Bank of Ireland has signalled that it may sell off problem mortgages and other non-performing loans to meet tougher regulatory pressures.
Article by Donald O’Donovan on Independent.ie
Loans sales would be a major departure for Bank of Ireland but management said recent changes by regulators in Dublin and Frankfurt could drive it to follow AIB, Ulster Bank and Permanent TSB in launching large-scale sales of boom-era customer loans that are in arrears or impaired following the crash.
“We are now keeping all options under review,” said CEO Francesca McDonagh.
That is a change since February – when the bank had ruled out loan sales – but reflects “changes in the regulatory environment” she said.
“Two very material developments have come together,” Ms McDonagh said, prompting the possible change of strategy.
They are the near-conclusion of the European Central Bank’s so called Trim project, which tested all big Euro-area banks’ internal valuation models for loans. This has resulted in the bank being told to hold more capital capable of absorbing losses in its mortgage book – reflecting the riskiness of bad loans in particular.
In addition, the Irish Central Bank decided earlier this month that all lenders must hold a higher-than-expected capital level in order to ride out the next downturn.
This so-called countercyclical capital buffer (CCyCB), of 1pc of Irish risk-weighted assets, kicks in from July 2019.
Bank of Ireland chief finance officer Andrew Keating said the combined impact means the bank must hold an additional €650m of capital to absorb potential losses. That must be at the expense of new investment, new lending or shareholder dividends – or, alternatively, the bank can shed some of the problem assets that capital has to be held against, he said.
Under the ECB’s revised regime, the bank must hold additional capital until it cuts bad loans from the current 7.5pc of its loan book to 5pc. In real terms that means reducing so-called non-performing loans by a third from €5.9bn.
Any sale could include some of the bank’s €2.5bn of problem Irish mortgages, which will inevitably fuel controversy.
Meanwhile, Ms McDonagh ruled out exiting the UK market, even in the event of hard Brexit next year, noting that the economy there is tipped for further growth and Bank of Ireland UK is funded independently of the Irish parent through British savers.
Earlier, the bank said it was on course to grow its overall loan book this year for the first time in a decade, and that it had cut its costs in the first six months of the year.
The bank said it was the biggest lender into the Irish economy in the first half of the year, including taking an expanded 28pc share of the mortgage market. Around 96pc of new mortgages are at fixed rates, increasingly for five-year fixed periods, the bank said.
That’s a break with the traditional dominance of variable rate loans here.
Bank of Ireland reported an underlying profit of €500m for the first half of the year.
Its net loan book grew by €500m to €76.6bn, while its net interest margin – the difference between what a bank earns and what it charges savers – was 2.23pc.
The bank also reported a net impairment gain of €81m, which it said reflected successful resolution strategies and “the positive economic environment and outlook in Ireland”.