Bank of Ireland to sell distressed mortgages and cut costs as profits fall

Bank of Ireland is planning deeper cost cuts and to shift hundreds of millions of euro of distressed mortgages off its books, after warning on Monday that it will not be able to meet key profitability targets as ultra-low interest rates squeeze lenders' incomes.

The bank reported on Monday that its underlying pre-tax profit fell by 19 per cent last year to €758 million as it set aside provisions for bad loans and its net interest margin – the difference between the rates at which it funds itself and lends on to customers – dipped.

The group dropped a key profitability target unveiled by chief executive Francesca McDonagh in 2018 of delivering a 10 per cent return on shareholders’ equity in the business by 2021. It is now aiming for an 8 per cent rate by next year, up from 6.8 per cent in 2019.

Ms McDonagh said she continues to expect to hit the higher rate over the longer term, and vowed to find €50 million of further savings in a “challenging” business environment to reduce its costs base to €1.65 billion. That’s in addition to €200 million of cuts previously earmarked for the four years to 2021.

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While the bank’s average number of employees fell by less than 2 per cent to 10,424 last year, it achieved higher levels of savings by swapping contracted workers, particularly in IT, for permanent staff. The bank has culled about 20 per cent of its managerial positions in recent years.

“I’ve never had a headcount target, internally or externally. I think they drive the wrong outcomes for both colleagues and customers,” Ms McDonagh told reporters.

“The easiest way to reduce headcount is not to backfill vacancies that come up in your frontline. But you’re actually making the customer pay for your headcount reduction and it’s just bad business. We’ve actually been putting more people into the frontline.”

Soured loans

Bank of Ireland shifted €600 million of soured loans off its balance sheet last year through the sale and bond market refinancing of portfolios of buy-to-let mortgages.

The bank is now planning to remove a portfolio of mainly problem owner-occupier loans this year, following the recent leads of Ulster Bank and Permanent TSB, in spite of rising political opposition to such moves. AIB is also lining up the sale of loans attached to primary dwellings as part of a final push by lenders to cut their levels of non-performing loans amid pressure from regulators.

It is understood that Bank of Ireland aims to carry out a bond market refinancing, or securitisation deal, on the transaction it is preparing.

Ms McDonagh rejected suggestions that the bank was seeking to advance a deal before a new government takes office and potentially sets out laws to restrict loan sales. A Sinn Féin Bill to stop banks selling loans without borrowers’ permission died as the last Dáil was dissolved.

Bank of Ireland has delayed the broad rollout of a new mobile banking phone app to March

Bank of Ireland grew its loan book by a net €2.5 billion last year to €79.5 billion, marking the second consecutive year of expansion after a decade of contraction.

While non-performing loans (NPLs) declined by €1.5 billion to €3.5 billion, the bank set aside €215 million to cover expected bad loan losses, as it took a charge against a “small number” of large loans. And its general provisioning for this returned to “normalised” levels. The bank had released €42 million of provisions in 2018.

Dividend increase

Davy analyst Diarmaid Sheridan said the bank’s 2019 loan impairment charge was 20 per cent higher than he expected, while its planned 9 per cent dividend increase to 17.5 cent per share was 2 cent below what he had pencilled into his forecasts.

The bank’s net interest margin declined to 2.14 per cent last year from 2.2 per cent in 2019. This was driven by the sale of its UK credit cards portfolio, which has high interest rates but requires large levels of capital reserves to be set against it – leading to weak profit returns.

Bank of Ireland has delayed the broad rollout of a new mobile banking phone app to March, having initially expected to launch this key project in its €1.15 billion IT overhaul last year.

Ms McDonagh said that while the rollout, currently confined to bank staff, has taken “a bit longer than expected”, the bank is “focused on getting it right”.

The CEO reaffirmed the bank’s commitment to maintaining the overall budget for its IT and wider restructuring programme at €1.4 billion.

Meanwhile, the bank has increased its capital reserves target to 13.5 per cent from 13 per cent to take into account rising regulatory demands that it have sufficient money set aside to cover potential shock losses in the future.