The Bank of Ireland has told markets that in a worst case scenario, the value of impaired loans on its balance sheet could almost double to €6 billion by 2011.
The bank had previously issued guidance in November saying the figure for impaired loans amongst property developers and other lending would be €3.8 billion.
However, the bank says the Government's injection of billions of euro into the bank meant it was confident it would withstand the impact of what it termed the deteriorating credit environment.
Impaired loans are those the bank is worried will have to be either partially or entirely written off in the future.
Bank of Ireland's worst case scenario on impaired loans has jumped from the €3.8 billion it forecast in November for the three year period to March 2011 to €4.5 billion now. However, the bank says there is a downside risk this could hit €6 billion as economic indicators deteriorate.
If all those impaired losses materialised as write-offs, it would dwarf the €3.5 billion injection of fresh taxpayer capital announced last night by the Government.
However, Bank of Ireland says that with the Government injection it has €10.8 billion of cash to buffer against that realisation of all those losses.
'Our stockholders have suffered very significant losses in the value of their holdings in Bank of Ireland. We sincerely regret this and see this capitalisation as a major step in the long-term rebuilding of value for our stockholders. We are committed to this task and to ensuring that Bank of Ireland is worthy of the trust of its customers, staff, and stockholders, '
commented Richard Burrows, Governor and Brian Goggin, Bank of Ireland's CEO in today's statement.
Bank of Ireland says the second half of its financial year to the end of March will be loss-making, though it expects to make an underlying profit for the year in total.
It said that there has been a further sharp and widespread deterioration in global economic and financial conditions since September. The bank said its core market are in recession with rising unemployment, reduced levels of economic activity and falling asset prices. It added that equity markets remain weak and volatile while interbank and wholesale funding markets remain stressed.
Bank of Ireland said that new business momentum across the group continues to slow in the second half of its financial year. It said that total income is expected to be mid-single digit percentage points lower for the year to March 31, 2009 compared to the previous year.
It said that it has started a number of downsizing programmes, including initiatives in its UK mortgage and business banking units. The costs associated with these changes will be around €90m.
Giving a breakdown of how its various divisions have performed, Bank of Ireland said its Retail Ireland unit has been materially impacted by the 'very difficult' conditions in the Irish economy. It said the main factor driving performance this year will be an increased loan impairment charge.
It added that demand for credit has slowed down considerably, reflecting the very sharp downturn in the economy. The bank's total income is expected to be lower in the year to March 2009 compared to the previous year.
Continued weakness in stock markets around the world has also significantly reduced the level of sales in Bank of Ireland Life, especially in the single premium market.
Despite strong income growth and good cost control, Bank of Ireland says it expects a lower profit result from its Capital Markets - reflecting the rise in the loan impairment charge.
Profits at its UK financial services division is expected to be much lower, again mainly due to a marked increase in the loan impairment charge. Lending in the division has slowed, while profits in its mortgage business are set to be marginally lower in the second half of the year compared to the first half.
However, it adds that deposit growth in its UK Post Office Financial Services has been strong.
Credit rating agency Moody's has downgraded Bank of Ireland's long-term credit ratings, saying the move is due to expectations that its impairments will increase substantially. It said a slowdown in BoI's main markets would also affect profits. The debt which is covered by the Government's guarantee scheme is not affected by the change.
Shares in Bank of Ireland closed down 10 cent at 51 cent in Dublin.
