Bank of Ireland shares made a much-needed recovery yesterday after the bank went into the market and bought back 47.3 million shares from institutional investors - just under the 5 per cent of its shares that the bank aimed to repurchase.

Bank of Ireland ended up buying back the 47.3 million shares at €8.45 (£5.06) each after a book-building exercise carried out by its Dublin and London brokers, Davy and Cazenove. Book-building involves institutions indicating how many shares they are willing to sell back and at what price, after which the brokers strike a price for the repurchase.

Under Stock Exchange rules, the buy-back price must be based on the average of the previous five days' closing prices, plus a maximum premium to that average price of 5 per cent. As things turned out, Bank of Ireland ended paying a very small premium to the five-day average of €8.39.

Yesterday's move by Bank of Ireland was not unexpected, given the 11 per cent fall in the share price in the previous two days, but it will be of some concern that the €8.45 price struck for the buyback failed to underpin the share price.

After the buy-back was completed, Bank of Ireland shares fell back to close on €8.15 (£6.42), 55 cents up on the day but still well off the €9.00 at which the shares were trading a week ago.

"The fact that Bank can buy back that much stock and still trade lower from the price gives some indication of sentiment at the moment," said one Irish dealer.

Before commissions paid to Davy and Cazenove, Bank of Ireland will pay €400 million (£315 million) for the 47.3 million shares. This will substantially eat into the bank's surplus capital - estimated by Goodbody analyst Mr Oliver O'Shea at €1.1 billion (£870 million) at the March 2000 year-end.

Investors do not usually like banks carrying large amounts of surplus capital as this tends to erode the return on equity. They far prefer to see surplus equity spent on earnings-enhancing acquisitions or buy-backs which also enhance earnings by reducing the number of shares in issue.

Using the Goodbody forecasts, Bank of Ireland's surplus capital will now fall to around €700 million (£551 million) and will fall even further if Bank of Ireland is successful in its bid for ICC Bank. Bank of Ireland is seen by many as the front-runner in the bidding for ICC, which will command a price tag in the order of €440 million (£350 million).

The Bank of Ireland buy-back did little to support other financial shares. AIB continued to weaken on the back of the mortgage rate cut and concerns among overseas investors about the Irish economy and lost 20 cents to €11.25 (£8.86). First Active fell 10 cents to €2.80 (£2.21), while positive comments on its half-year results failed to support Irish Life & Permanent, which fell 30 cents to €9.10 (£7.17)