An image of the plannned upgrading of Bank of Ireland headquarters at Baggot Street, Dublin

Bank of Ireland said in a trading statement today that it expects the discount paid for the loans it will transfer to "bad bank" NAMA to be less than the average 30% signalled by the Minister for Finance Brian Lenihan in the Dáil on Wednesday. Market expectations are that the so-called "haircut" or discount will be under 20%.

Lenihan told the Dáil that BoI was expected to transfer €16 billion in loans to NAMA.

Pre-close trading statement

In its statement, the bank said the writedown on the value of the NAMA loans would be €1.2 billion to €1.4 billion. But it said the impact on its financial position would be determined by the timing of the transfer of the loans.

The bank signalled the possibility of generating fresh funds by issuing new shares. It said today the transfer of its loans to NAMA may result in a need for additional capital. It said it could also generate some of that money internally by buying back existing debts.

The bank said trading conditions in the first six months of the financial year, which will end on Sept 30th, have been difficult. The level of economic activity across its main markets has contracted and the credit environment has deteriorated. Trading conditions in Ireland remain particularly challenging with continuing low levels of activity. 

Against this backdrop BoI expects underlying* operating profit (pre-impairment) to be lower in the six months to 30 September 2009 than in the comparable prior period to 30 September 2008. Total income is expected to be ‘mid teens’ percentage points lower and costs ‘high single digit’ percentage points lower.  The credit environment has continued to deteriorate and the bank expects this to result in an impairment charge on loans and advances to customers of approximately €1.6 to €1.8 billion in the six months to 30 September 2009.

Underlying operating profit (pre-impairment)

BoI said total income is expected to be ‘mid teens’ percentage points lower in the six months to 30 September 2009 compared to the six months to 30 September 2008 primarily as a result of reduced deposit margins, higher funding costs, the cost of the Government Guarantee and reduced new business activity in both lending and the sale of investment and savings products. In addition, as a result of the narrowing of the group’s credit spread, total income was adversely affected by the reversal in the six months to 30 September 2009 of some of the gains recorded in prior reporting periods on the fair value of its own debt. This negative income performance is expected to be offset somewhat by the impact of a positive movement in the investment variance in the Life company which was a charge of €63 million in the six months to 30 September 2008 and is expected to be a gain in the six months to 30 September 2009.

On NAMA, BoI said the Minister for Finance has announced that it is expected that NAMA will purchase loans with a book value of c. €77bn across the industry, of which Bank of Ireland could comprise c. €16bn or c.21% of the total gross lending to be transferred.  This would account for c.12% of Bank of Ireland total customer lending at 31 March 2009.

* Note: Underlying excludes the impact of non-core items: goodwill impairment; gross-up for policy holder tax in the Life Company; investment return on treasury stock held for policyholders in Bank of Ireland Life; hedge ineffectiveness on transition to the IFRS accounting standard; costs associated with restructuring programmes; gain / (loss) on disposal of business activities; gain arising on the buy-back of tier 1 debt securities.  In the 6 months to 30 September 2008 the total effect of non-core items was a gain of €56 million.

SEE: Finfacts report Sept 16, 2009: Irish "bad bank" NAMA will accept €77bn in property loans for value of €54bn - - a 30% discount