Bank of Ireland (IRE)
Q2 2012 (Interim) Earnings Call
August 10, 2012 4:00 AM ET
Richie Boucher – Group Chief Executive
Andrew Keating – CFO
Eamonn Hughes – Goodbody
Gérard Moore – Merrion Capital
David Lock – Deutsche Bank
Vincent Hung – Autonomous Research
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Hi. Good morning, everyone. Welcome to our Interim Results Presentation for the Six Months to June 30, 2012. And we’d like to thank you for joining us here in Dublin and for those who are joining us by way of the conference call and webcast. I’d like to do a short presentation, following which then our CFO, Andrew Keating, will do more a detailed run-through of the numbers, and then we’ll move to a Q&A session.
So, the operating environment in the first half of 2012 has been characterized by considerable uncertainties in the Eurozone and very low official interest rates. While there the Irish economy has return to growth driven by the export sector, demand in the domestic economy has been sluggish. The external environment and interest rate environment remains challenging. However, Ireland is achieving considerable progress in the adjustments in the industry to realign the Irish economy with sustainable economic recovery. Ireland continues to meet its commitments on the EU/IMF Programme of Support. And in July, we turned to international bond market. The regulatory environment is also subject to a broad range of changes from both domestic and international regulators.
Against this backdrop, we continue to make progress in strengthening the group’s balance sheet with robust core Tier 1 capital ratios and improving liquidity ratios. We exceeded our asset disposal target of €10 billion ahead of schedule and well within the discounts assumed as part of the 2011 pre-call. In addition, redemptions and repayments remain in line with the expectations. As a result, our loan-to-deposit ratio has further improved to 136%.
Our deleveraging initiatives have lowered the group’s requirement for wholesale funding, and we have no requirement to raise term funding this year with unsecured term maturity of just €0.4 billion for the remainder of the year. Our unsecured term maturities for 2013 and 2014 are both low and very manageable.
Our operating performance in the first half of 2012 has been impacted by the interest rate environment, exceptional guarantee fees and the economic environment. Operating profits before impairments reduced from €164 million in the first half of 2011 to €58 million for the first half of 2012. This positively reflected a reduction in the level of our average interest earning assets as we deleverage the balance sheet and particularly the sharp reduction in official interest rates, which impacted on our earnings rates. This, together with the continued elevated cost of funding in deposits, impacted our net interest margin which was 1.20% for the half year.
Rebuilding net interest margin is one of our key priorities, and we have taken a range of actions to help rebuild that net interest margin. We have taken a leadership position, endeavoring to bring pricing discipline into an intensely competitive market in Ireland. We have also continued to reduce the quantum of our deposits in wholesale funding on which we are charged ELG fees.
These pricing and ELG actions have not adversely impacted our deposit run charges or volumes we’ve received. In addition, we have taken measured actions to reprice loan assets including in our Irish SME book where we have repriced the loan portfolios to reflect the actual cost of funds and increasing our SVR rate in the UK, 100 basis points in June and a further 50 basis points in September. We expect these and other varied actions we are taking will strengthen our net interest margin.
Our operating costs remain in line with the first half of 2011. Lower staff costs were offset by investments in our core franchises and in processes and systems aimed in improving customer service and bringing cost efficiencies, which will flow through. As we restructure the group to further improve their efficiencies, regrettably, the number of people that we employ will reduce. Revised redundancy terms have been agreed with key stakeholders and our volunteer redundancy programs to facilitate the controlled departure of stock in line with the group’s revised requirements has recommenced.
Impairment charges and loans and advances to customers were €941 million. This was higher than the first half of 2011, but below the level incurred in the second half of 2011. We remain focused on proactively managing the credit quality of our portfolios. Without being complacent, we are becoming more comfortable with the performance of our corporate and unsecured consumer loan books and our UK mortgage book. We are seeing some stabilization in Irish commercial real estate and in the Irish SME sector, albeit the very challenging conditions remain.
The management of arrears in our Irish mortgage book is a critical priority. We have made significant investments in people, processes and systems in order to help us support customers in difficulty through engagements and restructures, where they are sustainable and appropriate. Whilst the number of customers moving into arrears has increased, reflecting both the economic environment and a considerable number of our buy-to-let customers moving from interest-only to full capital and interest-repayment basis. The rate of migration into earlier arrear and to broad categories has begun to reduce.
We still anticipate that impairment charges will reduce from the level recorded at the half year, trending to a more normalized level as the Irish economy recovers. However, the pace of the reduction in impairment charges will be particularly dependent on the future performance of our Irish residential mortgage book and on the commercial property market, as well as, obviously, our own credit management initiatives.