Central Bank review dents Bank of Ireland's capital cushion

Monday 02 December 2013 18.18
Bank of Ireland passes Central Bank's balance sheet assessment but still in talks about results
Bank of Ireland passes Central Bank's balance sheet assessment but still in talks about results

Bank of Ireland's capital adequacy ratios suffered a sharp drop today after the Central Bank said the lender needed to make extra provisions for loan losses as part of an industry-wide review.

Bank of Ireland said it was not required to raise additional capital after the health check, carried out ahead of the exit from an EU/IMF bailout scheme.

But it noted that it was still in talks with the Central Bank about the results of the review.

"The outcome of this engagement cannot be anticipated with certainty and actions taken following engagement with the Central Bank of Ireland may adversely impact capital ratios," Bank of Ireland said in a statement.

A spokeswoman said Bank of Ireland was happy with its current approach to potential loan losses and reiterated that it did not need to raise additional capital.

Bank of Ireland shares closed almost 3% lower in Dublin trade today.

Under the balance sheet review, Bank of Ireland's core Tier 1 capital adequacy ratio as of June 30 fell to 10.61% of risk-adjusted assets from 14.2% and measured 9.85% when tough new capital rules, set to be introduced next year, were applied.

Bank of Ireland said it expected to maintain a core Tier 1 capital ratio above 10%.

The decrease reflected the Central Bank's estimate that Bank of Ireland needed to set aside an extra €360m to cover potential loan losses on Irish mortgages, an additional €486m to cover potential losses on business loans and €547m on defaulted loans.

The Central Bank also increased Bank of Ireland's risk-weighted assets.

Analysts said the Central Bank's review was based on data as of June 30 of this year and since then there had been improvements in the bank's main markets of Ireland and the UK and in the performance of its loan book.

"The exercise appears to crudely apply industry-wide experience to Bank of Ireland's loan book performance with scant detail revealed," Emer Lang, an analyst at Davy Stockbrokers, said in a statement.

"We note the outcomes are not set in stone, remaining subject to ongoing engagement between Bank of Ireland and the Central Bank," she added.

Davy also said that the reduction on the bank's capital ratio "looks alarming and on closer inspection looks overly penal".

From Bank of Ireland's perspective, it said that such a lack of detail from the Central Bank's assessment and the penal treatment are "especially unhelpful" at a time when it is proactively assessing options to refinance the state owned 2009 preference shares.