Bank of Ireland (BOI) is working on a strategy to avoid accruing an additional €445 million “step-up” payment to the Government, if it fails to pay back the State’s €1.78 billion holding of high-interest preference shares by next spring.
The issue is seen as a top priority within the bank, which yesterday reported its results for the first half of the year. One possibility being discussed in political circles is that the bank could tap its existing shareholders, such as Wilbur Ross, for cash to pay off the State's preference shares before the March 31st deadline.
The Government took out the preference shares in 2009 and they pay a coupon of 10.25 per cent, or currently about €182 million annually. Under the terms of their issuance, if the preference shares are not paid back by March 31st next year an additional 25 per cent “step-up” liability is attached to the total sum owed.
“We are working on a range of options [in relation to the preference shares],” said Richie Boucher, the bank’s chief executive. He told a media briefing yesterday it was management’s preference to pay off the shares as soon as possible.
“It is psychologically important to our sense of self worth to repay the State. We like to pay our debts,” he said.
Dividend payments
BOI is also barred from making dividend payments until the end of 2015, as long as the preference shares remain unredeemed. Andrew Keating, the bank's chief financial officer, said the payment of dividends is "a factor" in its thinking as it formulates a preference share strategy.
The bank yesterday struck an upbeat tone as it delivered its interim results, which saw losses narrow from €1.26 billion a year ago to €504 million. BOI said it is moving “closer to profitability” and asserted that its four-year crisis had come to an end and it is nearing “normality”.
Its income over the first six months of the year rose 36 per cent to almost €1.2 billion. The bank’s net interest margin, a measurement of the profitability of its lending closely watched by investors, jumped from 1.3 per cent to 1.65 per cent.
Profits before making provisions for loan losses rose to €380 million, while the bank made a net loss after provisioning for the half-year period of €455 million, narrowing from €1.1 billion a year ago. The rate of growth in mortgage arrears is also showing signs of slowing down, although the figures are still rising.
About 10.5 per cent of owner-occupier loans are in arrears of 90 days or more, while 26 per cent of buy-to-lets are in similar difficulty.
Reputational risk
Mr Boucher said the bank was being "selective about returning to commercial property lending. "We have to look at reputational risk, we are cognisant of what people think," he said.
He said property lending would “always be a component of our business, but it has to be very measured. We have the lessons of the past burned into our hearts and our brains.”
The bank said it has repaid 70 per cent, or €24 billion, of the liquidity funding it has received from the European Central Bank.
