Tougher regulations could prompt Bank of Ireland to sell mortgages and business loans that have fallen into arrears, changing its strategy for dealing with the legacy of the Republic's financial collapse.
The lender reported yesterday that re-tax profits dipped to €454 million in the six months to June 30th from €460 million during the first half of last year.
Speaking after it published its results, chief executive Francesca McDonagh confirmed that Bank of Ireland was considering selling some of the €5.9 billion of home and business loans on its books that have fallen in arrears.
Ms McDonagh specifically ruled out selling so-called “non-performing loans” six months ago, but said on Monday that this option was now on the table. “Our position has changed because the regulatory environment has changed,” she stressed.
Chief financial officer Andrew Keating explained that new regulations recently imposed by the Central Bank of Ireland meant that Bank of Ireland has to hold an extra €650 million as a buffer against insolvency.
He said this meant that the bank had to cut costs if it wanted to maintain returns to shareholders.
Protests by politicians and consumer groups earlier this year forced AIB and Permanent TSB to rein in plans to sell home loans to so-called vulture funds.
Bank of Ireland’s non-performing loans amount to 7.5 per cent of its total lending. Regulators want this cut to 5 per cent.
Ms McDonagh predicted that the company should achieve this by the end of 2019. “If we want to get there quicker, then we will look at other options as well,” she added.
Mortgages
Bank of Ireland’s bad loans include €2.5 billion worth of mortgages in the Republic, close to half the total. The remaining €3.4 billion comprises UK home loans, advances to businesses, and property- and construction-related debt.
The bank did not say what loans it would consider selling. Eamonn Hughes, an analyst with Goodbody Stockbrokers, suggested that any disposal would include mortgages as they made up such a significant proportion of the total.
Non-performing loans are mostly a legacy of the property bubble whose collapse a decade ago left the Republic’s financial system in chaos. Banks have been wrestling with the problem ever since.
The improving economy is easing some of this pressure. During the first half of the year, Bank of Ireland gained €81 million on loans whose value it had previously written down.
The lender reported underlying profit of €500 million in the six months to June 30th. Operating expenses, excluding levies and regulatory charges, fell by 3 per cent to €933 million.
Total income was €1.4 billion for the period, down from €1.5 billion in the first half of 2017. Its net interest margin fell from 2.32 per cent to 2.23 per cent.
The bank took a non-core charge of €46 million, primarily related to costs associated with its restructuring programme.
New lending
Ms McDonagh described the first half performance as strong. “All our trading divisions are profitable, contributing towards an underlying profit of € 500 million during the period,” she said.
New lending at the bank rose by 16 per cent to €7.7 billion, with mortgage lending up by 30 per cent to about €1 billion, giving the bank a 28 per cent share of the Irish mortgage market.
The bank said its expected re-entry to the Irish broker market later this year would support further growth in home loans.
Bank of Ireland is financing the construction of almost 3,000 homes and 1,700 student beds in the Republic. New corporate lending stood at €2.1 billion, up 9 per cent on 2017.
