Bank of Ireland's pre-provision profit shrank two thirds in the first half on the back of steep funding costs, underlining the challenge facing the country's largest lender despite its fresh investor base and falling impairment charge.
The only domestic lender to avoid effective nationalisation after an unprecedented property binge in Ireland went belly-up, Bank of Ireland's success in attracting private capital has helped fuel a rally in Irish sovereign debt prices.
Only half of Bank of Ireland's loan book is sourced domestically helping to cut impairments by 22% and nearly halving its underlying pretax loss to 723 mln euros ($1.03 mln).
Operating profit before provisions fell two thirds to 163 mln euros as competition for deposits, higher funding costs and rising fees for a government guarantee ate into margins.
Bank of Ireland's lower provisioning charge contrasted with rival Allied Irish Banks whose impairment charge rose nearly a third in the same period. AIB has been effectively nationalised to shore up its capital base.
Bank of Ireland's funding difficulties, which predate current problems experienced by Italian and Spanish banks, and the continuing downward spiral in Irish property prices and domestic demand have been shrugged off by North American investors who paid 1.1 bln euros for a 35% stake in Bank of Ireland last month.
U.S. billionaire Wilbur Ross, who invested 300 mln euros as part of the overall deal told Reuters last month the 10 cents per share he paid was far below his estimate of the bank's book value of around 26 cents and he did not expect the bank to turn a profit for a while.
"There is a cleaner investment story with Bank of Ireland. We are a quoted company with a very large free float," chief executive Richie Boucher told reporters on Wednesday, adding the investors were long-term players.
MARKET VOLATILITY
Bank of Ireland's reliance on emergency funding from the European Central Bank and its own central bank fell to 29 bln euros from 31 bln at the end of December and deposit levels remained stable.
Boucher said he hoped to grow the country's Irish deposit base modestly, in line with economic growth, as well as attracting corporate deposits between now and the end of 2013 when Ireland's EU-IMF bailout runs out.
"We had about 20 bln euros of rating sensitive deposits which left us in the period between August 2010 and December 2010 and we are not anticipating that those rating sensitive deposits will return during the life of our plan."
Unlike domestic rivals, which remain locked out of term funding markets, Bank of Ireland has raised 2.9 bln euros in term loans in June and July and Boucher said he hoped to generate more funding via term issues before the year end.
Bank of Ireland, which has to sell around 10 bln euros of loans and run-down around 20 bln by the end of 2013 as part of efforts to wean it off a dependency on ECB funding, said current market volatility had not derailed its sales plans.
"We are quite well advanced on the sale process of a number of portfolios," said Boucher. The Wall Street Journal reported Bank of Ireland had sold its $1.4 bln U.S. commercial real estate loan portfolio to Wells Fargo , citing people familiar with the matter.
