Bank of Ireland said its underlying operating profit would be up to 40 per cent lower in 2010 as operating income declined and the cost of the bank guarantee rose due to its extension.
In an interim statement this morning, the bank said net interest income was continuing to be affected by intense competition for deposits and higher deposit pricing in Ireland, the higher cost of wholesale funds, and lower demand for new lending.
Bank of Ireland said it believes its loan losses peaked last year, and will reduce progressively up to 2012. Home arrears in Ireland are stabilising, the bank said, and loan losses in the UK are in line with expectations.
"Our corporate banking loan book has begun to benefit from the general improvement in world economic conditions," the bank said in a statement. "While arrears in our Irish mortgage books have continued to rise, there is evidence that these are stabilising, particularly for owner occupier borrowers, and our loan losses for our Irish mortgage portfolios are in line with our expectations."
At the end of September 30th, Bank of Ireland had transferred €3.75 billion of assets to the National Asset Management Agency, at a gross discount of 36 per cent. It has loans with a book value before impairment provisions of €6.35 of remaining assets that could be eligible to transfer to Nama. These are expected to have a discount of up to 42 per cent.
The fees incurred as a result of the Government’s guarantee scheme are expected to rise significantly, with Bank of Ireland estimating it will amount to 150 per cent of the €151 million it cost for the six months to June 30th, 2010. The Government extended the scheme to the end of December after its initial expiry, and earlier this week, the European Commission approved a further extension to the end of June next year.
However, the bank said it was keeping a tight control on costs. Lower pension costs as a result of changes to its main pension scheme and other cost-cutting measures are expected to cut operating expenses from the €1.9 billion incurred last year. The bank is also reducing jobs, as part of the restructuring plan approved by the EU to enable the Government to provide State aid. Some 750 jobs are to go under the plan, and last week Bank of Ireland said it was cutting 270 jobs from its operations in Northern Ireland and Britain.
It acknowledged that difficult market conditions had led to some loss in deposits in the capital markets business.
The bank said its equity tier 1 ratio, which was 8.2 per cent at the end of June, would fall by the end of the year as a result of the transfer of assets to Nama. However, it is still expected to meet the requirements of the Prudential Capital Assessment Review by December 31st.
Irish retail deposits are stabilising, it said, and UK deposits are "better than expected".
Bank of Ireland last month announced it would sell Bank of Ireland Asset Management to State Street Global Advisors for €57 million, as part of a restructuring plan approved by the European Commission.
Shares gained 4.9 per cent on the Irish market today to trade at 40.3 cent. AIB was also up, climbing 14.8 per cent to 38 cent shortly after 12.30pm.