Bank of Ireland's bond buyback programme took the sting out of nose-diving earnings, a hike in its bad debt forecast and the departure of its chairman on Tuesday as investors cheered the expected capital boost. Shares in Ireland's largest lender by assets soared 30 percent, pushing the wider market to a six-month high and prompting a 16 percent jump in rival lender Allied Irish Bank on expectations it would make a similar move.
"It's an easy way to grow your capital base. It makes sense. I would expect that Allied will be looking at their options as well," said Sebastian Orsi, analyst with Merrion Capital. Bank of Ireland raised its expected bad debt charge for the three years to March 2011 to 6 billion euros ($8.08 billion) and warned there was a downside risk to that forecast should Ireland's recession, already the worst on record, worsen.
But Chief Executive Richie Boucher said the lender was adequately capitalised and did not foresee the need for further funds from the state even with a likely large writedown on its development portfolio when the government sets up its "bad bank" to cleanse the sector of risky property loans.
"Based on our current estimate of loan losses we believe that what we have is sufficient for us to stabilise the bank and also participate in the economy," he told reporters. Dublin has already got a 25 percent indirect stake in the country's top two lenders and has warned it may end up a majority owner of Bank of Ireland and Allied Irish following the creation of the 'bad bank', which will take over property loans with a book value of up to 90 billion euros.
At 1245 GMT, Bank of Ireland shares were up nearly 28 percent at 1.38 euros helping the market hit a six-month high of 2,772 points. Under its debt buyback, Bank of Ireland will purchase securities with a maximum face value of 1.4 billion euros. It is the latest lender to take advantage of deeply discounted secondary market prices to improve its capital position. Royal Bank of Scotland made a similar move last month.
Scott Rankin, an analyst with Davy Stockbrokers, said they were assuming around 700 million euros would be added to Bank of Ireland's core Tier 1 capital from the purchase. "It boosts it quite nicely," he said. "There are some good spots and some bad spots in the results but on balance I think the market will be reasonably happy with the numbers given how bad the environment is."
Three months ago, Bank of Ireland was estimating a bad debt charge of 4.5 billon euros for 2008-2011 but had flagged a downside risk of a further 1.5 billion euros. The group's underlying earnings per share have slid 80 percent and its share price has been cut to pieces by impairment charges, leading Chairman Richard Burrows to announce his resignation.
"Accountability for these losses must be taken at the top," he said in a statement accompanying the results. The bank, whose principal market is recession-wracked Ireland, warned that the financial year to March 2010 would be another difficult one.
"We expect lower levels of new business activity, higher impairment charges and further pressure on liability spreads," it said. Bank of Ireland's underlying earnings per share (EPS) were 30.2 euro cents for the year to March 2009 compared with 150.3 cents a year ago after the company took a bad debt charge of 1.4 billion euros. Analysts were expecting underlying EPS of 20 cents according to the median of 11 polled by Reuters Knowledge.
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