Bank's asset sales mark return to prudent era of banking
BANK of Ireland came into the financial crisis with an extraordinarily large balance sheet, with €189bn of assets, bigger than the entire output of Ireland.
Like AIB, much of this balance sheet was funded by wholesale funding, meaning that once inter-bank markets started to freeze up in 2008, the bank was always going to find it difficult, and definitely expensive, to fund a balance sheet of this size.
Leverage was simply too high and since then the bank has been trying to shrink itself. Last night's announcement that €4.5bn of assets have been sold is a significant sign of progress for the bank, which still has a long way to reach a target of €10bn of asset sales by 2013.
At the end of 2010, the bank had assets of €164bn and this latest disposal programme will bring this down even further. Clearly, there will be an earnings hit, and in some ways the bank is being forced to sell the family silver, like its US loan book.
Overall, the bank has taken a 9pc hit on the book value of its assets. In the current environment this is not necessarily a bad outcome. Virtually every company quoted on the Irish stock exchange is trading way below the book value of its assets.
It is a reflection of the risk aversion present in markets and the lack of appetite for real estate assets, even in markets outside Ireland. The bank describes the assets being sold as non-core, but in many cases they would have been relatively profitable assets.
But ultimately the bank has no choice -- the sale of assets was demanded by the Central Bank in March. Many of the assets being sold were part of the bank's expansion into overseas markets during the boom years when it was led by chief executive Brian Goggin. These expansions are now being rolled back.
The bank is being forced to go back to old-fashioned banking where there is a simple, prudent relationship between the amount of money loaned out and the amount of deposits taken in.