Bank of IrelandA Strategy to Move Forward

Presented by:John MurrayOlayinka AinaAbiodun AdelajaSinead McDonagh

Contemporary Issues in Financial Services Lecturer: Philip Burke, September 2010 – December 2010

Areas for Review

• Liquidity Issues• Background I.e. Irish Government Ownership • Wholesale Funding For Bank Of Ireland• What can we do?/Recommendation • The Way Forward

Liquidity Issue

It is very hard to isolate the liquidity issue without commenting on solvency and then the State so lets briefly talk about what happened first.

Liquidity Issue

• Against the backdrop of very low European and global interest rates, the Irish banks were able to borrow very cheaply on international money markets.

• They used this wholesale funding to finance their lending activities both at home and abroad.

• The onset of the ‘credit crunch’ as a result of the US sub-prime mortgage market debacle, collapse of Lehman Brothers and subsequent volatility in economic and financial markets effectively closed the money markets. Thereby, freezing the Irish banks out of the markets upon which they had become reliant.

• Concerns over the banks’ ability to fund themselves intensified as deposit outflows compounded liquidity pressures.

• The blanket deposit guarantee was introduced to address the liquidity problem and instil confidence in the banking system.

• It also inextricably tied the banking sector to the Sovereign or State.

Liquidity Issue

• However, the Irish banks equally had a solvency problem as bad debts from the bursting of the property bubble meant loan losses would erode the capital bases.

• In an effort to cleanse the bad loans from the banks NAMA was established and capital was provided both from the State and in Bank of Ireland’s case partly from the market.

• However, time delays and numerous iterations of the ‘worst case scenario’ created uncertainty as banks either didn’t know or wouldn’t say how bad things were.

• As markets hate uncertainty, fears re-emerged as to whether the banks were adequately capitalised. Not knowing whether the banks would be able to absorb future loan losses or pay back their debt to funding providers (e.g. bondholders, depositors), the markets began to bet that the Irish banks would default.

• As the debts of the banks are effectively the debts of the State, the Sovereign came under pressure. Simultaneously, the Irish public finances are in deficit as our costs (public spending) are simply greater than our income (tax revenue).

• The State is similarly reliant on international markets (i.e. bond markets) to fund the difference.

Liquidity/Cont.

• Markets began to take the view that Ireland (and its banks) would not be able to afford to pay back its debts and were not willing to extend any further credit or only at prohibitively expensive rates.

• The perceived risk of default intensified with markets spooked that the larger economies of Portugal and Spain were next in line.

• Immense pressure mounted on the Euro as markets were characterised by fierce instability.

• To address the Irish problem and to contain any further contagion, the need for a finance package (bail-out) from the IMF and European authorities became unavoidable.

Wholesale Funding Issues for BOI

• At 30th June 2010 BOI ratio of loans and advance to customers (excl assets held for sale to NAMA) to Customer deposits was 143%– Nov 12th it’s now 160%

• Heavy reliance on wholesale funding– 59% of this wholesale funding has maturity of <1 year

• Large exposure to bond market uncertainty surrounding Irish Government backed bonds.– Irish Government bond yields have peaked at over 9% this year– E.g. CDS (credit default swap) on BOI have being trading in the region of 816

bps • Increased cost to BOI for participating in Government guarantee scheme• First time buyer mortgage rates vary from 3% -4% (per BOI website), and then up

to 5% for buy to let.– Therefore large, costly maturity/funding mismatch

What can they do?

• The issues identified on the previous slides, and those which face BoI, are not unique to BoI, but issues that are intrinsically linked to that of the Irish State. As a result, resolution of these issues are dependent on factors outside of BoI control and influence the Irish State, International Governments, etc.

• BoI are limited in what they can do on a day-to-day basis in dealing with these issues, and the recommendations identified on the following slides are a sample of day-to-day measures, within BoI control, to seek to contribute to overall improved stability and growth.

Recommendation :• Raise capital by way of additional Rights Issue: Perception that BOI need to raise an

additional c2.2m or they could be nationalised. • Continue efforts to dispose of non essential elements of the Group, as identified in

the EU Restructuring Plan – BIAM (already sold), New Ireland Assurance, ICS Mortgages, etc., in an effort to further shrink the Balance Sheet.

What can they do?/Cont.

• Rebuild trust both domestically and internationally, in Consumer, Business and Corporate Customers.

• Demonstrate an ‘Open for Business’ message by supporting Customers in difficulty.• Remain competitive and attractive in chosen markets e.g. Competitive mortgage

rates and competitive deposit rates in the short term to entice customers to maintain deposits with them. Launch an advertising campaign to reassure customers that deposits are safe and secure.

• Identify new and emerging markets, and become primary provider in these markets – e.g. Energy efficiency home/business improvements (recent ESB Halo Home Improvement Loan, Green Mortgage), Save to Borrow Consumer lending (Credit Union model, of driving deposits from Customers, to enable demonstration of repayment capacity, thereby proving greater ability to approve lending)

What can they do?/Cont.

• Increase overall net interest margin, by greater ability to influence and control margin received on loan books, e.g. RoI Mortgage Book currently has circa 60% of Customers on Tracker products – the more Customers moved off this and on to Fixed products will allow greater ability to forecast and manage margin.

• Obtaining Deposits (assuming post current crisis) that are not rate led, or at least are at more normalised levels, i.e. profitable.

• Promote multiple product holding, through rewarding loyalty and supporting Customers, throughout their life stages, e.g. Student, Graduate, Young Family, etc.

• Continued Growth & Focus on Domestic/Non Domestic Business in order to diversify their business and not be reliant on the Irish Markete.g.– UK Post Office – Asset Finance NI & in the UK, this is additional to BIF (Bank of Ireland Asset

Finance) – Corporate Banking Germany & Australia (IBI)

The Future for BOI

• It’s very uncertain what the future holds for Bank Of Ireland as Ireland finds itself in very unprecedented & uncertain times and this directly impacts the future of the Bank.

• One thing we know is that one bank must succeed . The Irish government would like to showcase a bank succeeding and fulfilling its capital shortfall from mostly private sources and which can recover from Ireland's property market crash even among turmoil in the wider euro zone.

• At the moment BOI is 36% owned by the state however if they are successful with another rights issue, if they can sell parts of the business off and reduce the balance sheet together with strengthening their organic market they might be in the running to becoming Irelands number 1 bank.