Bank of Ireland was founded in 1783 and the premises at College Green, Dublin, of the Irish Parliament, which became defunct on the Act of Union coming in to effect in 1801, were purchased for £40,000 in 1803.

Bank of Ireland today issued proposals to raise €3.421bn in equity tier 1 capital. Separately in an Interim Management Statement, the bank said trading conditions in its core markets in Ireland and the UK in the first quarter (Q1) of the 2010 financial year "remain challenging though economic conditions have recently shown some signs of stabilisation after the substantial fall in economic output from early in 2008."

Patrick Molloy, Governor of Bank of Ireland said "Today's announcement marks a significant turning point for Bank of Ireland and its stockholders. The substantial private sector interest in the capital raising alongside the firm support provided by the State demonstrate the inherent strength of the bank and confidence in its future. We believe the completion of these proposals will provide strong foundations upon which to build Stockholder value."

The capital raising proposals total €3.421bn equity tier 1 capital comprising: Firm institutional placing of €0.5bn; placing to the State of €1.036bn; rights issue of up to €1.885bn, potentially reduced through equity generation and profit impact of debt for equity offers.

The plan is to have a maximum State ownership of 36%, compared with current fully diluted State ownership of 34% and the strengthened capital position will increase the pro forma equity tier 1 ratio from 5.3% to 8.0% at 31 December 2009. It is expected to maintain a minimum equity tier 1 ratio of greater than 7% under Basel II capital requirements going forward to meet the Financial Regulator's stress test.

BoI said the plan provides a strong capital foundation to support the bank's future growth and over time build value for ordinary stockholders:

• Assists the bank's prudent disengagement from State guarantees over time

• Allows the bank to focus its resources on expanding its business in those areas where it has competitive strengths and capabilities in its chosen core markets of Ireland, the UK and selected international markets

• Facilitates repayment of the State's preference shares and a return to paying ordinary dividends in the medium term

In its trading statement today, BoI said trading conditions in its core markets in Ireland and the UK in the first quarter of the 2010 financial year remained challenging though economic conditions have recently shown some signs of stabilisation after the substantial fall in economic output from early in 2008.

Net interest income is being impacted by a number of factors:

• the low interest rate environment, together with the impact of continuing competition on deposit pricing, placing pressure on deposit margins;

• the higher cost of wholesale funding as the bank continues to increase the quantum of term funding (wholesale funding with a maturity of one year or greater) in pursuit of the strategy to disengage in a prudent manner from the Government Guarantee Schemes; and

• while lending margins on new business remain strong, low levels of new business activity mutes the impact of this.

As a result, BoI continues to anticipate some downward pressure on its net interest margin in 2010.

"We continue to believe that loan losses on our non-NAMA-bound loan portfolios have peaked with the impairment charge progressively reducing as previously guided. Loan losses on these portfolios for the three year period to 31 March 2011 remain within the loan loss guidance of €4.7bn," the bank said.

The quantum of customer lending, including loans held for sale to the State toxic property loans agency, NAMA, remains broadly unchanged at 31 March 2010 when compared to 31 December 2009 on a constant currency basis. The demand for new loans is muted. Competition for customer deposits remains intense and the customer deposits at 31 March 2010 are marginally lower compared to 31 December 2009 on a constant currency basis. In January 2010, BoI's long term and short term credit ratings were downgraded by Standard & Poor's to A- / A-2 with a stable outlook.

This downgrade led to an initial outflow of some ratings sensitive international deposits. In the quarter ended 31 March 2010, the bank has raised approximately €4.5bn in term funding (funding with a maturity greater than one year at date of issue). In line its stated goals, the maturity profile of its wholesale funding has been extended with over 37% of its overall wholesale funding having a maturity of greater than one year at 31 March 2010 compared to 32% at 31 December 2009.

Goodbody analyst, Ken Darmody, commented: "Bank of Ireland has announced the plans for the much anticipated capital raise, which are to include a placing, debt for equity swap, rights issue and the conversion of some of the government preference shares. In total the company is looking to raise c€3.4bn, which is slightly higher than the €3.2bn expected. It will also purchase the warrants from the government for €490m (close to our expected €474m). First up will be the €0.5bn placing with institutional investors at a 15% discount to Friday's close, along with the conversion of €1bn of the preference shares at market level (Friday's close €1.80). There is also a debt-for-equity exchange, which could see them raise c€300m in a gain, although there are a number of options available to the bond holders and therefore the rights issue will not take place until the results are in.

The government will also take up rights on the back of the new shares, leaving them with a maximum stake of 36%. The government will also have preference shares of c.€1.8bn left in the company, with the dividend being adjusted up from 8% to 10.25%. The rights price will not be decided until the results of the debt-for-equity swap, although within the information today there is mention of a discount range of 38% to 42% to the TERP adjusted price, which suggests a discount of c60% to market levels. The proposals will be put to vote at an EGC on May 19.

The company also released an IMS today with no major surprises. As anticipated, the net interest margin is still under pressure, there has been little change to the loans on the balance sheet and term funding greater than 1 year has increased from 32% to 37%. At first glance we don't believe the valuation has moved much from where we were pitching it on Friday c0.9x TERP adjusted price to book, although there looks like a greater government ownership of 37%."

Davy analyst, Emer Lang, commented: "The group recently revealed its 2013 financial targets. These include a net interest margin in excess of 1.75%; a cost/income ratio below 50%; a return to a ‘normalised' impairment charge (we assume 52bps); an Equity Tier 1 ratio of over 7%; a group loan/deposit ratio of <125% and an ROE in the low to mid teens percent.

The capital raising announcement is accompanied by a trading update in which the group reports some signs of stabilisation, albeit that trading conditions remain challenging. It reiterates its confidence with its €4.7bn through-the-cycle non-NAMA impairment charge, an estimate that is supported by Oliver Wyman. Management reckons that non-NAMA loan losses peaked in 2009 and will reduce progressively from here.

The capital raising timetable stretches to mid-June, with an announcement of the rights issue take-up and the final results of the exchange offer expected on June 9th and settlement of rump shares by June 15th. Davy is acting as joint bookrunner and underwriter."