BoI halves dividend to weather the storm as bad debts spiral
Bank of Ireland chief Brian Goggin has been forced to preserve capital in the teeth of a financial storm which is besetting banks
Thursday September 18 2008
Bank of Ireland yesterday unveiled a surprise plan to save over €300m this year by halving its dividend, as the group prepares to shore up its balance sheet in the face of soaring bad loan losses.
The bank has almost doubled its bad-debt charge forecast for this year to about 0.45pc of loans, rising to between 0.6pc and 0.9pc next year -- as property development loans turn increasingly sour.
Davy analyst Emer Lang said the guidance points to a €640m impairment charge this financial year and a €1.3bn writeoff for the year to end of March, 2010. While analysts largely applauded the group's move to protect its capital base, they slashed their forecasts in light of the trading statement.
Bank of Ireland shares plunged 14.3pc yesterday to €3.96, falling below €4 for the first time in over 11 years. Allied Irish Banks sank 13.7pc, Irish Life & Permanent lost 8.1pc and Anglo Irish Bank fell 3.3pc.
"Trading conditions in the first six months of our financial year have become increasingly difficult," said John O'Donovan, chief financial officer, in a conference call with analysts. "We are taking the right action . . . to protect the bank's capital position."
Bank of Ireland expects 45pc of the bad-loan charge next year to come from its €37bn property loan book, excluding mortgages. It sees valuations in the €24bn property investment portfolio falling 20pc-25pc, sending loan-to-value (LTV) ratios from an average of 62pc when the loans were granted into the "high 70s".
Property
LTVs in the €13bn property development portfolio should move from the "low 60s" to the "high 70s", after factoring in an expected 30pc-40pc slump in land-bank values and a 20pc fall in the value of projects under development.
The 50pc dividend cut, starting with the interim payout, will leave the bank with an equity Tier 1 capital ratio -- a key measure of a lender's financial stability -- of 6pc at the end of September and next March.
The group has a goal of keeping its core ratio between 5.5pc to 6.5pc, though analysts pointed out that the financial markets are demanding lenders have a ratio of at least 6pc.
Asked if the group would restrict lending growth, Mr O'Donovan said: "The answer, unequivocally, is yes." He suggested market fallout following the collapse of US investment giant Lehman Brothers would keep wholesale funding rates at high levels and net interest margins under pressure.
"It is probably too early to call in terms of the medium- to longer-term effect . . . but my guess is that margins will be impacted because the period of dislocation and the quantum of that dislocation is likely to be higher than I would have forecast . . . last Friday," he said.
Mr O'Donovan reiterated that the bank was not planning to raise additional capital from shareholders or sell off non-core assets, but said nothing could be ruled out.
NCB Stockbrokers analyst Christopher Wheeler welcomed the fact that 80pc of the group's loan book is funded by retail deposits or wholesale funding not due to mature for at least a year. "Encouragingly, deposits grew by 20pc in the first half," he said.
- Joe Brennan
