net interest income was up 27% (+8% anticipated) though 7% underlying (income classifications issue).
Loans were up 8% and resources +19%, compared to our 6% and 20% expectation (respectively). Very strong deposits growth in UK. Average interest earning assets were up 3% (forecast 7%). The net interest margin at 1.71% (+7bps yoy), compared to our 1.66% estimates. Non interest income looks much weaker than expectations - partly a reclassification - and partly the life side is weak too. Associates were also lower. Costs were down 1.3% yoy (-1.4% estimate). Credit & Capital: The bad debt charge was €267m (€410m estimate) and 38bps of average advances (60bps estimate). IBNR was just 4bps and we had suspected they may have gone for more. Impaired loans of €1,908m were up 80% from the €1,062m at end March 2008 - big jumps in Ireland and UK.
Provisions to Impaired coverage was 44% compared to 56% last March. On the capital front, the Tier 1 ratio was 8.7%. The core equity ratio was 6.3%, which is higher than we anticipated - due to flatter RWA growth in period. We note the €403m charge on available for sale portfolio, which is through reserves. A similar outturn at year end would knock c.40cent off our forecast TNAV per share of €6.60. Outlook Statement & Estimates: BOI has not given any FY09 guidance to date, so today's statement has prompted a stab at FY09 guidance. It indicates that H2 will be marginally better than breakeven, which implies a 55-60 cent EPS figure. This compares to our current 67c forecast which we flagged earlier could be vulnerable, so we will be moving on our estimate.
Guidance of 60-75bps on credit means we are currently at top of this range, but may be more in income side. In relation to our FY10 loss of 7 cent per share, our first view is to hold this unchanged given guidance of 90-110bps on credit charge compares to our current forecast of nearly 130bps. However, we suspect we may be moving our income figures lower. On capital, anything we lose here will be compensated by the fact that equity Tier 1 was ahead of our expectations in H1. So we are likely to finish FY11 at close to the same numbers as we are currently forecasting. This means in our estimates that BOI still needs equity at some stage, which will continue to overhang the stock."
