Bank of Ireland said its underlying profit for 2010 will fall by as much as 30 per cent as the high cost of funding hit its balance sheet.
A year earlier, the bank recorded a profit of €1.4 billion, but it said intense competition for deposits and higher costs for the Government's guarantee would offset improved lending margins.
The figures are before loan losses are taken into account, although Bank of Ireland said excluding those assets held for sale to the National Asset Management Agency (Nama), loan impairments were lower in 2010 compared with a year earlier.
"The group maintains its expectations that the impairment charge on loans and advances to customers (excluding assets held for sale to Nama) peaked in 2009 with anticipated reductions in subsequent years," the bank said in a statement.
The group transferred €9.4 billion in assets to Nama last year, at a gross discount of 44 per cent.
It also held assets of about €4.1 billion that could be eligible to transfer to Nama, and these are expected to move to the so-called bad bank one the relevant legislation has been enacted and due diligence has been carried out.
The bank predicted a rise in other income due to "one off" items, and said it was keeping a close eye on costs as it predicted lower operating expenses.
In November, the Central Bank said Bank of Ireland must raise a total of almost €2.2 billion in additional core tier 1 capital by the end of this month, as part of the bailout by the European Union and International Monetary Fund. That deadline was extended after the Government said it was postponing any additional capital injections into the banking system until after the election on February 25th.
Bank of Ireland today said it had generated about €750 million of core tier 1 capital since November 28th 2010. This was due to the sale of Bank of Ireland Asset Management to State Street, and a swap of tier 2 securities for medium term notes.
The bank said its customer deposits have remained stable.
"Throughout 2010 and despite intense competition, the group’s retail customer deposit base in Ireland has remained stable and the Group’s retail deposit gathering activities in the joint venture with the UK post office continue to outperform expectations," it said in a statement. Overall customer deposit volumes have remained broadly stable since November 28th, it added.
Davy analysts called the trading update encouraging. "This is a favourable outcome for both shareholders and creditors in comparison with last year, when the 'dividend stopper' resulted in equity issuance in lieu of a cash payment to government," Davy said in a note.
Bank of Ireland said it will pay the dividends payable on its euro and sterling preference stock, totalling about €3.7 million, and dividends of €214.5 million on the 2009 preference stock held by the National Pensions Reserve Fund Commission.
"The intention to pay the discretionary dividends on the preference stock will encourage bond holders, albeit that there are still significant capital issues overhanging all Irish banks," Davy's Stephen Lyons said.
