Tuesday 19 September 2017

BoI moving away from the precipice

FRIDAY'S trading update from Bank of Ireland provides the first indication that Ireland's largest bank might, just might, manage to stay out of majority state ownership. However, the news from IL&P that bad debts would be €80m-€100m higher than previously expected piles even further pressure on the embattled bancassurer.

With the state shareholding already up to 36 per cent, BoI has been fighting a desperate rearguard action. Working in its favour is that it has managed to raise €750m of fresh capital since the end of November, deposits have been broadly stable over the same period and 2010 bad debts are likely to be down on 2009.

The bad news is that BoI needs to raise €1.45bn of fresh capital by the end of this month, its profits before bad debts are likely to be 25 per cent-30 per cent lower than the €1.4bn recorded in 2009 and its loan-to-deposit ratio, which had been falling earlier last year, has since shot up from the 143 per cent figure recorded for June 30.

If all of this extra capital were to come from the State in the form of fresh equity then its shareholding in BoI would rise above 75 per cent. That's unlikely to happen. In practice, not all of the extra capital will come in the form of fresh equity. With the bank having resumed paying dividends on its preference shares, the possibility of the National Pensions Reserve Fund pumping in at least some of the extra capital in the form of preference shares rather than straight equity has opened up.

This means that the most probable outcome is a further increase in the state shareholding to 48 per cent-49 per cent, de facto state control but still preserving the fig leaf of majority private sector ownership.

But even as BoI inches away from the precipice, IL&P's predicament, particularly that of its mortgage banking subsidiary Permanent TSB, continues to worsen.

With bad debts continuing to rise and its funding difficulties intensifying, some state-backed recapitalisation seems inevitable.

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