| 13.2°C Dublin

BoI bond buy-back to result in €1bn profit


Capital reserve boost: Bank of Ireland. Photo: AFP/Getty Images

Capital reserve boost: Bank of Ireland. Photo: AFP/Getty Images

Capital reserve boost: Bank of Ireland. Photo: AFP/Getty Images

Bank of Ireland said yesterday it was on track to make a much-needed €1bn once-off profit from buying back some of its riskier bonds, which have been trading at a deep discount in the markets.

The gain, coming hot on the heels of a €3.5bn state recapitalisation, will help further bolster its capital reserves as the group prepares to write down €6bn of bad loans over three years.

The bank has bought back 58pc of the non-core tier one bonds in the hands of UK and European investors.

It paid between 38pc and 50pc of the total €1.26bn value at which they were originally sold -- and which BoI has accounted for them in its own books. BoI will, as a result, be able record the difference between both prices as profit.

The very cheap prices at which these securities are trading in the market reflect the fact that they are not covered by the €440bn government guarantee.

BoI also has a tender offer out for a maximum of $600m of similar 'hybrid' bonds in America, which expires on June 16.

All told, the bank now believes the exercise will generate a €1bn gain from a balance sheet rejig -- much higher than the €700m most analysts in Dublin had expected.

Anglo Irish Bank, which is receiving a €4bn cash injection from the Government, also signalled last week it plans to mop up some of its hybrid securities at sharply reduced prices. It has been speculated that the nationalised bank could also pocket a €1bn windfall from the measure.

Shares in Allied Irish Banks soared 17.6pc to €1.88 on mounting speculation it may soon follow suit, giving it a market value of €1.65bn. BoI, which has stolen a march on its rival in recent times, ended yesterday's session up 1pc at €1.79 a share (or €1.8bn market capitalisation).

Merrion Capital said yesterday it expects that BoI -- buoyed by a strong share rally recently and expected transfer of about €18bn of risky property loans to the National Asset Management Agency -- now has the potential to raise equity from investors.

This could allow the bank redeem the Government's €3.5bn of preference shares in the group on a phased basis, said Merrion analyst Sebastian Orsi. If BoI manages to pay down €1.5bn of the state investment by the end of this year, it will reduce the stake taxpayers are due to take in the bank in five years' time from 25pc to 15pc.


The bank is obliged to pay the State €400m a year in interest for the preference shares, and for participation in the guarantee scheme.

"We previously expected BoI's equity tier one capital ratio to fall well below 4pc (a benchmark for acceptable reserves) . . . which, in the absence of access to private capital, would have resulted in majority government ownership at a minimum," said Mr Orsi.

Business Newsletter

Read the leading stories from the world of business.

This field is required

And while he has pencilled in €9bn of loan losses for the group over three years, he now believes BoI can keep its key capital ratio above 4pc through 2011.

The broker expects BoI to post €5.6bn of operating profits over the period, which, together with the €1bn gain from the bond buy-back, would absorb most of the impairment charges.

Most Watched