The Bank of Scotland (Ireland) parent believes Ireland has not yet bottomed, writes SIMON CARSWELL

LLOYDS BANKING Group, the UK owner of Bank of Scotland (Ireland) (BoSI), stopped breaking out performance figures for its struggling Irish bank in the middle of last year. It is now clear why.

The UK bank has written off a whopping €4 billion of its €32 billion loan book after haemorrhaging large sums primarily on its €13.2 billion Irish development and commercial property loans.

BoSI posted a loss of €250 million for 2008 in Mark Duffy’s last presentation as chief executive.

The headline loss would be substantially higher for 2009 if Lloyds allowed BoSI to report it, given that the bank wrote off £2.9 billion (€3.3 billion) in loans in the year.

Sources close to BoSI described the write-off as “not cautious, not optimistic, but appropriate”. The sense is that Lloyds believes Ireland has not yet bottomed while conditions are improving in the UK. Given Lloyds’ qualified comments on the Irish economy, the bank clearly expects further impairments on the Irish loans.

BoSI has so far set aside the equivalent of 12 per cent of the bank’s book over the past two years and taken €3.45 billion from its parent bank, Lloyds, which was bailed out by the UK government.

This compares with 4.1 per cent of loans written off by Ulster Bank, which has received €3.3 billion (£3 billion) from its part-nationalised parent, RBS, also in the UK.

Another foreign-owned lender, Danske, owner of National Irish Bank, has written off 9.1 per cent of its €10 billion loan book so far.

All this points to the huge task ahead at the two largest domestic banks – relatively speaking, the foreign banks are taking a much more pessimistic view of Ireland.

Allied Irish Banks (AIB) and Bank of Ireland have written off just 3.6 per cent and 3 per cent of loans in their Republic of Ireland divisions respectively and have some way to go on bad debt charges. This explains why most analysts are saying AIB and Bank of Ireland require fresh capital injections of about €7 billion on top of the €7 billion they have already received from the State.

AIB is expected to take loan loss provisions of €5.2 billion – amounting to about 4 per cent of its loan book – when it announces its annual results for 2009 on Tuesday.

However, funding remains an equally challenging problem.

As Ulster Bank said when it posted its 2009 results on Thursday, foreign players are losing deposits because they are not willing to pay what one executive in a non-guaranteed lender described as “ludicrous prices”.

Both BoSI and Ulster Bank have the benefit of large parents to fund them instead of having to pay well over the odds for deposits in an Irish market with liquidity issues.

The highly competitive savings market and the absence of any possibility of making a profit in the current market were cited yesterday as the reason for the closure of another Irish bank, Postbank, the joint venture between An Post and European bank BGL BNP Paribas.

Postbank, which was set up just three years ago at a cost of €56 million mostly to Fortis, the Benelux bank that was later acquired by French group BNP Paribas, will close its doors at the end of this year.

Margaret Sweeney, chief executive of Postbank, acknowledged that the rates offered in the Irish savings market were loss-making. “It is extremely competitive and you have to put it in the context of the ECB rate at 1 per cent. The market here is paying a significant premium over that,” she said.

This is the second retail bank in as many weeks to close, reflecting the pressure in Irish banking.