DBRS: Bank of Ireland Reports Fall in Defaulted Loans but Higher Impairments Lead to Net Loss

Summary:
•Bank of Ireland reported that the level of defaulted loans fell in H2 2013, the first reduction in several years, while increased impairment charges helped the coverage ratio to increase to 48%.
•The further high impairment charges led to the Bank reporting a net loss before tax for H2 2013, however progress continues to be made with the NIM improving further to over 2% and costs reducing.
•DBRS rates Bank of Ireland at BBB (high), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

DBRS Ratings Limited (DBRS) views the results of Bank of Ireland (BoI or the Bank) for 2H13 as providing more evidence of the Bank’s progress. For the first time in several years the level of defaulted loans (defined as impaired loans plus residential mortgages greater than 90 days in arrears) reduced and this, together with further impairment charges taken in the period has led to a further improvement in the Bank’s coverage ratio to 48% as of end-2013, up from 43% at end-2012. Importantly the improvement in defaulted loans was seen across all of the Bank’s major loan portfolios. The elevated impairment charge follows the balance sheet assessment carried out by the Central Bank of Ireland in Q4 2013. As asset quality remains weak, with defaulted loans accounting for 18.5% of total loans, impairment charges are likely to remain elevated, albeit reducing in future periods. DBRS is of the view that the Bank’s asset quality will continue to improve, helped by the nascent recovery in the economies of Ireland and the UK.

In 2H13 net interest income increased by 27%, compared to the same period of 2012, driven by the substantial improvement in the reported net interest margin (NIM) to 2.03% (2H12: 1.34%). The rebuilding of the NIM reflects the repricing of both loan and deposit portfolios as well as more efficient balance sheet management and lower wholesale funding costs. Total costs in the 2H13 reduced when compared to previous periods, with the 11% reduction in staff costs compared to the same period of 2012 reflecting a reduction in headcount of approximately 2,000 since June 2012. As a result of these cost reductions, a reconfiguration of premises and other infrastructure, as well as renegotiated outsourcing contracts, the Bank’s reported cost-income ratio improved to 53% in 2H13. DBRS would expect this focus on costs to continue. In total the Bank reported a loss before tax of EUR 186 million for 2H13 primarily as a result of the impairment charges. The Bank’s pre-impairment charge profitability has also been boosted by the expiry of the Eligible Liabilities Guarantee scheme (ELG) in March 2013 as the fees related to this have reduced considerably, and DBRS also notes that the Bank has been profitable in the first two months of 2014.

Under the Basel III capital regime the Bank’s capital ratios remain relatively modest with a fully-loaded ratio, including the preference shares that will cease to qualify in 2017, of 9.0% at end-2013, and a ratio of 12.3% (again including the preference shares) under the transitional rules that came into effect on January 1, 2014. These ratios highlight the need for the Bank to continue its progression to return to profitability to enable it to increase capital levels through earnings retention.

DBRS rates Bank of Ireland at BBB (high), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]