Bank of Ireland 20-F 2009
As filed with the Securities and Exchange Commission on May 29, 2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Commission file number: 1-14452
THE GOVERNOR AND COMPANY OF
THE BANK OF IRELAND
(Exact name of registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
LOWER BAGGOT STREET, DUBLIN 2, IRELAND
The Governor and Company of the Bank of Ireland
Lower Baggot Street
Dublin 2, Ireland
Telephone no: +353 1 6615933
Facsimile no: +353 1 6615671
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the Issuers classes of capital or common stock as of March 31, 2009:
Ordinary stock (nominal value of 0.64 per unit): 994,107,002
Preference stock (nominal value of 1.27 per unit): 3,026,598
Preference stock (nominal values of 0.01 per unit): 3,500,000,000
Preference stock (nominal value of Stg£1 per unit): 1,876,090
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [X] NO [ ]
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES [ ] NO [X]
Note checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated file and large accelerated file in Rule 12b-2 of the Exchange Act:
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 [ ] Item 18 [ ]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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The Governor and Company of The Bank of Ireland
ANNUAL REPORT ON FORM 20-F
Table of Contents
In this Annual Report on Form 20-F (Annual Report), the term Ordinary Stock refers to units of ordinary stock of nominal value 0.64 per unit of the Bank and the term ADSs refers to American Depositary Shares each representing the right to receive four units of ordinary stock and evidenced by American Depositary Receipts (ADRs).
The ADSs are listed on the New York Stock Exchange and are evidenced by ADRs issued by The Bank of New York as Depositary under a Deposit Agreement.
Unless a specific source is identified, all information regarding market and other operating and statistical data provided in this document is based on the Groups own estimates. In making estimates, the Group relies on data produced internally and, where appropriate, external sources, including information made public by other market participants or associations.
Information found on any website address included in this Annual Report is not part of or incorporated into this Annual Report and the inclusion of such addresses is for the readers reference only.
Certain statements contained in this Annual Report, including any targets, forecasts, projections and descriptions of anticipated cost savings, statements regarding the possible development or possible assumed future results of operations, any statement preceded by, followed by or that includes the words believes, expects, aims, intends, will, may, anticipates, targets, estimates, plans or similar expressions or the negatives thereof, and other statements that are not historical facts, are or may constitute forward looking statements (as such term is defined in the US Private Securities Litigation Reform Act of 1995). Examples of forward looking statements include among others, statements regarding the Groups future financial position, liquidity, income growth, business strategy, projected costs, projected impairment losses, estimates of capital expenditure, and plans and objectives for future operations. Forward looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward looking information is based on information available at the time and / or managements good faith belief with respect to future events, and is inherently subject to risk and uncertainties that could cause actual performance or results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include but are not limited to (i) risks and uncertainties relating to profitability targets, prevailing interest rates, the depth and duration of the recession in the Irish and UK economies, the performance and volatility of the international capital markets, the low levels of activity and valuations in residential and commercial property markets, the expected level of credit defaults, the extent to which the value of securities and other assets held by the Group are impaired due to market or other factors, the Groups ability to expand certain of its activities, development and implementation of the Groups strategy and priorities including the ability to achieve estimated cost reductions, competition, the Groups ability to address information technology issues, regulatory developments and the availability and costs of funding sources particularly in light of developments in international credit markets during the past year; and (ii) other risks and uncertainties detailed in this Annual Report, including under Item 3 Key Information Risk Factors and under Item 11 Quantitative and Qualitative Disclosures about Market Risk. The Group does not undertake to release publicly any revision or update to these forward looking statements to reflect events, circumstances or unanticipated events occurring after the date hereof. If we do update one or more forward looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward looking statements.
For the purposes of this Annual Report, the term Bank means The Governor and Company of the Bank of Ireland and the terms Group and Bank of Ireland Group mean the Bank and its consolidated subsidiaries and, where the context permits, its interests in associated companies and joint ventures.
Certain financial and statistical information in this Annual Report is presented separately for domestic and foreign activities. Domestic activities include transactions recorded on the books of the Group branches and offices located in Ireland. Foreign activities include transactions recorded on the books of the Group branches and offices in the United Kingdom (UK), the United States of America (US) and elsewhere outside of Ireland.
Unless otherwise stated, for the purposes of this Annual Report, references to Ireland exclude Northern Ireland.
The Group publishes consolidated financial statements in euro ( or EUR). Each euro is made up of one hundred cents, each of which is represented by the symbol c in this Annual Report.
References to dollars, US$, $ or ¢ are to US currency, and references to Stg£, GBP£ and pounds sterling are to UK currency. Amounts in dollars, unless otherwise stated, for the current financial (fiscal) year have been translated from euro at the rate prevailing on March 31, 2009 as shown below under Exchange Rates. This rate should not be construed as a representation that the euro amounts actually denote such dollar amounts or have been, could have been, or could be converted into dollars at the rate indicated.
As a significant portion of the assets, liabilities, income and expenses of the Group is denominated in currencies other than euro, fluctuations in the value of the euro relative to other currencies have had an effect on the euro value of assets and liabilities denominated in such currencies as well as on the Groups results of operations. The principal foreign currencies affecting the Groups financial statements are sterling and the dollar. At May 18, 2009, the spot rate was US$1.3503 = 1.00.
The following table sets forth, for the dates or periods indicated, the spot or Noon Buying Rate in New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) and the rates used by the Group in the preparation of its consolidated financial statements, which are sourced from the European Central Bank (ECB):
The highest spot or noon buying rate for each of the last six months was: April 2009: 1.3458, March 2009: 1.3730, February 2009: 1.3064, January 2009: 1.3946, December 2008: 1.4358, November 2008: 1.3039.
The lowest spot or noon buying rate for each of the last six months was: April 2009: 1.2903, March 2009: 1.2549, February 2009: 1.2547, January 2009: 1.2804, December 2008: 1.2634, November 2008: 1.2525.
(1) The average of the spot or Noon Buying Rates on the last day of each month during the Groups financial year.
(2) The rates used by the Group in the preparation of its consolidated financial statements.
The following tables present selected consolidated financial data which have been derived from the audited consolidated financial statements of the Group. Tables 1 and 2 detail financial data under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) for the years ended March 31, 2009, 2008, 2007, 2006 and 2005.
The consolidated financial statements of the Group have been prepared in accordance with IFRS as issued by the IASB for the years ended March 31, 2009, 2008, 2007, 2006 and 2005 (except for the application of IAS 32, IAS 39 and IFRS 4 which became effective on April 1, 2005). The EU adopted version of IAS 39 currently relaxes some of the hedge accounting rules in IAS 39 Financial Instruments Recognition and Measurement. The Group has not availed of this, hence these financial statements comply with both IFRS as adopted by the EU and IFRS as issued by the IASB.
The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, the consolidated financial statements of the Group and the notes thereto, which are included in this Annual Report. The financial results should not be construed as indicative of financial results for subsequent periods. See Item 5 Operating & Financial Review and Prospects.
SELECTED CONSOLIDATED FINANCIAL DATA
Set out below is a discussion of certain factors which could adversely affect the Groups future results and financial position. The factors discussed below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties because there may be risks and uncertainties of which the Group is not aware or which the Group now does not consider significant but which in the future may become significant.
The Groups businesses are subject to inherent risks arising from macroeconomic conditions in the Groups main markets, particularly conditions in Ireland, the UK and the US. Adverse developments, such as the ongoing deterioration in general economic conditions and in global financial markets, have already adversely affected the Groups earnings and are likely to continue to affect its results, financial condition and prospects.
The global financial system has been experiencing difficulties since August 2007 and the global financial markets have deteriorated very significantly since September 2008. This has resulted in severe dislocation of financial markets around the world resulting in material declines in the values of nearly all assets classes and unprecedented levels of illiquidity. This has caused the development of substantial problems at a number of large global commercial banks, investment banks and insurance companies, many of which are the Groups counterparties in the ordinary course of its business. Banks and other lenders have suffered significant losses and have become reluctant to lend due to the increased risk of default and the impact of declining asset values on the value of collateral.
There are growing indications of a deep and prolonged global recession. Despite measures by the European Central Bank and the UK and US Governments to stabilise the financial markets, the volatility and disruption of the capital and credit markets have continued. These conditions have already adversely affected the Group and have exerted downward pressure on stock prices, liquidity and availability of credit for financial institutions, including the Group, and other corporations.
The above described adverse macroeconomic conditions have caused a decline in demand for business products and services and decreases in business and consumer confidence, lower personal expenditure and consumption, increases in debt service burden on both consumers and businesses, and limitations on the general availability and cost of credit. These conditions have affected significantly and will continue to affect the Groups customers and, by extension, the demand for, and supply of, the Groups products and services and the Groups financial condition and results of operations. In addition, higher unemployment, reduced corporate profitability, increased corporate and personal insolvency rates higher and borrowing costs may reduce borrowers ability to repay loans and may cause prices of residential and commercial property or other asset prices to fall further, thereby reducing the value of collateral on many of the Groups loans and significantly increasing write downs and impairment losses.
Liquidity risk is the risk that a bank will be unable to meet its obligations, including deposit withdrawals and funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of enterprise specific factors, including an over reliance on a particular source of funding (including, for example, short term and overnight funding, securitisations and covered bonds), changes in credit ratings or market wide phenomena such as market dislocation and major disasters. Since August 2007, the global economy and the global financial system have been experiencing an ongoing period of significant turbulence and uncertainty. Credit markets worldwide have experienced and continue to experience a severe reduction in the level of liquidity and quantum of term funding available in the wholesale markets. The terms on which such funding is available has become more onerous and expensive. Counterparty risk (including the perception of such risk) between banks has also increased significantly following the collapse of Lehmans in mid September 2008.
The Groups liquidity management aims to focus on maintaining a diverse and appropriate funding strategy for its operations, controlling the mismatch of maturities and carefully monitoring its undrawn commitments and contingent liabilities. Whilst the Group has remained in compliance with all external liquidity limits and ratios, the dislocation in the wholesale markets has impacted the pricing and availability of liquidity and term funds for the
Group, as it has with most other financial institutions. This market dislocation has led to the introduction of a range of government guarantee schemes in a number of markets including Ireland. Should the dislocation persist or worsen, the price of liquidity may rise and liquidity may be further constrained.
Like many banks, the Group relies on customer deposits to meet a considerable portion of its funding requirements. The Groups lending activities depend on the availability of customer deposits on appropriate terms, for which there is increasing competition. This reliance has increased in the recent past given the difficulties in accessing wholesale funding. Any material decrease in the Groups deposits could have a negative impact on the Groups liquidity. The availability of commercial deposits is often dependent on credit ratings and any further downgrade could limit the Groups liquidity and therefore increase liquidity risk. The ongoing availability of these deposits is also subject to fluctuations due to certain factors outside the Groups control, such as a loss of confidence of depositors in the economy in general and the financial services industry specifically, competitive pressures, general economic conditions and the availability and extent of deposit guarantees. These factors could lead to a reduction in the Groups ability to access customer deposit funding on appropriate terms or within a short period of time in the future, and to sustained outflows all of which would impact on the Groups ability to meet its liquidity requirements.
In addition to the continuing lack of liquidity and high cost of funds in the interbank lending market, which are unprecedented in recent history, the Group is and will continue to be subject to the risk of deterioration of the commercial soundness or perceived soundness of other financial services institutions within and outside the main markets in which the Group operates. Within the banking industry the default of any institution could lead to defaults by other institutions. Concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions because the commercial soundness of many financial institutions may be closely related as a result of their credit, trading, clearing or other relationships. This risk is sometimes referred to as systemic risk and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Group interacts on a daily basis, which could have an adverse effect on the Groups ability to raise new funding and on the Groups results, financial condition and prospects.
Risks arising from changes in credit quality and the recoverability of both secured and unsecured loans and amounts due from counterparties are inherent in a wide range of the Groups businesses. The outlook for the global economy in 2009/10 has significantly deteriorated in the last 12 months. Adverse changes in the credit quality of the Groups borrowers, counterparties and their guarantors, including sovereigns, or adverse changes arising from a general deterioration in global economic conditions or systemic risks in the financial systems have reduced, and are expected to continue to reduce, the recoverability and value of the Groups assets and have increased, and are expected to continue to increase, the quantum of impaired loans and impairment charges. Furthermore, the Groups performance may be affected by future recovery rates on assets, which may continue to deteriorate in line with a deteriorating economy. Additionally, historical assumptions underlying asset recovery rates may no longer be accurate given the unprecedented market disruption.
The Group has exposures to a range of customers in different sectors, including exposures to investors in and developers of commercial and residential property. Property prices have shown significant declines throughout the last year and developers of commercial and residential property are facing particularly challenging market conditions, including substantially lower prices and volumes. Beyond this sector, economic conditions are deteriorating more broadly and this may lead to further declines in values of collateral and investments, weakening consumer and corporate spending, declining corporate profitability and an increase in corporate insolvencies. Residential property prices are declining in Ireland and the UK. Many borrowers in Ireland and the UK borrow on short term fixed or discounted floating rates and when such rates expire, the continued reduced supply and stricter terms of lending, together with the potential for higher borrowing rates, have led and will continue to lead to higher delinquency rates. These developments could have a materially adverse impact on the Groups ability to recover on these loans or lead to write downs of investments.
The Group has also been exposed to increased counterparty risk as a result of recent financial institution and corporate failures and nationalisations, including recent events in Ireland, and will continue to be exposed to the risk
of loss if counterparty financial institutions or other corporate borrowers fail or are otherwise unable to meet their obligations.
Effective management of the Groups capital is critical to its ability to operate its businesses, to grow organically and to pursue its strategy. The Groups business and financial condition could be affected if it is not able to manage its capital effectively or if the amount of capital is insufficient due to a materially worse than expected financial performance including, for example, reductions in profits and retained earnings as a result of write downs or otherwise, increases in risk weighted assets, delays in the disposal of certain assets as a result of market conditions or otherwise.
The Group participates in the guarantee scheme for deposits and specified liabilities implemented by the Irish Government pursuant to the Credit Institutions (Financial Support) Act 2008. The financial position of the Group could be impacted by the termination, amendment or cancellation of the scheme or the removal of the Group from the scheme, prior to its termination. The Groups financial position may also be impacted by changes to the costs of participating in the scheme.
The Irish Government via the National Pensions Reserve Fund Commission invested 3.5 billion in Bank preference stock capital on March 31, 2009.
The terms and conditions of the Government guarantee scheme and recapitalisation place certain restrictions on, and require the Group to submit to a degree of governmental regulation in relation to the operation of the Groups business. In particular, obligations to reduce risk profile and meet target ratios including, inter alia, specific targets for increased lending capacity to small to medium enterprises and residential mortgages, accept board appointees and controls on acquisitions and dividend payments could limit the Groups ability to determine independently its corporate strategy or adversely affect the Groups financial condition.
On April 7, 2009, the Irish Government announced its intention to establish the National Asset Management Agency (NAMA) to take control of land and development assets of the covered Irish financial institutions. Details on how NAMA will operate and the valuation at which these assets will transfer to NAMA have not been determined. The outcome may adversely affect the Groups results, financial condition and prospects.
The Group can be exposed to market risks such as changes in interest rates, foreign exchange rates, and bond and equity prices. Changes in interest rate levels and spreads may affect the interest rate margin realised between lending and borrowing rates, the effect of which may be heightened during periods of liquidity stress, such as those experienced in the past year. Changes in currency rates, particularly the euro sterling exchange rate, impact the value of assets, liabilities, income and expenses denominated in foreign currencies and the reported earnings of the Groups overseas operations (principally UK Financial Services) and may affect income from foreign exchange dealing. The performance of financial markets may affect the value of the Groups investment and trading portfolios. While the Group has no direct exposure to equity markets, changes in equity prices may effect the present value of the fee income that is linked to the value of equity assets under management. In addition, the Groups defined benefit schemes are predominantly invested in equities. Refer to note 38 to the consolidated financial statements for further information on these schemes. While the Group has implemented risk management methods to mitigate and control these and other market risks to which it is exposed, it is difficult, particularly in the current environment, to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on the Groups financial performance and business operations.
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate.
In establishing the value of certain financial instruments that are recorded at fair value, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to changes in market conditions, such as during the current financial crisis. In such circumstances, the Groups internal valuation models require the Group to make assumptions, judgements and estimates to establish fair value. In common with other financial institutions, these internal valuation models are complex, and the assumptions, judgements and estimates the Group is required to make often relate to matters that are inherently uncertain, such as expected cash flows, the ability of borrowers to service debt, residential and commercial property price appreciation and depreciation, and relative levels of defaults and deficiencies. Such assumptions, judgements and estimates may need to be updated to reflect changing facts, trends and market conditions. The resulting change in the fair values of the financial instruments could have a material adverse effect on the Groups earnings and financial condition. Also, recent market volatility and illiquidity has challenged the factual bases of certain underlying assumptions and has made it difficult to value certain of the Groups financial instruments. Valuations in future periods, reflecting prevailing market conditions, may result in changes in the fair values of these instruments, which could have a negative effect on the Groups results or financial condition.
Change of control provisions may be triggered if any party acquires control of the Group, which may lead to adverse consequences for the Group. The governments preference stock investment has not led to any such provision being incurred. Ordinary stockholders may be at risk of dilution in the event that the Group is required to raise additional capital and that this is not available from ordinary stockholders.
In the current volatile market, there is a risk to ordinary stockholders of increased ownership by the Irish Government and of nationalisation.
The Groups future success and financial strength depends on its ability to attract, retain and motivate highly skilled and qualified personnel. The loss of the services of key employees could have a negative impact on the Groups future success and financial strength. Good employee relations are vital to the Group and the success of its business. In the event that the Group is impacted by industrial action or other labour conflicts, this may result in disruption to the Groups business, loss of customers and increased costs and could have a material and adverse impact on the Groups future results and financial condition.
The Groups businesses are dependent on their ability to process and report accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Operational risks and losses can arise from fraud (internal or external), errors made by employees or by third parties, a failure to obtain proper authorisation for or to properly document transactions, a failure to comply with relevant regulatory rules and regulations (including those arising from anti money laundering and anti terrorism legislation), failures or inadequacies in equipment, systems and controls or natural disasters. Although the Group has implemented risk controls and loss mitigation actions to ensure that key operational risks are managed in a timely and effective manner, there can be no assurance that these controls or actions will be effective in controlling each of the operational risks faced by the Group. Any weakness in these controls or actions could result in an adverse impact on the Groups results and financial condition.
The Group maintains a number of defined benefit pension schemes for current and past employees and some of these schemes have a significant deficit as calculated under the relevant accounting rules International Accounting Standard (IAS) 19. Given the current economic and financial market difficulties and the prospects for them to continue over the short and medium term, the Group may be required to or elect to make additional contributions to the pension schemes. Such contributions could be significant and may have a negative impact on the Groups financial condition. Trends in pension scheme assets and liabilities which ultimately lead to schemes falling below the statutory minimum funding levels could have an adverse impact on the Groups capital position.
In accordance with accounting rules, the Group has recognised deferred tax assets on losses available to relieve future profits to the extent that it is probable that they will be recovered. The assets are quantified on the basis of current tax legislation and are subject to change in respect of the tax rate or the rules for computing taxable profits and allowable losses. A failure to generate sufficient future taxable profits or changes in tax legislation may reduce the recoverable amount of the deferred tax assets currently recognised in the financial statements.
The Groups insurance businesses are subject to inherent risks involving claims. Future claims in the Groups general and life assurance business may be higher than expected as a result of changing trends in claims experience resulting from causes outside of the Groups control. These trends could adversely affect the profitability of current and future insurance products and services. The Group reinsures some of the risks it has assumed and is accordingly exposed to the risk of loss should its reinsurers become unable or unwilling to pay claims made by the Group against them.
The Groups operations have inherent reputational risk. Negative public opinion can result from the actual or perceived manner in which the Group conducts its business activities or from actual or perceived practices in the banking industry, such as money laundering or misselling of financial products. Negative public opinion may adversely affect the Groups ability to keep and attract customers and, in particular, corporate and retail depositors. The Group cannot ensure that it will be successful in avoiding damage to its business from reputational risk.
The Group operates in a legal and regulatory environment that exposes it to potentially significant litigation and regulatory risks. Disputes and legal proceedings in which the Group may be involved are subject to many uncertainties, and their outcomes are often difficult to predict, particularly in the earlier stages of a case or investigation. Adverse regulatory action or adverse judgements in litigation could result in restrictions or limitations on the Groups operations or result in a material adverse impact on the Groups reputation, results of operations or financial condition.
The Group participates in compensation, contributory or reimbursement schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers. The Group may incur additional costs and liabilities as a result of participation in these schemes, which may negatively impact its financial condition and results of operations.
The Governor and Company of the Bank of Ireland was established as a chartered corporation by an Act of the Irish Parliament of 1781/2 and by a Royal Charter of King George III in 1783. The Bank of Ireland Group is one of the
largest financial services groups in Ireland with total assets of 194 billion at March 31, 2009. The address of the principal executive offices is Lower Baggot Street, Dublin 2 (Telephone +35316615933).
The Group provides an extensive range of banking and other financial services. All of these services are provided by the Group in Ireland, with selected services being offered in the UK and internationally. The Group has a network of retail branches in Ireland and joint ventures in the UK engaged in the provision of consumer financial services. Corporate Banking and Global Markets conduct the Groups international business with centres in Dublin, London and the US, as well as branches in Paris and Frankfurt, and representative offices in New York and Chicago.
The Group provides fund management services through its Asset Management business. Other subsidiaries include Bank of Ireland Life Holdings plc, a life assurance and pensions company in Ireland, ICS Building Society, a home mortgage business in Ireland, and Bank of Ireland Mortgage Bank (BoIMB).
The Group provides a broad range of financial services in Ireland to all major sectors of the Irish economy. These include checking and deposit services, overdrafts, term loans, mortgages, business and corporate lending, international asset financing, leasing, instalment credit, debt factoring, foreign exchange facilities, interest and exchange rate hedging instruments, executor, trustee, life assurance and pension and investment fund management, fund administration and custodial services and financial advisory services, including mergers and acquisitions and underwriting. The Group provides services in euro and other currencies. The Group markets and sells its products on a domestic basis through its extensive nationwide distribution network in Ireland, which consisted of 248 full time branches and 1,292 ATMs at March 31, 2009, its direct telephone banking service, direct sales forces and its on line services.
In the UK, the Group operates mainly through a grouping of businesses referred to as UK Financial Services (UKFS), whose functional currency is sterling. This grouping consists of the mortgage business operating under both Bristol & West and Bank of Ireland brands, the retail branch network in Northern Ireland, the business bank which has offices across the UK and our consumer financial services joint ventures with the Post Office. The UK Financial Services division provides lending, savings, insurance and investment products to commercial and retail customers.
Operations in the rest of the world are undertaken by:
As at March 31, 2009 the Group organised its businesses into Retail Republic of Ireland, Bank of Ireland Life, Capital Markets, UK Financial Services and Group Centre. The Groups operations extend geographically throughout Ireland, the UK, Europe and the US. The segmental analysis note, shown in note 1 to the consolidated financial statements includes an analysis of profit contributions by both geographic segments and by business classes. See also Item 5 Operating & Financial Review and Prospects for further detail.
On May 26, 2009 the Group announced the creation of a new division, Retail (Ireland & UK). Further information on this is outlined in Significant Changes in Item 8.
Retail Republic of Ireland includes all the Groups branch operations in the Republic of Ireland. The branches offer a wide range of financial products and services in addition to the deposit, lending, checking account and other
money transmission services traditionally offered by banks. It also includes Bank of Ireland Mortgage Bank (BoIMB), ICS Building Society (ICS), Private Banking, instalment credit and leasing business, credit card operations, commercial finance / factoring businesses, the domestic and US foreign exchange operations of First Rate Enterprises and a direct telephone and online banking unit.
As at March 31, 2009, Branch Banking Republic operated 248 full time branches. A full range of banking services is provided to all major sectors of the Irish economy including small and medium sized commercial and industrial companies. Branches provide checking accounts, demand and term deposit accounts, overdrafts, term loans and home loans as well as customary money transmission and foreign exchange services. Also available through branches are credit cards and assurance and investment products, as well as loan and deposit products of other Group businesses.
BoIMBs principal activities are the issuance of Irish residential mortgages and Mortgage Covered Securities in accordance with the Asset Covered Securities Act, 2001 to 2007. Such loans may be made directly by the Bank or may be purchased from Bank of Ireland and other members of the Group or third parties. As at March 31, 2009, the total amount of principal outstanding in respect of mortgage covered securities issued was 10 billion. At the same date the total value of the mortgage covered pool, including mortgage assets and cash, securing the mortgage covered securities was 12.7 billion.
As a building society, ICS is mainly involved in the collection of deposits and the making of loans secured by residential properties. Its mortgage business is generated principally by referrals from intermediaries. ICSs deposits are generated by referrals from Bank branches. In addition, ICS operates a mortgage servicing centre which processes the Groups mortgage portfolio as well as its own.
Bank of Ireland Private Banking provides wealth management solutions to high net worth individuals in Ireland. It offers a complete private banking service utilising an extensive range of investment, fiduciary and banking products.
Bank of Ireland Finance provides instalment credit and leasing facilities. Its products are marketed to the personal, commercial and agricultural sectors by a direct sales force, through the Banks branches and by intermediaries such as dealers, brokers, retailers and professionals with whom it has established relationships. Its products include secured instalment credit, leasing and insurance premium finance. It also provides current asset financing through invoice discounting, factoring and stock purchasing.
Card Services is responsible for the Groups credit card activities in the Republic of Ireland. It provides MasterCard, VISA and American Express cards and is supported by Bank branches in marketing its services.
First Rate Enterprises specialises in the provision of foreign exchange services. In Ireland, it operates mainly through a network of approximately 300 outlets located in hotels, shops and tourist sites. First Rate Enterprises also supplies foreign currency notes and travellers cheques to a number of financial institutions including Bank of Ireland. In North America , Foreign Currency Exchange Corporation provides a broad range of foreign currency related products and services to approximately 40,000 bank branches and a number of hotel chains.
Banking 365, a direct selling operation, offers personal loan facilities by telephone, outside as well as during normal business hours and it also operates a call centre, which deals with customer queries and processes transactions.
The Group operates in the life and pensions market in Ireland through Bank of Ireland Life. Bank of Ireland Life offers life assurance, protection, pensions and investment products to Bank of Ireland Group customers in Ireland through the extensive branch banking network. The company also operates in the independent intermediary market and through a direct sales force.
The principal constituents of this division are Corporate Banking, Global Markets, Asset Management Services and IBI Corporate Finance.
Corporate Banking provides integrated relationship banking services to a significant number of the major Irish corporations, financial institutions and multi national corporations operating in or out of Ireland. The range of lending products provided includes, but is not limited to, overdraft and short term loan facilities, term loans, project financing and structured finance. Corporate Banking is also engaged in international lending, with offices located in the UK, France, Germany and the US. Its international lending business includes, but is not limited to, acquisition finance, project finance, term lending and asset based financing, principally in the UK, Continental Europe and the US.
Global Markets is responsible for managing the Groups interest rate and foreign exchange risks, while also responsible for executing the Groups liquidity and funding requirements. Global Markets trades in a range of market instruments on behalf of the Group itself and the Groups customers. The trading activities include, but are not limited to, dealing in foreign exchange spot and forward contracts, options, inter bank deposits and loans, financial futures, bonds, swaps and forward rate agreements and equity tracker products. Global Markets is also represented overseas in the UK and the US.
Asset Management Services provides comprehensive investment management, custody and administration services to investors globally. It is comprised of Bank of Ireland Asset Management, Bank of Ireland Securities Services, and the Groups interests in Iridian Asset Management, Guggenheim Advisors and Paul Capital Investments.
IBI Corporate Finance provides independent financial advice to public and private companies on takeovers, mergers and acquisitions, disposals and restructurings, in addition to fund raising, public flotations and stock exchange listings.
UK Financial Services (UKFS) brings together the Groups significant activities in the sterling area. The UKFS structure facilitates the operation of business units by customer segments and needs rather than by traditional brand considerations.
Personal Lending UK provides standard and non-standard residential mortgages.
Business Banking UK operates as both a retail and business bank in Northern Ireland and as a business bank only in the UK. The retail business in Northern Ireland has a branch network and offers deposit, lending, checking account and other money transmission services traditionally offered by banks. The business banking unit provides mainly loan facilities to medium to large corporate clients while also providing international banking, treasury, current asset financing, leasing and electronic banking services. Offshore deposit taking services are offered through the Isle of Man.
Post Office Financial Services sells banking and insurance products directly and through the UK Post Office branch network. The banking products offered include instant access savings accounts and credit cards. The principal insurance products are car, home and life insurance.
First Rate Exchange Services provides personal foreign exchange services through the UK Post Office branch network.
Group Centre mainly includes capital management activities, unallocated support costs and the cost of the Government Guarantee (see note 57 for further details).
The principal acquisitions in the three years to March 31, 2009 were:
On June 20, 2006 the Group and Paul Capital Partners, a leading US private equity specialist, announced the establishment of a joint venture called Paul Capital Top Tier Investments LLC (subsequently renamed Paul Capital Investments (PCI) to provide private equity fund of funds products and advisory services to institutional and other investors worldwide. The Group paid US$25 million in cash for a 50% share in PCI.
The principal capital divestitures in the three years to March 31, 2009 consist of the following:
On October 31, 2006 the Group completed the sale of its 90.444% equity stake in J&E Holdings Limited (Davy Stockbrokers) to the management and staff of Davy for a consideration of 316.55 million. The profit on disposal after tax was 229 million and was reflected in the Groups results for the year ended March 31, 2007.
On April 21, 2006 the Group completed the sale of Enterprise Finance Europe GmbH for a consideration of 10.5 million resulting in a profit on disposal of 7.8 million.
The principal group undertakings at March 31, 2009 were:
All the Group undertakings are included in the consolidated accounts. Except as otherwise indicated, the Group owns 100% of the equity of the principal group undertakings and 100% of the voting shares of all these undertakings and in the case of ICS Building Society, 100% of the investment shares.
At March 31, 2009, the Group operated 292 full time retail bank branches of which 248 were in Ireland and 44 in Northern Ireland. There are no full service retail bank branches in Britain. Operations in the rest of the world are undertaken by Corporate Banking through offices located in the UK, France, Germany, Australia and the US, Global Markets through offices located in the UK and the US and Bank of Ireland Asset Management through an office located in the UK. These premises are owned directly by the Group or held under commercial leases. The premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for the Groups current and anticipated operations. Full details of acquisitions and disposals during the year are given in note 28 to the consolidated financial statements under the heading Property, Plant and Equipment.
The Bank of Ireland Group headquarters, located at Lower Baggot Street, Dublin 2, Ireland, comprise a complex of three buildings constructed in the 1970s having approximately 20,439 square metres (220,000 square feet) of net floor space, which the Bank leases on commercial terms. The Group also occupies approximately 48,310 square metres (520,000 square feet) of net floor space for central functions in Dublin, in addition to the offices and administrative buildings of Bank of Ireland Life and the multi occupied property at 40 Mespil Road referred to below.
The Banks UK Financial Services division occupies approximately 45,894 square metres (494,000 square feet) of net floor space in the UK for business centres and administrative support functions. The majority of these premises are held on individual leases with different expiry dates. As a result of changes in the UK Financial Services division there are a number of leased premises that are no longer used in support of business operations. These properties are either sub-let or vacant and on the market.
The head office of Bank of Ireland Life is located at 9/12 Dawson Street, Dublin, Ireland. The head office and administrative buildings occupy approximately 5,388 square metres (58,000 square feet) of net floor space. Bank of Ireland Life also has a network of 11 operational branches operating through New Ireland Assurance Company plc.
Bank of Ireland Asset Management along with other Group units including Bank of Ireland Private Banking, Bank of Ireland Business Banking, Bank of Ireland Group Legal Services and IBI Corporate Finance occupies approximately 9,383 square metres (101,000 square feet) of net floor space in 40 Mespil Road, Dublin 4, Ireland, held on a commercial lease, which expires in June 2028.
In October 2006, the Bank sold 36 high profile branches in key locations in Dublin, Cork, Limerick, Galway and provincial towns to a combination of institutional and individual investors and private syndicates for an aggregate consideration of 237 million. The branches were leased back from the purchasers for a 25 year period, with an annual rental commitment of 8 million.
The Bank of Ireland Group faces strong competition in all of its major markets. Other financial services groups, including local banks and domestic and foreign financial services companies, compete for business in these markets.
The Group provides a full range of banking services in Ireland and Northern Ireland and is subject to strong competition from various types of institutions in the financial services sector. The Groups main competitors across the full range of banking activities are other banks, in particular Allied Irish Banks plc, Ulster Bank Limited and HBOS plc (in both Ireland and Northern Ireland), National Irish Bank Limited (in Ireland), Northern Bank Limited (in Northern Ireland), Irish Life and Permanent plc (in Ireland), and Anglo Irish Bank Corporation plc (in Ireland).
Allied Irish Banks plc (which trades as First Trust Bank in Northern Ireland) and Irish Life and Permanent plc have their head offices in Dublin. Ulster Bank Limited is a subsidiary of The Royal Bank of Scotland Group plc and Northern Bank Limited and National Irish Bank Limited are subsidiaries of Danske Bank A/S.
The Group also competes in the corporate and investment banking services areas with a range of other domestic and foreign banks. There is also competition from the building societies, the Irish Post Office, which has entered into a joint venture with Fortis Bank, credit unions and national savings organisations in both Ireland and Northern Ireland.
The general competitive environment in Ireland is subject to the operation of the Competition Act, 2002 (as amended), and in the UK (including Northern Ireland) the Competition Act 1998, both of which are modelled closely on Articles 81 and 82 of the EC Treaty, and EC Directive 89/646 of December 15, 1989 (as amended, known as the Second Banking Co-ordination Directive), which permits in Ireland and the UK (including Northern Ireland) the establishment of branches and the provision of cross border services by banks headquartered elsewhere in the European Union.
The Bank of Ireland Groups operations in the UK focus on specific business niches, in particular business banking, mortgage lending and retail financial services (the latter through a joint venture with the UK Post Office). The UK has a very highly competitive and sophisticated financial market with over 500 licensed banking institutions with extensive retail networks. In addition, there are approximately 80 building societies, and the major insurance companies, which also operate nationwide branch networks.
In the UK, the Groups principal competitors include other providers of personal and commercial financial services, such as banks, building societies and insurance companies. Each of these types of financial services providers has expanded the range of services offered in recent years.
In those markets where the Groups strategy is to create niche businesses internationally the range and number of competitors is even more extensive. In addition, certain businesses based in Ireland, such as corporate finance or asset management, face competition on an international rather than a national basis.
In the UK the Competition Commission (CC) published its Final Report on Payment Protection Insurance in January 2009 and is expected shortly to publish a draft order implementing remedies.
The Office of Fair Trading (the OFT) also investigates issues in the UK from competition, consumer protection and other perspectives. In April 2007, the OFT launched an investigation into the fairness of personal current account unarranged overdraft charges under the Unfair Terms in Consumer Contracts Regulations. Seven UK banks, one building society brought a test case broadly on the question of whether unarranged overdraft charging terms for personal current accounts can be assessed for fairness. In February 2009 the Court of Appeal confirmed that they could be so assessed. Accordingly, the OFT will continue to progress its investigation, in dialogue with the banks, and expects to reach a final decision on fairness later in 2009.
SUPERVISION AND REGULATION
Recent measures by the Irish Government to support the Irish financial sector have resulted in closer supervision of financial institutions as well as additional regulatory requirements. These requirements relate to the specific measures implemented, such as the Guarantee Scheme and the recapitalisation. Refer to note 57 and note 40 to the consolidated financial statements for more information on these measures.
In respect of banking operations in Ireland, the provisions of the Central Bank Acts, 1942 to 2001, the Central Bank and Financial Services Authority of Ireland Act, 2003, the Central Bank and Financial Services Authority of Ireland
Act 2004, the European Communities (Consolidated Supervision of Credit Institutions) Regulations, 1992 (as amended) (the 1992 Consolidated Supervision Regulations) and the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992, as amended (the 1992 Licensing Regulations) apply to the Group.
Banking activities in Ireland are regulated and supervised by the Irish Financial Services Regulatory Authority (the Financial Regulator). The Irish banking law regulations consist primarily of the Central Bank Acts, 1942 to 2001, the Central Bank and Financial Services Authority of Ireland Act, 2003, the Central Bank and Financial Services Authority of Ireland Act, 2004, regulations made by the Irish Minister for Finance under the European Communities Act, 1972, and regulatory notices issued by the Financial Regulator. These ministerial regulations and regulatory notices implement EU directives relating to banking regulation, including Council Directive No. 77/780/EEC of December 12, 1977, as amended (the First Banking Co-ordination Directive), Council Directive 89/646/EEC of December 15, 1989, as amended (the Second Banking Co-ordination Directive), the Capital Adequacy Directive, the Solvency Ratio Directive, the Own Funds Directive, Council Directive 92/121/EEC of December 21, 1992 (the Large Exposures Directive), Council Directive 94/19/EC of May 30, 1994, as amended (the Deposit Guarantee Scheme Directive), Council Directive 92/30/EEC of April 6, 1992 (the Consolidated Supervision Directive) and European Parliament and Council Directive 95/26/EC of June 29, 1995 (the Post BCCI Directive). To the extent that areas of banking activity are the subject of EU directives, the provisions of Irish banking law reflect the requirements of those directives.
In Ireland, the Financial Regulator sets the requirements for liquidity for Irish licensed banks. The Financial Regulators liquidity requirements require Irish licensed banks to use a maturity mismatch approach for managing and reporting of liquidity. Irish credit institutions are required to ensure, that for defined timebands cash inflows cover a stipulated percentage of cash outflows. Liquid assets must be of a kind acceptable to the Financial Regulator.
The Central Bank and Financial Services Authority of Ireland Act, 2003 brings under one supervisory umbrella all of the financial services activities in Ireland. The Financial Regulator is a constituent part of the Central Bank and Financial Services Authority of Ireland (the CBFSAI) and is entrusted with the supervisory activities of the former Central Bank of Ireland. Two particular features of the Central Bank and Financial Services Authority of Ireland Act, 2003 should be noted. First, it established as a separate function the Office of the Consumer Director with particular responsibility for the administration of the Consumer Credit Act, 1995 and the consumer protection provisions of other supervisory enactments. The Consumer Credit Act had been administered by a separate office, the Director of Consumer Affairs, since that Acts implementation on May 13, 1996. Second, it established the Irish Financial Services Appeal Tribunal, which will hear and determine appeals under any of the designated enactments or statutory instruments referred to above that have the effect of imposing a sanction or liability on any person. The provisions relating to the Irish Financial Services Appeal Tribunal became effective on August 1, 2004. The CBFSAI has responsibility for contributing to the stability of the financial system, promoting the efficient and effective operating of payment and settlement systems, for holding and managing the foreign reserves of Ireland, promoting the efficient and effective operations of settlement systems or for the performance of functions imposed on the Authority under the Rome Treaty or the European System of Central Banks Statute (the sole responsibility of the Governor of the Authority).
All Irish licensed banks are obliged to draw up and publish their annual accounts in accordance with the European Communities (Credit Institutions: Accounts) Regulations, 1992 (as amended by the European Community (Credit Institutions) (Fair Value Accountancy) Regulations 2004. As a listed entity Bank of Ireland is required to prepare its financial statements in accordance with IFRS and with those parts of the Companies Acts 1963 to 2006 applicable to companies reporting under IFRS and Article 4 of the EU Council Regulation 1606/2002 of July 19, 2002.
Subject to the provisions of the 1992 Licensing Regulations relating to mutual recognition of credit institutions authorised elsewhere in the EU, the Central Bank Act, 1971 (as amended) (the 1971 Act) restricts the carrying on of banking business in Ireland to holders of licenses granted under the 1971 Act. The 1971 Act stipulates that license holders must maintain a minimum deposit with the Authority. The Financial Regulator has a qualified discretion to grant or refuse a license and may attach conditions to any licenses granted. Bank of Ireland holds a license granted under the 1971 Act with one condition attached that Bank of Ireland must notify the Financial Regulator of its
intention to close any branch in Ireland. The Financial Regulator, after consultation with the Minister for Finance, may revoke a license under certain circumstances specified in the 1971 Act.
The Financial Regulator has statutory power to carry out inspections of the books and records of license holders and to obtain information from license holders about their banking and bank related business. Pursuant to this power, the Financial Regulator carries out regular review meetings and periodically inspects licensed banks. The Financial Regulator is also empowered by law to obtain information from license holders about their banking and bank related business.
The Financial Regulator may also prescribe ratios to be maintained between, and requirements as to the composition of, the assets and liabilities of licensed banks and to make regulations for the prudent and orderly conduct of banking business of such banks. The 1992 Licensing Regulations set forth minimum start up and ongoing capital requirements for banks licensed by the Financial Regulator and require applicants for a license to notify the Financial Regulator of the identity of certain shareholders and the size of their holdings in the applicant. The Financial Regulator also sets requirements and standards from time to time for the assessment of applications for licenses. The most recent requirements and standards were published initially in the Quarterly Review of the Central Bank of Ireland, Winter 1995, have been updated regularly and are non-statutory requirements which are applied by the Financial Regulator to credit institutions as a supplement to the statutory requirements referred to generally in this section but do not purport to interpret or refer comprehensively to the statutory provisions applicable to credit institutions.
The Group is also subject to EU Directives relating to capital adequacy, and in the area of monitoring and control of large exposures. These EU Directives, which have been implemented in Ireland by way of administrative notice, were codified into a single text by Directive 2000/12/EC of March 20, 2000 (Directive 2006/48/EC, the Banking Consolidation Directive).
The Groups operations in overseas locations are subject to the regulations and reporting requirements of the regulatory and supervisory authorities in the overseas locations with the Financial Regulator having overall responsibility for their regulation and supervision. The Financial Regulator is required to supervise the Group on a consolidated basis, i.e. taking account of the entire Group activities and relationships.
Licensed banks must notify their existing fees and charges and related terms and conditions, and any changes therein from time to time to the Consumer Director of the Financial Regulator, who can direct that no fees, charges or increases or changes therein be made without his or her approval.
All credit institutions are obliged to take the necessary measures to counteract money laundering effectively in accordance with the Criminal Justice Act, 1994 (as amended) and the Guidance Notes for Credit Institutions, which were issued with the approval of the Money Laundering Steering Committee. Revised guidance notes were issued in 2003.
Under the European Communities (Deposit Guarantee Schemes) Regulations, 1995 (as amended) the Financial Regulator also operates a statutory depositor protection scheme to which both licensed banks (including the Issuer) and building societies are required to make contributions amounting to 0.2 per cent of their total deposits. The maximum level of compensation payable to any one depositor has been increased in 2008 to 100,000 per depositor. Previously it was 90 per cent of the aggregate deposits held by that depositor subject to a maximum compensation of 20,000.
In addition, under the Credit Institutions (Financial Support) Scheme 2008 (the Scheme) the covered liabilities of The Governor and Company of the Bank of Ireland, ICS Building Society, Bank of Ireland Mortgages Limited and Bank of Ireland (IOM) Limited (the covered institutions) for the period September 30, 2008 to September 29, 2010 inclusive are guaranteed under the laws of Ireland by the Minister for Finance. Covered liabilities are all retail and corporate deposits (to the extent not covered by existing deposit protection schemes in Ireland or any other jurisdiction), interbank deposits, senior unsecured debt, covered bonds (including asset covered securities) and dated subordinated debt (Lower Tier 2). In the event of a default in respect of a covered liability, the Minister for Finance will pay to the relevant creditor, on demand, an amount equal to the unpaid covered liabilities. The guarantee is unconditional and irrevocable. Should any of the covered institutions be removed from the Scheme, all of its fixed term covered liabilities outstanding at that time will continue to have the full benefit of the guarantee to
September 29, 2010 or their maturity, whichever is earlier. All covered liabilities, including on-demand deposits, will be protected by notice of at least 90 days prior to any covered institution being removed from the Scheme. No call can be made under the guarantee after September 29, 2010. Further information on the Government Guarantee Scheme is outlined in note 57 in the consolidated financial statements.
The Financial Regulator has implemented Consumer Protection Code and Minimum Competency Requirements. The Consumer Protection Code, fully effective from July 2007, applies to banks and building societies, insurance undertakings, investment business firms, mortgage intermediaries and credit unions. The Code requires regulated entities to know their customers and their suitability for products or services, to prepare terms of business and minimum levels of information for customers, including disclosure requirements and customer record obligations, to identify all charges, fees or other rewards connected with the supply of a service and to establish processes to deal with errors, complaints and conflicts of interest. There are also detailed rules on the fairness of advertising, and specific sectoral rules on banking products, loans, insurance services and investment products. The Minimum Competency Requirements, effective from January 2007, requires employees of regulated entities who provide advice on or sell retail financial products to acquire the competencies set out in the Requirements, and to engage in continuing professional development on an ongoing basis.
A financial services ombudsmans bureau and a financial services ombudsman council have been established under the Central Bank and Financial Services Authority Act of 2004. This also sets out the functions and powers of that council and bureau, respectively, and establishes consultative panels to advise the Financial Regulator on matters relating to its statutory functions.
In respect of its banking operations in Northern Ireland and Britain, Bank of Ireland has the status of credit institution under the Banking Consolidation Directive. Pursuant to the Banking Consolidation Directive, Bank of Ireland has exercised its EU passport rights to providing banking services in the UK through the establishment of branches and also the provision of services on a cross-border basis.
The powers of the UK Financial Services Authority (FSA) in relation to European institutions are less extensive than those in relation to UK institutions because, pursuant to the principle of home country control incorporated in the Banking Consolidation Directive, the Financial Regulator, as the competent authority in Ireland, has primary responsibility for the supervision of credit institutions incorporated in Ireland. The FSA, however, has a specific responsibility to co-operate with the Financial Regulator in ensuring that branches of European credit institutions from Ireland maintain adequate liquidity in the UK. The FSA also has the responsibility to collaborate with the Financial Regulator in ensuring that Irish credit institutions carrying on activities listed in the Banking Consolidation Directive in the UK take sufficient steps to cover risks arising from their open positions on financial markets in the UK. In addition, it has the power to make rules about the conduct of financial business in the UK by credit institutions. For example, in relation to deposit taking, it has made rules about the approval of advertisements, the handling of complaints and the avoidance of money laundering.
Under the Banking Consolidation Directive as implemented in the UK, the FSA is empowered in specified circumstances to impose a prohibition on, or to restrict the listed activities of, a credit institution. Consistent with the allocation of supervisory responsibilities in the Banking Consolidation Directive, the FSA would usually exercise its power only after consulting the Authority, which, inter alia, expresses willingness of the respective authorities to exchange information in order to facilitate the effectiveness of the supervision of credit institutions in the EU. It also provides for the exchange of information in crisis situations and in cases where the authorities become aware of contraventions of the law by institutions covered by the Banking Consolidation Directive operating in their territory. The FSA can also enforce its conduct of business rules and has certain other enforcement powers under UK legislation.
Because Bank of Ireland has established a place of business in England, it is subject to the provisions of the Companies Act 1985 of Great Britain, which affect overseas companies. Equally, on account of its having established a place of business in Northern Ireland in connection with its operations there, Bank of Ireland is subject to the provisions of Part XXIII of the Companies (Northern Ireland) Order 1986 which apply to companies incorporated outside Northern Ireland which have established a place of business in Northern Ireland.
In respect of its banking operations in Northern Ireland, Bank of Ireland is empowered under the Bank of Ireland Act 1821 to issue bank notes as local currency, and is subject to the provisions of the Bankers (Northern Ireland) Act 1928, the Bank of Ireland and Subsidiaries Act 1969 and the Financial Services and Markets Act 2000 (FSMA) in respect thereof.
In addition to the role of the FSA in relation to Bank of Ireland as a credit institution described above, the FSA is also the home country regulator of a number of the Groups UK incorporated subsidiaries. Until October 1, 2007, these included Bristol & West plc (an authorised bank and successor to Bristol & West Building Society) and Bank of Ireland Home Mortgages Limited. As of October 1, 2007, as part of a corporate restructuring, the business of Bristol & West plc was transferred to the UK branch of the Governor and Company of the Bank of Ireland .The business of Bank of Ireland Home Mortgages Limited was at the same time transferred to the UK branch of the Governor and Company of the Bank of Ireland. As a result the FSA authorisation of both businesses was cancelled. Since December 1, 2001, the FSAs power and responsibilities derive from the FSMA, which gave effect to a major overhaul of the regulatory system in the UK. The scope of the FSMA was extended in 2004 to include retail mortgage lending and general insurance intermediation. In January 2005, Post Office Limited became an appointed representative of Bristol & West plc in respect of its activities in relation to the Post Office Financial Services joint venture with Bank of Ireland. With effect from October 1, 2007 Post Office Limited became an appointed representative of the Governor and Company of the Bank of Ireland as a result of the corporate restructuring described above.
The FSAs basic method of supervising banks involves the regular reporting of statistical information and a regular set of returns giving balance sheet and consolidated statement of income data, material on the maturity structure of assets and liabilities, sector- analysis of business and details of concentration of risk in assets and deposits. Review meetings are held by the FSA with the management of regulated firms. Under the risk based approach introduced in 2001 (ARROW) the FSAs supervision of banks is based on a systematic analysis of the risk profile of each bank. The FSA also publishes requirements it expects banks to meet on matters such as capital adequacy, limits on large exposures to individual entities and groups of closely connected entities and liquidity.
In order to maintain authorisation under the FSMA, regulated firms must be able to demonstrate that they have adequate resources and that they are fit and proper. In addition, firms must meet the FSAs requirements with regard to senior management arrangements, systems and controls, conduct of business, training and competence, money laundering and complaints handling.
In addition to various powers to make rules and issue guidance, the FSMA also gives the FSA power to gather information, undertake investigations and to impose sanctions both on regulated firms and on certain of their directors and managers. For example, under FSMA section 166 the FSA may require an authorised firm to provide it with a report from a skilled person (for example an accountant) in relation to the exercise of the FSAs functions.
Various members of the Group hold licences from the UK Director General of Fair Trading under the UK Consumer Credit Act, 1974 in relation to regulated consumer credit lending and mortgage broking. The Director General of Fair Trading has certain powers in relation to these activities.
All covered liabilities of the Governor & Company of the Bank of Ireland held in the UK businesses are guaranteed by the Government Guarantee Scheme (see note 57 for further details).
In the United States, Bank of Ireland, its Connecticut branch, its representative offices and certain US subsidiaries are subject to a comprehensive regulatory structure involving numerous statutes, rules and regulations.
Bank of Ireland operates a branch in Connecticut from which it conducts a wholesale banking business. The branch is licensed by the Connecticut Department of Banking and is subject to regulation and examination by the Department. The Bank of Ireland has representative offices in the States of New York and Illinois. These representative offices are licensed by their respective states and are subject to the laws and regulations of those states. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority over the branch and the representative offices. The regulation of our Connecticut branch imposes restrictions on its activities, as well as prudential restrictions, such as limits on extensions of credit to a single
borrower. The branch does not accept retail deposits and its deposits and obligations are not insured by the US Federal Deposit Insurance Corporation or any other United States government agency. All covered liabilities of the branch are guaranteed by the Scheme.
The Connecticut Department of Banking has the authority to take possession of the business and property of the Group located in Connecticut in certain circumstances relating to the branch. Such circumstances generally include violation of law, unsafe business practices and insolvency.
By operating a branch in the US, the Bank of Ireland and its subsidiaries are subject to regulation by the Board of Governors of the Federal Reserve System under various laws, including the International Banking Act of 1978 and the Bank Holding Company Act of 1956. In this regard, Bank of Ireland has elected to become a financial holding company under the Bank Holding Company Act of 1956. Financial holding companies may engage in a broader spectrum of activities, including underwriting and dealing in securities and merchant banking activities, than are permitted to banking organisations that are not financial holding companies. To maintain its financial holding company status, Bank of Ireland is required to meet or exceed certain capital ratios and its branch is required to meet or exceed certain examinations ratings. The failure to maintain financial holding company status could limit the activities of Bank of Ireland and its subsidiaries in the US and have other adverse consequences.
A major focus of US governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing and enforcing compliance with US economic sanctions issued by the Office of Foreign Assets Control. Regulations applicable to the US operations of Bank of Ireland and its subsidiaries impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to ensure compliance with US economic sanctions against designated foreign countries, nationals and others. Failure of a financial institution to maintain and implement adequate programmes to combat money laundering and terrorist financing or to ensure economic sanction compliance could have serious legal, monetary and reputational consequences for the institution.
Bank of Irelands subsidiaries in the US are also subject to regulation by applicable federal and state regulations with regards to their activities in the asset based lending, asset management, investment advisory, mutual fund and securities broker dealer businesses.
The majority of the Groups business activities are in Ireland and the UK.
The Irish economy is experiencing a steep and prolonged recession. Annual GDP growth turned negative in the first quarter of 2008 and by the final quarter had fallen by 7.5%, leaving the average decline for the year at 2.3%. A significant factor behind the slowdown is residential construction; house building fell by 35% in 2008 and is expected to decline by 45% in 2009. Non-residential construction also declined last year and may fall more sharply in 2009, including lower public sector spending on the infrastructure. The corporate sector reduced its spending on machinery and equipment in 2008 and a further fall is generally expected this year. Consumer spending, which accounts for about half of GDP, continued to grow in the early part of 2008 but turned negative as the year progressed, and declined by an annual 4% in the fourth quarter. Household income rose modestly but consumers appear to have increased savings, reflecting uncertainty about the path of future income in the face of a sharp deterioration in the labour market; the unemployment rate rose from 4.6% at end-2007 to 8.6% at end -2008 and by March 2009 had risen further, to 11%. Personal consumption is likely to fall sharply in 2009, by over 5%, as disposable income appears set to decline, reflecting a steep drop in employment, minimal wage growth, if any, a higher tax burden and falling rental income. Interest rates are now at historically low levels, which will offer some respite to households with debt, and consumer prices may fall, so supporting real incomes, but a further increase in the savings ratio is likely given the negative economic backdrop at home and abroad. The external sector provided the only major stimulus for the economy in 2008 and this may well prove to be the case in 2009; the volume of exports did fall last year, but only marginally in volume terms, against a 4.5% decline in imports, with pharmaceuticals, chemicals and medical devices proving particularly resilient.
The Irish housing market has also slowed appreciably since a cyclical peak in early 2007. Prices fell by 9.1% in 2008, according to the Permanent TSB index (a leading Irish housing price indicator), following a 7.3% fall the
previous year and a further decline is expected in 2009. Mortgage lending growth decelerated to 5.8% at end-2008 from a cyclical peak of 28% in mid 2006, reflecting a deterioration in affordability, a change in price expectations and the impact of the credit crunch, which has prompted a tightening of credit standards in the banking sector. The cost to banks of funding in the wholesale money markets has also risen substantially, as has the cost of term funding, putting a premium on customer deposits. Rents had risen substantially by 22% in the three years to February 2008 but have since started to fall. Affordability is improving, given the fall in ECB rates, but the housing market is likely to remain weak this year.
The fall in economic activity and the decline in asset prices badly affected the Governments finances, and the Department of Finance expects Exchequer borrowing to exceed 10% of GDP in 2009, with only a modest improvement forecast for 2010. The Government has responded by raising taxes and cutting expenditure, which will dampen activity. S&P reduced Irelands sovereign debt rating from AAA to AA+ in March 2009.
The UK economy is also in recession and the economy there is projected to fall by some 3% in 2009. Unemployment has risen and consumers have started to cut spending, with business spending also falling. Inflation has slowed, albeit gradually, and the Bank of England expects it to be well below the 2% target by 2010, despite official rates of just 0.5%. Consequently the Bank embarked on more unconventional policies, including the purchase of £75 billion in bonds (mostly Gilts) funded by the creation of bank money, in an effort to boost credit creation and stimulate economic activity. Mortgage lending has been particularly weak (monthly applications fell to under 30,000 in late 2008 from a 5-year average of 90,000) and house prices have fallen sharply. The commercial property market has also weakened, with a substantial downward revaluation of capital values.
In a broader international context the global economy is experiencing its most severe downturn since the 1930s. Most of the major developed economies are in recession and developing economies have seen growth slow sharply as world trade contracts. There has been a pronounced policy response from the major economies, involving expansionary fiscal and monetary policy and more direct intervention to support the banking sector. The path of the economic cycle over the next twelve months is very uncertain, however, adding to a difficult business environment for the banking sector.
Trading conditions for Bank of Ireland in the financial year ended 31 March 2009 were extremely difficult. The unprecedented turbulence in financial markets, in particular since September 2008, together with the impact of the economic recession across the Groups main markets resulted in the deterioration of financial performance and in the Group reporting a significant reduction in overall profitability.
The Irish Government has played a significant role in stabilising the financial sector during this extended period of financial and economic disruption by providing support to systemically important institutions through a series of key initiatives. This has had the effect of reinforcing the stability of the Irish financial system, increasing confidence in the banking system, and facilitating the banks involved in lending to the economy.
Bank of Irelands objective during this period of disruption is to stabilise the Bank thus ensuring the Groups recovery and thereby securing its future. The Groups immediate priorities remain:
Looking to the future Bank of Ireland is committed to supporting and rebuilding the trust of its customers and stockholders.
In Ireland, through the strength of the Groups enduring core franchises the Groups leading distribution capability, the broadest product offering, and capable staff committed to delivering sales and service excellence the Group will continue to support its customers. The Group recognises that its customers needs are changing and the Group is responding to these changes. The Group has launched a number of specific initiatives: a mortgage fund for first time buyers and an investment and support fund to assist viable businesses at this time of greater economic and financial challenge. In addition, the Group has also launched a series of environmental initiatives aimed at supporting green projects in Ireland. And finally, the Group has established a Financial Advice Centre to support both business and personal customers through this economic downturn. Through these initiatives and others the Group has experienced an increased level of customer activity in recent months.
Building on the strong position that Corporate Banking has established in Ireland, the Group will remain committed to a number of specific niches in the UK and selected international markets in the areas of project finance, mid market leveraged acquisition finance and comprehensive asset based lending (Burdale) where Bank of Ireland has developed clear capabilities and competitive strengths in originating and structuring deals.
In the UK, the scale of the distribution and strength of the Post Office brand provide clear competitive strength for continued growth in Post Office Financial Services where today the Group has over 2 million customers. In Business Banking UK the Group remains focused on a number of specific niches in leisure, healthcare and professional services. The Groups relationship banking approach enables it to meet a broad spectrum of customer requirements including deposit, treasury and lending requirements.
Going forward therefore, the strategic bias will remain in Ireland and in those businesses overseas where Bank of Ireland has clear competitive strengths and capabilities.
The Group has been and will continue to pursue options to strengthen its balance sheet. Of most significance has been the Government supported recapitalisation of the Group.
On 31 March 2009, the National Pensions Reserve Fund Commission completed the recapitalisation of Bank of Ireland through their investment of 3.5 billion in new preference stock and warrants to subscribe for up to 25% of the enlarged ordinary stock in the Group.
This investment followed comprehensive due diligence, including stress testing across all lending portfolios. The Groups capital position has been significantly strengthened as a result. At March 31, 2009, core Tier 1, Tier 1 and total capital ratios were 9.5% (10 billion), 12.0% (12.6 billion) and 15.2% (16 billion) respectively.
Balance sheet deleveraging has been a further initiative employed to both strengthen the Groups capital position and prioritise the allocation of more scarce funding resources. In January 2009 the Group announced its intention to withdraw from intermediary sourced mortgage business in the UK, which will result, over time, in a significant reduction in the size of the UK mortgage book. In addition the Group has commenced the process of winding down a number of non-core international niche lending businesses including film finance, shipping and European property.
Market conditions during the year have not been conducive to asset disposals given reduced asset values and pressure on funding. The Group however, remains open to disposal opportunities.
The Group continues to fund its balance sheet effectively it has prioritised the gathering of customer deposits, maintaining access to the wholesale funding markets and the strengthening of contingent liquidity throughout the year. This is against a background of stressed conditions in global money markets, which were exacerbated by negative sentiment towards Ireland in January and February 2009 as a result of rating agency actions and the nationalisation of Anglo Irish Bank.
Notwithstanding this difficult backdrop, the Group has maintained the level of customer deposits at 31 March 2009 in line with 31 March 2008 (constant currency). The extensive distribution capability in both Ireland and the UK has resulted in good customer deposit growth with market share gains in both Retail Ireland and UK Post Office Financial Services. This performance has been offset somewhat by lower levels of credit balances in business accounts in Ireland as a result of reduced levels of economic activity. In addition, the Group experienced some withdrawal of institutional deposits due to a variety of factors.
In the year ended 31 March 2009 the Group raised 8.4 billion in term funding (wholesale funding with a maturity of greater than one year at time of issue), through both public and private placements. At 31 March 2009, 27% of wholesale funding had a maturity of greater than one year.
Reflecting the nature of the lending book and technical skills the Group continued to generate eligible collateral from its balance sheet. Currently, Bank of Ireland has a contingent liquidity asset pool of 49 billion, which can be pledged to the European Central Bank (ECB), the Bank of England and the US Federal Reserve to borrow wholesale funding during periods of pressure in markets.
The Group continues to actively manage its credit risk it has redirected significant senior resources to the intensive management of its more challenged portfolios. Whilst remaining supportive of the Groups customer base in these difficult times, the Group is also fully committed to maximising debt recovery.
The Groups Interim Management Statement indicated an expected loan impairment charge in the region of 4.5 billion in the 3 year period to March 2011, indicating that if key economic indicators deteriorated there was downside risk to this estimate of up to an additional 1.5 billion. Given the change to consensus economic forecasts particularly in Ireland where circa 50% of the Groups credit risk on its lending portfolio is based, the more likely outcome of loan impairment for the overall Group is now circa 6 billion in the 3 year period to March 2011. Downside risk to this estimate arises in the event of even further deterioration in economic conditions or further prolonged low levels of activity in residential and commercial property markets.
The Group welcomes the Irish Governments initiative to establish National Asset Management Agency (NAMA) and are actively engaging with the National Treasury Management Agency (the agency charged with the management of NAMA) to explore how this initiative can be successfully implemented.
Faced with a significant reduction in income in the current year the Group has significantly reduced the levels of overall costs. Rigorous control has been enforced over all discretionary expenditure. Staff numbers are down as a result of a recruitment freeze, a policy of non-replacement of departing staff, and some redundancies resulting from the closure of the UK intermediary mortgage business, downsizing of the Business Banking UK activities and the winding down of some non-core international capital markets businesses. As at March 31, 2009, staff numbers are down 5% to c. 15,500. Staff variable compensation costs have been reduced significantly through the non-payment of bonuses.
The Group faces another difficult financial year in the 12 months to March 31, 2010. The pace of economic activity across the Groups main markets has reduced and the Group now expects lower levels of new business activity, higher impairment charges and further pressure on liability spreads. Bank of Ireland will continue to focus on the factors that are most critical to ensuring the stability and recovery of the Group: engaging with customers, strengthening capital, effectively managing funding, actively managing asset quality and rigorously managing costs.
Group loss before tax of 7 million for the year ended March 31, 2009 compares to a profit before tax (PBT) of 1,933 million for the prior year to March 31, 2008, with basic earnings per share (EPS) of 5.9 cent for the year, compared to 174.6c for the prior year reflecting significantly higher impairment charges in the year ended March 31, 2009. The Group loss before tax for the year ended March 31, 2009 included a goodwill impairment charge of 304 million related to its US based asset management businesses, Guggenheim and Iridian, which have been severely impacted by the downturn in the global asset management sector.
Total operating income, net of insurance claims paid, is 7% lower in the reporting period, largely as a result of volatility in financial markets, reduced levels of new business activity and continuing elevated levels of funding costs.
Other operating expenses are 12% higher in the year ended March 31, 2009. Total other operating expenses included a charge of 304 million (March 31, 2008: nil) relating to impairment of goodwill and other intangibles and a restructuring charge of 83 million (March 31, 2008: 17 million) as the Group initiated a number of downsizing initiatives. Excluding the impairment charge and the costs relating to the downsizing initiatives, other operating expenses are 5% lower in the year to March 31, 2009 compared to the prior year, as a result of tight control of costs throughout the year. This focus on rigorous cost management will continue as further action is taken to align costs to an environment of lower levels of activity and revenues.
As a result, the cost / income ratio for the year to March 31, 2009 was 62%, compared to 50% for the prior year.
Total impairment charges on financial assets are 1,513 million, an increase of 1,281 million over the comparable prior period when impairment losses were low. Impairment charges on loans and advances to customers are 1,435 million or 102 basis points (bps) when expressed as a percentage of average loans, an increase of 1,208 million over the comparable prior period when impairment losses were exceptionally low. The increase reflects the impact of the economic recession in our main markets, its impact on the credit environment and also asset revaluations, particularly in the property sector. Of the remaining impairment charge of 78 million, 76 million relates to impairment charges on the Groups available for sale financial assets.
Profit after tax for the year ended March 31, 2009 of 34 million compares to 1,704 million in the prior year. The tax credit for the current year of 41 million compares to a tax charge of 229 million in the prior year with the current year tax credit driven by a reduction in earnings across the Group and the life policyholder tax gross up.
Retail Republic of Ireland delivered PBT of 11 million in the year to March 31, 2009 compared to 749 million in the prior year. Profits have been impacted by a higher impairment loss charge, up from 146 million in the year ended March 31, 2008 to 708 million in the year ended March 31, 2009, reflecting the sharp slowdown in the economy and asset revaluations in the property sector. The results for the year also included an impairment of investment properties and related activities. In addition, the weakness in stock markets adversely impacted the sales of investment products. In the difficult environment, costs were reduced by 4% reflecting a strong cost containment focus.
Bank of Ireland Life delivered loss before tax of 107 million, versus a PBT of 48 million for the prior year. The results for this year include a negative investment variance charge of 117 million compared to 50 million in the prior year. Also the year on year comparison is directly impacted by a charge relating to the gross-up of policyholder tax in the current year of 76 million compared to a charge of 60 million in the prior year. Weakness and continued volatility in equity markets impacted investor sentiment resulting in a slowdown in new business volumes in the second half of the financial year. Consistent with long term bond yields, the discount rate applied to future cash flows was increased from 8.0% to 9.0% resulting in a cost of 16 million in the year ended March 31, 2009.
The Capital Markets Division PBT of 161 million is 75% lower than the prior year. The results for the year to March 31, 2009, include a charge of 304 million relating to the write-off of goodwill and other intangible assets in relation to the Groups US based asset management businesses. PBT in Corporate Banking is lower by 35% driven by higher impairment charges. Global Markets delivered a strong performance with a PBT increase of 11%.
The UK Financial Services division delivered a loss before tax of £46 million, compared to a PBT of £330 million for the prior year. Profits in the Business Banking and Mortgage businesses were significantly impacted by higher impairment charges. The results for the year also include costs related to a downsizing initiatives of £56 million. Business Banking recorded a loss before tax in the year ended March 31, 2009, versus a profit in the prior year. The Mortgage business PBT reduced significantly in the year ended March 31, 2009. The joint ventures with the UK Post Office (including Post Office Financial Services and First Rate Exchange Services) performed well with PBT slightly higher versus the prior year.
The economic environment in Ireland, the UK and the US has deteriorated significantly in recent months leading to recession. This, coupled with the continued dislocation in global financial markets, has already adversely affected the Groups earnings and is likely to continue to affect its results, financial condition and prospects.
The Groups main markets are currently in the midst of major recessions. These conditions have exerted downward pressure on stock prices, liquidity and availability of credit for financial institutions, including the Group, and other corporations. This has led to a decline in demand for business products and services and decreases in business and consumer confidence, lower personal expenditure and consumption, increases in debt service burden on both consumers and businesses, and limitations on the general availability and cost of credit, and have affected significantly and will continue to affect the Groups customers and, by extension, the demand for, and supply of, the Groups products and services and the Groups financial condition and results of operations. In addition, higher unemployment, reduced corporate profitability, increased corporate and personal insolvency rates and increased cost of funding may reduce borrowers ability to repay loans and may cause prices of residential and commercial property or other asset prices to fall further, thereby reducing further the value of collateral on many of the Groups loans and significantly increasing write downs and impairment losses.
See item 4 Information on the Company Economic conditions affecting the Group.
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Details of these critical accounting estimates and judgements are set out on pages F-30 to F-32 of this document.
Trading conditions for Bank of Ireland in the financial year ended March 31, 2009 were extremely difficult. The unprecedented turbulence in financial markets, in particular since September 2008, together with the impact of the economic recession across the Groups main markets resulted in the deterioration of financial performance and in a significant reduction in overall profitability.
The result for the year was achieved against the backdrop of volatile global financial markets and an environment of recession in the Groups main markets. These factors have had a direct impact in a number of key areas including higher funding costs, a negative investment variance in the Life business (117 million) and lower fees from Assets under Management. The recessionary environment has contributed to significantly higher impairment charges.
Where possible, the Group calculates fair value using observable market prices. Where market prices are not available or unreliable, fair values are determined using valuation techniques which may include discounted cash flow models or comparisons to instruments with characteristics either identical or similar to those of the instruments held by the Group. More detail on the methods and assumptions used in the valuation of financial instruments is set out in note 45 and 46 to the consolidated financial statements.
The Groups overall liquidity policy and control is the responsibility of the Group Asset and Liability Committee (ALCO) and is managed on behalf of ALCO by Group Asset and Liability Management to ensure that the Group can meet its current and future re-financing needs at all times and at acceptable costs. See Item 11 Quantitative and Qualitative Disclosures about Market Risk for further details about our risk management policies. (See also note 46 in the F pages of this document.)
The objectives of Bank of Ireland Groups capital management policy are to:
It is the Groups policy to maintain a strong capital base, to seek to expand this where appropriate and to utilise it efficiently in the Groups development as a diversified international financial services group. Long term debt capital, undated capital notes, preferred securities and preference stock are raised in various currencies in order to align the composition of capital and risk weighted assets. The Groups capital includes the Groups equity stockholders funds (which includes 3.5bn Government preference stock issued to the National Pensions Reserve
Fund), perpetual and dated subordinated securities with appropriate regulatory adjustments and deductions applied. The following table sets out the Groups capital resources (stockholders equity and subordinated liabilities):
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
In the year ended March 31, 2009, total Group capital resources increased by 525 million to 14,855 million primarily following the recapitalisation of the bank by the Irish Government through its investment of 3,500 million in preference stock (3,462 million net of costs), offset by negative retentions for the period of 328 million, other net negative movements in equity of 2,766 million including changes in the cash flow hedge reserve (540) million, the available for sale (AFS) reserve (1,113) million, foreign exchange adjustments (528) million, the movement in the defined benefit pension schemes (544) million, the issue or reissue of capital stock (83) million and other movements of 42 million. Other movements in the year to March 31, 2009 include a 176 million increase in relation to undated loan capital, a 42 million decrease in relation to dated loan capital while minority interests increased by 23 million.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
In the year ended March 31, 2008, total Group capital resources decreased by 236 million to 14,330 million primarily following retentions of 1,074 million, other net negative movements in equity of 1,314 million including changes in the cash flow hedge reserve (247) million, the available for sale (AFS) reserve (386) million, foreign exchange adjustments (712) million, the movement in the defined benefit pension schemes (209) million offset by the issue or reissue of capital stock 194 million and other movements of 46 million.
As at March 31, 2009, the Group had 3,385 million of undated loan capital and 4,557 million of dated loan capital (including fair value adjustments), a total of 7,942 million in aggregate of subordinated liabilities. Of the dated loan capital 3,782 million is repayable in five or more years. The cost and availability of subordinated debt are influenced by credit ratings. A reduction in the ratings assigned to the Groups securities could increase financing costs and reduce market access. The credit ratings of the Group as at May 18, 2009 are as follows:
Depending on the degree of subordination the ratings assigned to Loan Capital may be one or more notches below the level for senior debt. Credit ratings are not a recommendation to buy, hold or sell any security and each rating should be evaluated independently of every other rating. These ratings are based on current information furnished to the rating agencies by Bank of Ireland and information obtained by the rating agencies from other sources. The ratings are accurate only as of May 18, 2009 and may be changed, superseded or withdrawn as a result of changes in, or unavailability, of such information.
As at March 31, 2008, Bank of Ireland Group had 3,209 million of Undated Loan Capital and 4,599 million of Dated Loan Capital (including fair value adjustments), a total of 7,808 million in aggregate of subordinated liabilities. Of the Dated Loan Capital 3,832 million as of such date was repayable in five or more years.
Bank of Ireland Groups capital resources policy has been developed within the supervisory requirements of the Financial Regulator.
The EU Capital Requirements Directive (CRD) which came into force from January 1, 2008, introduced significant amendments to the existing capital adequacy framework. The implementation of the CRD results in a more risk sensitive approach to the derivation of a banks capital requirements.
The CRD is divided into three sections commonly referred to as Pillars. Pillar 1 introduced the Internal Ratings Based Approach (IRBA) which permits banks to use their own internal rating systems to calculate their capital requirements for credit risk. Use of the IRBA is subject to regulatory approval. Where credit portfolios are not subject to IRBA the calculation of the minimum capital requirements is subject to the Standardised Approach which is a more granular approach to the calculation of risk weightings than the Basel I framework.
Under Pillar 2 of the CRD (Supervisory Review) banks undertake an Internal Capital Adequacy Assessment Process (ICAAP) which is then subject to supervisory review. Pillar 3 of the CRD (Market Discipline) involves the disclosure of a range of qualitative and quantitative information relating to capital and risk. The Group will be disclosing this information in due course.
The CRD also introduced a requirement to calculate capital requirements, and to set capital aside, with respect to operational risk. The Group is also required to set capital aside for market risk. During the financial years under review all externally imposed capital requirements were complied with.
The basic instrument of capital monitoring is the risk asset ratio as developed by the Basel Committee. This ratio derives from a consideration of capital as a cover for the credit and market risks inherent in Group assets. Capital is defined by reference to the European Union Own Funds Directive (OFD) and Capital Adequacy Directive (CAD), and is divided into Tier 1 capital consisting largely of stockholders equity, Tier 2 capital including general provisions and debt capital instruments, and Tier 3 capital including short-term subordinated loan capital and net trading book profits. Assets (both on and off-balance sheet) are weighted to allow for relative risk according to rules derived from the European Union Solvency Ratio Directive.
The target standard risk asset ratio set by the Basel Committee is 8%, of which the Tier 1 element must be at least 4%. The minimum risk asset ratio is set by the Financial Regulator and satisfies capital adequacy requirements of the EU.
Capital Adequacy Data
The following table shows the components and basis of calculation of the Groups Tier 1 and Total Capital ratios under Basel II for March 31, 2009 and March 31, 2008.
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
In the year to March 31, 2009 the Tier 1 Capital Ratio increased from 8.1% to 12.0% and the Core Tier 1 ratio improved from 5.7% to 9.5% with both ratios reflecting the capital initiatives by the Group. The Total Capital Ratio increased from 11.1% to 15.2%.
In the year ended March 31, 2009 a range of initiatives were implemented which have increased the Groups capital and reduced risk weighted assets resulting in an improvement in each of the key capital ratios.
Of most significance has been the Government supported recapitalisation of the Group. On March 31, 2009, the National Pensions Reserve Fund Commission (NPRFC) completed the investment of 3.5 billion in new preference stock. This stock with a coupon of 8% is redeemable at par until the fifth anniversary of its issue and thereafter at 125% of par. The NPRFC also received warrants to subscribe for up to 25% of the enlarged ordinary stock of the Group. The preference stock qualifies as core Tier 1 capital. In January 2009, the Group announced its intention to cease mortgage lending through the intermediary channel in the UK and also to exit from some non-core Corporate Banking international lending niches.
In August 2008 the Group issued Stg£450 million of lower Tier 2 capital and in December 2008 redeemed 600 million of lower Tier 2 capital.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
The following table shows the components and basis of calculation of the Groups Tier 1 and Total Capital ratios under Basel I for March 31, 2008 together with comparative figures for March 31, 2007.
In the year to March 31, 2008 the Basel I Tier 1 Capital Ratio decreased from 7.9% to 7.6% and the Basel I Equity Tier 1 ratio improved from 4.9% to 5.3% with both ratios reflecting a range of capital initiatives by the Group. The Total Capital Ratio decreased from 11.5% to 10.5% on a Basel I basis. On a Basel II basis the Tier 1 ratio and Equity Tier 1 ratios at March 31, 2008 were 5.7% and 8.1% respectively whilst the Total Capital ratio was 11.1%.
These changes in the Basel I Tier 1 ratio arose from retained earnings, the sale and leaseback of a further 30 branches and the benefit of a 400 million embedded value securities transaction offset by risk weighted asset growth.
In October 2007, the Group completed a 400 million embedded value securities transaction which references the future cash flows from our life assurance business. The transaction resulted in the reclassification of certain capital reserves relating to the value in force in our life assurance business from Tier 2 capital to Equity Tier 1 capital. Repayment of the securities issued will depend on the emergence of future cash flows thereby preserving the value of the capital protected by the transaction. The transaction imposes no obligations on our life assurance business.
Basel I Tier 1 capital increased by 663 million reflecting 1,074 million in retained earnings and 400 million related to the embedded value securities transaction (transfer from Tier 2) offset by negative currency movements of 1,036 million (of which 712 million related to equity) and 225 million of net other positive movements.
The Basel I Total capital ratio reduced by 1.0% to 10.5%. This reduction reflected the factors behind the higher Tier 1 level (excluding the embedded value securities transaction which involved a reclassification of existing capital) together with the raising of additional dated subordinated debt offset by risk weighted asset growth.
Basel I Total Capital funds increased by 309 million including 263 million (that is excluding the embedded value securities transaction) relating to the movement in Tier 1 funds described above together with 379 million (US$600 million) for dated subordinated debt capital. These items were offset by capital amortisation (150 million) and other movements (183 million) including negative currency movements.
Tier 2 capital benefited from the US$600 million of new Tier 2 capital raised offset by the transfer of 400 million to Tier 1 reflecting the embedded value securities transaction, negative exchange rate movements of 149 million and miscellaneous other movements of 230 million negative.
Capital resources as at March 31, 2008 were 229 million lower under Basel II than under Basel I primarily as a result of the deduction of expected losses that are in excess of accounting provisions and with collective provisions on transactions on IRB approach no longer included within Tier 2 capital. The only other change related to the deduction of the first loss on securitisations equally from Tier 1 and Tier 2 as opposed to Total Capital.
The Group has established as priorities the gathering of customer deposits, maintaining access to the wholesale funding markets and the strengthening of its contingent liquidity throughout the year. This is against a background of funding conditions in global wholesale money markets, which were exacerbated by negative sentiment towards Ireland in January and February 2009 as a result of rating agency actions and the nationalisation of Anglo Irish Bank.
The Group performs stress testing and scenario analysis to evaluate the impact of stresses on its liquidity position. These stress tests are at both a Group specific and systemic risk level. The stress tests are run at three levels of moderate, serious and severe. The results of the tests are compared to the strategic actions which the Group can take in such circumstances to correct a potential liquidity shortfall and bring it back in order. Such actions range from selling assets, switching from unsecured to secured funding and adjusting the price the Group would pay for liabilities. The result of the stress testing is reported at regular intervals to the Group Risk Policy Committee (GRPC) and the Court.
A significant part of the liquidity of the banking businesses in Ireland and the UK arises from their ability to generate customer deposits. A substantial proportion of the customer deposit base is made up of current and savings accounts, which, although repayable on demand, have traditionally, provided a stable source of funding. These customer deposits are supplemented by the issue of subordinated loan capital and wholesale funding sources in the capital markets, as well as from direct customer contracts. Wholesale funding sources include deposits taken on the inter-bank market, certificates of deposit, sale and repurchase agreements, commercial paper programmes, a euro medium term note programme and the mortgage covered securities programme.
The monitoring and reporting of liquidity takes the form of cash flow measurement and projections for future periods, with the 0-8 days and 8 days to 1 month periods as two of the key periods of measurement for liquidity management. The Group also operates a contingency liquidity plan for periods of liquidity stress.
The ability to sell assets quickly is also an important source of liquidity to the Groups banking business. The Group holds sizeable balances of marketable treasury and other eligible bills and debt securities which could be disposed of to provide additional funding should the need arise.
The Group has developed significant pools of eligible collateral from its balance sheet which are capable of being pledged in the secondary market and through the normal market operations of the Monetary Authorities to provide access to secured funding. At March 31, 2009, the net drawings, primarily from Monetary Authorities, were 17 billion.
The following table sets out the amounts and maturities of the Groups contractual cash obligations at March 31, 2009.
In addition, the Group takes deposits and other liabilities in the normal course of its banking business. The maturity of deposits by banks, customer accounts and debt securities in issue is given in note 46 to our consolidated financial statements.
Total assets decreased by 2% (4% increase on a constant currency basis) from 197 billion at March 31, 2008 to 194 billion at March 31, 2009. Loans and advances to customers decreased by 1% during the year to March 31, 2009 (5% increase on a constant currency basis, reflecting the strong pipeline of business carried forward from the prior year). Customer deposits decreased by 4% (unchanged on a constant currency basis) in a difficult environment.
The Group funds its operations through a combination of customer accounts and wholesale funding sourced from the debt markets.
The funding environment has been subject to a number of significant shocks and volatility during the Groups financial year from April 1, 2008 through March 31, 2009.
Against this backdrop the Group has prioritised deposit gathering. The Group continues to leverage the potential of its extensive retail distribution platform both in the Republic of Ireland, and internationally through its joint venture with the UK Post Office, its Business and Corporate Banking relationship management teams and its network of treasury offices in Dublin, the UK and the US.
The Groups wholesale funding programmes are diversified across geographies, investor types and maturities. In addition, Bank of Ireland has invested in recent years to build a strong technical capability to support contingent liquidity strategies which has allowed it to maximise funding from its balance sheet.
Wholesale funding as a percentage of Group total assets (excluding BoI Life policyholder assets) reduced to 40% (74 billion) at March 31, 2009, compared to 41% (75 billion) at March 31, 2008. At March 31, 2009, 27% of this wholesale funding had a term to maturity of greater than one year.
Bank of Ireland operates under the Liquidity Regime introduced by the Irish Financial Regulator in July 2007. This regime requires that banks have sufficient payment resources (cash inflows and marketable assets) to cover 100% of expected cash outflows in the 0 to 8 day time horizon and 90% of expected cash outflows in the over 8 day to one month time horizon. The Group continues to maintain a significant liquidity buffer in excess of these requirements. Overall, Bank of Irelands established and diversified funding strategy continues to support growth across our businesses.
In the significantly challenged global financial markets the Groups diversified funding strategy has continued to provide support and strength to its balance sheet. Bank of Ireland raised 8.4 billion of term funding with a maturity greater than one year during the year ended March 31, 2009. The weighted average maturity of this term funding was 1.7 years and the weighted average cost was 3 month Euribor + 66 basis points.
The Group issued 2 public benchmark sized issues during the year ended March 31, 2009. In June 2008 a 1.25 billion senior unsecured 2 year FRN at a cost of 3 month Euribor + 105 basis points was issued and in November 2008 a 2 billion senior unsecured 21 month fixed rate transaction was issued under the Irish Government Guarantee scheme at a cost of mid-swaps + 65 basis points.
The remaining transactions amounting to 5.15 billion were reverse enquiry private placement transactions across various funding programmes with a weighted average cost of 3 month Euribor + 42 basis points.
The Irish Government announced on April 7, 2009, that it intends to extend the date of the Government guarantee for certain issuance of debt securities with a maturity of up to 5 years.
The Group has developed significant pools of eligible collateral from its balance sheet which are capable of being pledged in the secondary market and through the normal market operations of the Monetary Authorities to provide access to secured funding. At March 31, 2009, the net drawings, primarily from Monetary Authorities, were 17 billion.
In summary, despite the unprecedented deterioration in the global funding and liquidity environment, the Groups diversified funding structures and strategies have ensured that it has been able to continue to fund effectively during the year ended March 31, 2009.
Lending commitments are agreements to lend to customers in accordance with contractual provisions; these are either for a specified period or, as in the case of credit cards and overdrafts, represent a revolving credit facility which can be drawn down at any time, provided that the agreement has not been terminated. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.
The Group has a number of Special Purpose Vehicles (SPVs) where it does not own more than half of the voting power in the company but which are consolidated. Details of these subsidiaries are available in note 40 to the consolidated financial statements.
ANALYSIS OF RESULTS OF OPERATIONS
The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) and with those parts of the Companies Act, 1963 to 2006 applicable to companies reporting under IFRS with the European Communities (Credit Institutions: Accounts) Regulations, 1992 and with the Asset Covered Securities Act, 2001 to 2007. These financial statements comply with both IFRS as adopted by the EU and IFRS as issued by the IASB.
Review of Group Performance
Net interest income and other income (net of insurance claims) are affected by a number of IFRS income classifications. Under IFRS, certain assets and liabilities can be designated at fair value through profit or loss. Where assets or liabilities have been designated at fair value through profit or loss, the total fair value movements on these items, including net interest income, are reported in other income (net of insurance claims). However, the costs of funding the assets and the interest income on investment of the liabilities are reported in net interest income. In addition, debt is raised in a variety of currencies and the resulting foreign exchange and interest rate risk is managed using derivative instruments the cost of which is reported in other income.
The following table shows net interest income for each of the three years ended March 31, 2009.
Net interest income increased by 12% or 407 million, from 3,263 million to 3,670 million for the year to March 31, 2009.
As outlined above, net interest income is affected by the classification of certain income between interest expense and other income (net of insurance claims) under IFRS which relates to the designation of certain financial instruments under the fair value option. This treatment resulted in additional net interest income of 578 million for the year ended March 31, 2009 and 346 million for the year ended March 31, 2008, offset by a similar reduction in other income (net of insurance claims) in both years. Excluding the impact of the IFRS classifications, the Groups net interest income increased by 175 million or 6% in the year ended March 31, 2009.
Growth in net interest income was driven by improved lending margins primarily in Corporate Banking and UK mortgage lending which are repricing for risk and higher cost of funds, together with improved treasury margins due to being well positioned in a declining interest rate environment.
Net interest income increased by 18% or 506 million, from 2,757 million to 3,263 million for the year to March 31, 2008.
The classification of certain income between interest expense and other income (net of insurance claims) under IFRS which relates to the designation of certain financial instruments under the fair value option resulted in additional net interest income of 346 million for the year ended March 31, 2008 and 122 million for the year ended March 31, 2007, offset by a similar reduction in other income in both years. Excluding the impact of the IFRS classifications, the Groups net interest income increased by 282 million or 11%.
Growth in net interest income was driven by strong volume growth in loans and deposits across the Group. Loans and advances to customers increased by 9% and customer deposits grew by 19% (16% and 27% respectively on a constant currency basis).
The following table sets forth the Groups net interest margin for each of the three years ended March 31, 2008.
The Group net interest margin increased by 21bps to 2.07% for the year ended March 31, 2009 from 1.86% for the year ended March 31, 2008. 13bps of the increase is due to the classification of certain items under IFRS, as mentioned above in the net interest income section.
Excluding the impact of this classification, net interest margin increased by 8 bps for the year to March 31, 2009 and the key drivers of margin growth were:
The Group net interest margin increased by 9bps to 1.86% for the year ended March 31, 2008 from 1.77% for the year ended March 31, 2007. 6bps of the increase was due to the classification of certain items under IFRS, as mentioned above in the net interest income section.
Excluding the impact of this classification, net interest margin reduced by 3bps to 1.66% for the year ended March 31, 2008 and the key drivers of margin attrition were:
Offset in part by:
The following table shows interest rates in effect at March 31, 2009, 2008 and 2007.
The following table shows other income (net of insurance claims) for each of the three years ended March 31, 2009, 2008 and 2007.
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
Other income (net of insurance claims) reduced by 71% to 287 million in the year to March 31, 2009 compared to the prior year ended March 31, 2008. IFRS income classifications, as mentioned above have also impacted other income (net of insurance claims) (credit of 578 million in the year to March 31, 2009, versus a credit of 346 million in the prior year).
Grossing up for policyholders tax in our Life business was a 76 million charge in the twelve months to March 31, 2009 compared to 60 million charge in the previous year. The non recognition of the investment return on treasury
shares held for the benefit of policyholders in Bank of Ireland Life increased other income (net of insurance claims) by 131 million for the year ended March 31, 2009 compared to a benefit of 189 million for the year to March 31, 2008.
In the year ended March 31, 2009 there was a loss of 7 million on hedge ineffectiveness on transition to IFRS compared to 6 million in the prior year.
Also, there was a significant negative investment valuation variance of 117 million in Bank of Ireland Life due to weaker global equity markets in the year to March 31, 2009, versus a negative investment valuation variance of 50 million in the prior year.
Other contributing factors to the drop in other income (net of insurance claims) include lower fees in the Business and Corporate Banking businesses, impairment of investment properties (46 million), lower management and performance fees in the asset management businesses and the cost to unwind customer risk positions following the Lehmans collapse in mid September 2008 (39 million). The cost of the government guarantee in the year ended March 31, 2009, was 66 million and is charged to other income (net of insurance claims). These charges are partly offset by a gain of 64 million on the widening of credit spreads relating to the Groups issued notes designated at fair value through profit or loss.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
Other income (net of insurance claims) reduced by 11% to 974 million in the year to March 31, 2008 compared to March 31, 2007. Other income (net of insurance claims) in the prior year includes 94m relating to our Davy holding (disposed of in October 2006). IFRS income classifications, as mentioned above have also impacted other income (net of insurance claims) (credit of 346 million in the year to March 31, 2008, versus a credit of 122 million in the prior year).
Grossing up for policyholders tax in our Life business was a 60 million charge in the twelve months to March 31, 2008 compared to 19 million credit in the previous year. In addition the non recognition of the investment return on treasury shares held for the benefit of policyholders in Bank of Ireland Life reduced other income (net of insurance claims) by 68 million for the year ended March 31, 2007 compared to a benefit of 189 million for the year to March 31, 2008.
In the twelve months to March 31, 2008 there was a loss of 6 million on hedge ineffectiveness on transition to IFRS compared to 2 million in the prior year.
Finally, there was a significant negative investment valuation variance of 50 million in Bank of Ireland Life due to weaker global equity markets.
The drivers of this growth include Global Markets performance, POFS performance and increased activity in our credit card business.
The following table sets forth the Groups other operating expenses for each of the three years ended March 31, 2009.
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
Other operating expenses increased by 12% in the year ended March 31, 2009, which includes 304 million relating to impairment of goodwill and other intangible assets and also costs associated with a number of downsizing initiatives (83 million). Excluding the impairment of goodwill and the costs associated with the downsizing initiatives in both years, operating expenses are 6% lower on the prior year to March 31, 2008. The Group has carried out an impairment review of all goodwill and other intangible assets on the Group balance sheet at March 31, 2009. The carrying value of the US based asset management businesses, Guggenheim and Iridian, have been severely impacted by the downturn in the global asset management sector, falling assets under management and client redemptions. Consequently a decision was made to write down the carrying value of the businesses to their recoverable amounts, which is fair value less costs to sell. As a result the Group has recorded an impairment charge of 304 million in the year ended March 31, 2009. This impairment has no cash impact nor does it impact the Groups capital ratios. The Group is currently reviewing its strategic options relating to these businesses.
The downsizing initiatives relate to the Groups goal of aligning its structure and cost base to an environment of lower levels of new business and activity. These initiatives include the cessation of mortgage lending through the intermediary channel in the UK and downsizing of some activities within Capital Markets and in the UK business banking operations. Total costs for the prior year to March 31, 2008 also included 17 million in restructuring charges.
The Group has tightly managed its headcount during the year. Staff numbers (full time equivalents) were 5% lower at March 31, 2009, at 15,487 compared with March 31, 2008. Variable compensation across the Group has been reduced significantly such that, notwithstanding higher pension costs, staff costs overall are down by 4% when compared with the prior year.
The challenging economic environment, reduced levels of new business and increased impairment levels have brought a renewed focus on our cost infrastructure. Significant progress has been made since the launch of the Strategic Transformation Programme (STP) in March 2005, but the new environment in which the Group finds itself has led to a renewed focus on costs. Tight cost management remains an imperative. We reiterate our commitment to rigorous cost management.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
Operating expenses for the year to March 31, 2008 of 2,157 million compare to 2,159 million for the prior year. Our cost/income ratio continued to improve with a further reduction of 1 percentage points from 51% in the year ended March 31, 2007 to 50% in the year ended March 31, 2008.
The year on year comparison has been impacted by the cost of the restructuring programme which incurred a 17 million charge in the year to March 31, 2008, compared to a 49 million charge in the prior year. Excluding these items, operating expenses grew by 1%. Moreover, the prior year figures include 63 million expenses relating to Davy.
Operating expenses, excluding the trading impact of the disposal of Davy in the year ended March 31, 2007, have increased by 5% driven by:
Group loans and advances to customers at 31 March, 2009 were 133.7 billion (net of impairment provisions of 1.8 billion) compared to 135.7 billion (net of impairment provisions 0.6 billion) at March 31, 2008, a 1% decrease. Growth was more significant in the first half of the financial year reflecting the momentum resulting from a strong pipeline developed in the second half of the prior financial year ended March 31, 2008. Balance sheet deleveraging, together with the impact of the significant slowdown in the level of economic activity, resulted in a marginal reduction in loans and advances to customers during the second half of the financial year to March 31, 2009. In January 2009, the Group announced its intention to cease mortgage lending through the intermediary channel in the UK and also to exit from some non-core Corporate Banking international lending niches. Loan demand in Ireland continued to slow throughout the year, in particular in consumer lending.
The following table analyses the loan book by portfolio:
44% of the Group loan book comprises residential mortgages (March 31, 2008: 44%).
27% of the Group loan book is non-property related lending to small and medium sized businesses and larger corporates and is well diversified across industries and geographies. (March 31, 2008: 24%)
25% of the Group loan book comprises exposure to non-residential mortgage property lending (March 31, 2008: 27%). Of this, 65% or 21.8 billion is investment property lending (March 31, 2008:64%) with the remaining 35% or 12.2 billion being exposures to landbank and development lending (March 31, 2008: 36%).
Loans and Advances to Customers asset quality
The Group classifies loans as financial assets neither past due nor impaired, financial assets past due but not impaired and impaired financial assets in line with the requirements of IFRS7. Loans and advances to customers within financial assets neither past due nor impaired are assigned an internal credit grade by the Group based on an assessment of the credit quality of the borrower and these ratings are summarised below:
Past due but not impaired loans and impaired loans are defined as follows:
91.8% of loans and advances to customers at March 31, 2009 were classified as neither past due nor impaired, compared to 97.0% at both March 31, 2008 and March 31, 2007. The deterioration from March 31, 2008 to March 31, 2009, is due primarily to the deterioration in the international and local economic environment, together with a lack of liquidity and a repricing of property assets.
The Groups challenged risk loans were 15.7 billion at March 31, 2009 compared to 4.1 billion at March 31, 2008. These challenged loans include impaired loans, together with elements of past due but not impaired loans, lower quality but not past due nor impaired, and loans at the lower end of acceptable quality which are subject to increased credit scrutiny. The year on year change of 11.6 billion is due to an increase of 4.3 billion in impaired loans with the balance attributable to the impact of general economic conditions on arrears and downward grade migration across the portfolio.
Impaired loans increased from 1,062 million at March 31, 2008 to 5,322 million at March 31, 2009, or from 78bps to 393bps of total loans. The increase in impaired loans reflects the rapid slowdown in the property and construction sectors both in Ireland and the UK together with a deterioration in general economic conditions and weaker consumer sentiment.
Total balance sheet provisions against loans and advances to customers were 1,781 million at March 31, 2009 compared to 596 million at March 31, 2008. Impairment provisions as a percentage of total loans were 131bps, the ratio being 24bps for the Group mortgage book and 214bps for non-mortgage lending.
Impairment provisions as a percentage of impaired loans (the coverage ratio) is 33% at March 31, 2009, which compares to 56% at March 31, 2008. This year on year reduction reflects a higher proportion of impaired collateralised loans at March 31, 2009 compared to March 31, 2008. These loans, due to their collateralised nature, require lower provisioning and impact the coverage ratio accordingly.
The Group impairment charge for the year ended March 31, 2009 amounted to 1,435 million or 102bps, when expressed as a percentage of average loans and advances to customers. The charge was 85bps higher than the charge for the twelve months ended March 31, 2008. This higher charge reflects the impact of the rapid deterioration in general economic conditions, consequent downward loan grade migration and falling property values both in Ireland and the UK.
The split of the Group impairment charge in bps for the year ended March 31, 2009 by portfolio is as follows:
The asset quality of the mortgage portfolio has shown some deterioration with an impairment charge of 20bps in the year to March 31, 2009 compared to 1bp in the prior year. Unemployment is a key risk driver of impairment in the mortgage portfolio and this higher charge reflects the general deterioration in the economy and increase pace of unemployment.
The asset quality of our non-property SME and corporate lending is diversified across a range of business sectors and has been impacted by the general downward trend in levels of economic activity.
The property and construction portfolio represents 25% of the Groups loan book. The impairment charge of 211bps in the year to March 31, 2009 compares to 17bps in the prior year. The recession in both the Irish and UK economies together with lack of liquidity and falling asset values, have significantly impacted the asset quality in this portfolio.
The impairment charge on the consumer portfolio has increased from 110bps in the year ended March 31, 2008 to 308bps in the year ended March 31, 2009, reflecting a significant deterioration in the asset quality of this book.
In Retail Republic of Ireland the impairment charge for the year ended March 31, 2009, was 129bps compared to 28bps for the year ended March 31, 2008. Of the increased year on year impairment charge of 562 million, 10% relates to residential mortgages, 12% relates to consumer lending with the balance of 78% relating primarily to the property and construction component of the business lending portfolio.
In Capital Markets asset quality deteriorated with an impairment charge for the year ended March 31, 2009, of 108bps, up from 19bps for the year ended March 31, 2008. The key driver of the higher year on year charge is the deterioration in the property lending book which was not a feature of the prior year.
The impairment charge in UK Financial Services for the year ended March 31, 2009, has increased to 78bps up from 6bps for the year ended March 31, 2008. The impairment charge relating to the mortgage portfolio for the year ended March 31, 2009, was 20bps compared to 1bp for the year ended March 31, 2008. The balance of the increased impairment charge arises primarily in the property development lending portfolio.
The Group has redeployed significant resources from loan origination into active management of existing loans which has further strengthened its management of past due and impaired loans and is a key risk mitigant for the Group. This heightened focus on credit risk management has also provided the Group with a firm basis for assessing the adequacy of loan impairment provisions at March 31, 2009. The deterioration in general economic conditions, weaker consumer sentiment, reduced liquidity and declines in asset values in the property and construction sectors both in Ireland and the UK over the past year have impacted the increasing trend in impairment charges.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
Impaired loans increased from 679 million at March 31, 2007 to 1,062 million at March 31, 2008, or from 54bps to 78bps of total loans remaining below the 10 year average to March 31, 2007 of 96bps for the Group. The 54bps in the year ended March 31, 2007 represented the lowest point in this 10 year period. The increase in impaired loans from this low point in March 2007 is mainly due to the impact of higher interest rates, slowing economic growth in Ireland and the UK and softening in the property sector.
As expected against the backdrop of slowing economic activity, our impairment loss charge for the year has increased from a historically low level of 9 basis points (bps) to trend towards more normalised levels.
Total balance sheet provisions against loans and advances to customers were 596 million at March 31, 2008, compared to 428 million at March 31, 2007. Impairment provisions as a percentage of total loans were 44bps, the ratio being 3bps for the Group mortgage book and 76 bps for non-mortgage lending. We continue to maintain a satisfactory level of provisions, with a coverage ratio of 56% against impaired loans.
The Group impairment loss charge for the year ended March 31, 2008 amounted to 232 million or 17bps, when expressed as a percentage of average loans and advances to customers. The charge included 46 million (3bps) being 57% coverage on 81 million of exposures to SIVs that are classified as loans and advances to customers. The remaining charge of 186 million or 14bps (excluding SIVs) was 5bps higher than the charge for the year ended March 31, 2007. This higher charge reflected the impact of a slowing economic environment, consequent loan grade degradation and a reversion towards a more normalised level of impairment loss charge following a historically low charge in the year ended March 31, 2007.
At March 31, 2009 the Groups portfolio of available for sale (AFS) financial assets amounted to 26.9 billion (March 31, 2008: 29.3 billion).
At March 31, 2009, the Liquid Asset Portfolio comprises 25.2 billion of the total AFS financial assets; 2.5 billion in government bonds and 22.7 billion in senior bank debt. The other AFS assets of 1.7 billion are Asset Backed Securities (ABS) comprising Commercial Mortgage Backed Securities (CMBS) of 0.4 billion, Residential
Mortgage Backed Securities (RMBS) of 0.5 billion, Student loans, SME loans, Whole business ABS and syndication loans totaling 0.8 billion and Collateralised Debt Obligations (CDOs) of 40 million.
The Group expects to retain its AFS assets until maturity and, under IFRS, they are marked to market through reserves. The International Accounting Standards Board (IASB) made certain amendments to IAS 39 and IFRS 7 in October 2008 allowing the reclassification of financial assets from AFS to loans and advances to customers, where they meet the definition of loans and advances to customers at the date of reclassification. In particular, bonds which were originally AFS assets but are no longer considered to be traded in an active market would now meet the definition of loans and advances to customers and could be reclassified. The Group has reclassified 419 million of AFS assets to loans and advances to customers during the year ended March 31, 2009, as they are no longer traded in an active market. (See also note 21 in the F pages of this document.)
The receivership of Washington Mutual resulted in an impairment of 36 million in the AFS portfolio and this has been charged through the income statement in the year ended March 31, 2009. In addition the nationalisation and subsequent receivership of certain Icelandic banks has led to a 25 million impairment charge in the year to March 31, 2009.
The Group has no direct exposure to US subprime asset backed securities and a 7 million (March 31, 2008: 8 million) indirect exposure to this asset class through ABS CDOs.
The Group holds a portfolio of bonds for trading purposes typically taking positions in financial and corporate risk with ratings between investment grade AAA and BBB (average rating A). The value of the portfolio at March 31, 2009 was 125 million (March 31, 2008: 119 million). In the year ended March 31, 2009 this portfolio recorded a profit of 1 million and this is included in the income statement.
Profit after tax from associated undertakings and joint ventures was reduced from a profit of 46 million for the year ended March 31, 2008 to a loss of 42 million for the year ended March 31, 2009.
First Rate Exchange Services (FRES) a joint venture with the UK Post Office generated profit after tax of £31 million (39 million) in the year ended March 31, 2009 down from £34 million (47 million) in the year ended March 31, 2008, as a result of the poor economic environment and weaker Sterling impacting travel abroad from within the UK.
The Group has recorded a charge of 11 million in the year ended March 31, 2009 arising from a review of the goodwill and other intangible assets in Paul Capital Investments, LLC, a US private equity specialist in which the Group has an investment.
The Group has some venture capital investments. These investments reduced in value by 7 million in the year ended March 31, 2009, which is reflected in the income statement.
The Group has a stake in a property unit trust that holds an investment in a UK retail property. This interest, initially acquired by the Group to sell onto private investors, remains on the Groups balance sheet. The decline in the property market has led to a fall in the value of this interest, which is reflected in the income statement for the year ended March 31, 2009. The net impact on the profit attributable to stockholders from this transaction is a loss of 20 million which is reflected in the following lines in the income statement:
In the year to March 31, 2008, the Group disposed of 30 retail branches which yielded a profit on disposal of 33 million. Other properties that were sold in the normal course of business netted a profit on disposal of 6 million.
In the twelve months to March 31, 2007 the Group disposed of business activities realising a profit on disposal of 239 million (included in this is the disposal of Davy with a profit on disposal of 229 million). The Group also disposed of 36 retail branches in the Republic of Ireland in a sale and leaseback transaction realising a profit on disposal of 87 million, and realised a profit of 32 million from the disposal of the Bank of Ireland Head Office.
The following table sets forth a reconciliation of taxes chargeable at the statutory Irish corporation tax rate and the Groups effective tax rate for the three years ended March 31, 2009. The effective tax rate is obtained by dividing the tax charge by profit before tax.
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
The taxation credit for the Group was 41 million for year ended March 31, 2009 compared to a taxation charge of 229 million in the year ended March 31, 2008. The tax credit arises primarily due to a reduction in earnings across the Group and the life policyholder tax gross-up. The effective tax rate was a credit of 586% for the year ended March 31, 2009, compared to a charge of 11.8% for the year ended March 31, 2008.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
The effective tax rate was 11.8% in the year ended March 31, 2008 compared to 15.6% for the year ended March 31, 2007. The rate has decreased largely as a result of a reduction in the tax charge of BoI Life due to lower investment income earned and lower capital gains, together with the effect of the elimination of the investment return on treasury stock held on behalf of policyholders by BoI Life.
Retail Republic of Ireland incorporates the Branch Network, Mortgage, Consumer Banking, Business Banking and Private Banking activities in the Republic of Ireland.
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
The year ended March 31, 2009, was particularly challenging for the Retail businesses which were adversely impacted by the rapid and severe contraction in the Irish economy, the downturn in residential and commercial property markets, the effect of stock market weakness on the sale of investment products and the continued dislocation in financial markets.
Retail Republic of Ireland delivered profit before tax of 11 million in the year ended March 31, 2009, compared with 749 million in the year ended March 31, 2008.
The divisional performance for the year ended March 31, 2009, is not directly comparable to the prior year as the current year to March 31, 2009, includes costs associated with the costs of the downsizing initiativess of 9 million. In addition, the prior year numbers to March 31, 2008, include 33 million of a gain in relation to disposal of property compared to nil in the current year.
Net interest income increased by 1% in the year to March 31, 2009, to 1,452 million. However the year on year percentages for net interest income and other income are impacted by IFRS income classifications between net interest income and other income. Excluding the impact of both of these income classifications, net interest income decreased by 1% and other income decreased by 4%.
The net interest income reduction primarily reflects higher funding costs associated with market dislocation, tighter liability spreads due to competition and balance sheet mix.
In line with overall market trends, book growth of 5% in mortgages, 1% in business lending and a reduction of 7% in consumer lending resulted in the loan book at March 31, 2009, remaining unchanged compared to March 31, 2008. Deposit growth of 1% was achieved through competitive products, brand strength and distribution capability.
Other income was lower by 38% in the year ended March 31, 2009, compared to the prior year. This reduction primarily results from lower general insurance sales and higher claims costs, together with the impairment of investment properties and lower sales and commissions.
A strong cost performance was achieved with operating expenses reduced by 5% in the year ended March 31, 2009, compared to the prior year. Staff numbers were reduced significantly (down 6%) and all cost categories were managed very tightly through the year.
Reflecting the sharply disimproved economic environment, rising unemployment and severe weakness in the property and construction sector, the impairment charge for the year ended March 31, 2009 was 708 million or 129bps compared with 146 million or 28bps in the year ended March 31, 2008. Of the year on year increase of 562 million in the impairment charge, 10% relates to residential mortgages, 12% relates to consumer lending with the balance of 78% largely relating to the property and construction component of the business lending portfolio. The impairment charge on the mortgage portfolio was 23bps for the year ended March 31, 2009 compared with 1bp in the year ended March 31, 2008 and this increase largely reflects the impact of higher levels of unemployment and lower property prices. At March 31, 2009, 3 month arrears in the mortgage portfolio were 192bps at March 31, 2009 compared to 70bps at March 31, 2008. The impairment charge on consumer lending was 416bps for the year ended March 31, 2009 compared to 195bps in the prior year. Loan impairment on other lending, primarily property and construction was 210bps for the year ended March 31, 2009 compared to 33bps for the year ended March 31, 2008.
Share of associated undertakings and joint ventures represents the Groups stake in a property unit trust which holds an investment in a UK retail property.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
Retail Republic of Ireland PBT of 749 million for the year to March 31, 2008, compares to 785 million for the prior year. The comparison of divisional performance is affected by the prior year disposals of property. The year to March 31, 2008, includes 33 million in relation to the disposal of property, compared to 87 million in the prior year. Apart from these property disposals, Retail Republic of Ireland delivered PBT growth of 3% from 698 million to 716 million, in the year ended March 31, 2008.
Total operating income grew by 6% while total operating expenses also rose by 6%.
Net interest income increased by 9% with the impact of strong volume growth being partially offset by a lower net interest margin due to, loans growing faster than deposits, the impact of competition on residential mortgage margins and higher funding costs partly offset by improved resource margins.
The Business Banking market grew 16% in the year ended March 31, 2008. A weaker residential property market led to a significant slowdown in mortgage demand as the year progressed; nevertheless the mortgage book grew by 9% in the year ended March 31, 2008.
Other income fell by 3% principally due to lower profits on property disposals. Excluding the impact of the profit on disposal of property other income increased 10%, driven mainly by growth in credit card activity together with the benefit from the disposal of Mastercard shares which accounted for 2 percentage points of this increase.
Operating expenses grew by 6% year on year driven by salary and general inflation together with business growth, partially offset by efficiency gains cost/income ratio remained constant at 52%.
The impairment loss charge was 146 million (28bps of average loans) for the year ended March 31, 2008 compared to 63 million or 14bps for the year ended March 31, 2007. The impairment charge of 28bps remains within the 10 year range to March 31, 2007 of 14bps to 31bps for the Division. 50% of the increase in the impairment charge relates to a very small number of specific cases, while the balance is broadly based reflecting the impact of higher interest rates and the overall slowdown in the level of economic activity.
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
Profit before tax has fallen from 48 million in the year to March 31, 2008 to a loss of 107 million for the year ended March 31, 2009.
The reduction in profit before tax of 155 million is attributable to the following factors:
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
Profit before tax in Bank of Ireland Life, the Groups Life and Pension business decreased to 48 million in the year to March 31, 2008 from 167 million in the prior year.
The year on year comparison is directly impacted by a charge relating to the lower gross up of policyholder tax in the current year of 60 million compared to a credit of 19 million in the prior year. Also the outturn for March 31, 2008 includes an investment valuation variance charge of 50 million compared to a credit of 2 million in the prior year. Furthermore, consistent with increases in long term bond yields, the discount rate applied to future cash flows was increased by 0.5% to 8% in the year ended March 31, 2008; this negative impact has been significantly offset by an increase of 0.75% to 6.25% in the future growth rate assumption on unit linked assets, resulting in a net loss of 6 million.
Our Capital Markets Division comprises Corporate Banking, Global Markets, Asset Management and IBI Corporate Finance.
Capital Markets: Income statement
Financial year ended March 31, 2009 compared to financial year ended March 31, 2008
Capital Markets profit before tax of 161 million for the year ended March 31, 2009, reduced by 75% over the comparable prior period. The Divisional performance for the year ended March 31, 2009 is not directly comparable with the year ended March 31, 2008 as the current year other operating expenses include goodwill impairment of 304 million, relating to an impairment review of all goodwill and other intangible assets on the Group balance sheet. The carrying value of the US based asset management businesses, Guggenheim and Iridian, have been severely impacted by the downturn in the global asset management sector, falling assets under management and client redemptions. As a result the Group has recorded an impairment charge of 304 million in the year ended March 31, 2009.
In addition, costs associated with the downsizing initiatives of 9 million are included in the current year numbers to March 31, 2009.
Net interest income grew by 44% while other income fell by 363%. However the year on year percentages for net interest income and other income are impacted by IFRS income classifications between net interest income and other income. Excluding the impact of both of these income classifications, net interest income increased by 34% and other income fell by 29%.
Operating income at 1,245 million for the year ended March 31, 2009 is 11% higher than the prior year due to strong net interest income growth in Corporate Banking coupled with a strong performance in Global Markets. This growth is partly offset by lower other income particularly in the Asset Management Services business. The focus on cost management resulted in costs (before impairment of goodwill and other intangibles and costs related to the downsizing initiatives) of 377 million in the year ended March 31, 2009 which were 10% lower than the comparable prior period, mainly driven by a scale back in operations in asset management activities, tighter discretionary spend and lower variable compensation. The divisional cost/income ratio is 56% compared to 37% for the prior period.
Lending growth of 10% for the year ended March 31, 2009, reflects strong volume growth in the 6 months to September 30, 2008 whilst volumes at March 31, 2009, are broadly in line with the September 30, 2008 level. The first half volume growth resulted from the very strong pipeline developed in the second half of the prior financial year. Slowdown in new lending activity in the 6 months to March 31, 2009, reflects a selective approach to new business lending together with the impact of slower economic growth.
Through the Groups treasury offices in Dublin, London, Belfast and Bristol together with branches in Paris, Frankfurt and the US a significant pool of high quality corporate and institutional deposits was accessed, many arising from the Groups broader lending and treasury management relationships. Notwithstanding this distribution capability, deposits were down 10% year on year. Following the introduction of the Irish Government Guarantee, higher than usual deposit flows were experienced in the quarter to December 31, 2008. These inflows were unwound in January and February 2009 as a result of negative sentiment towards Ireland following rating agency actions and the nationalisation of Anglo Irish Bank.
Asset quality deteriorated with an impairment charge on loans and advances to customers for the year ended March 31, 2009, of 305 million (108bps) up from 48 million (19bps) for the year ended March 31, 2008. Of the increased impairment charge over the prior period, over 60% relates to some specific provisions together with grade degradation in the property lending portfolio.
In addition, within the AFS financial assets portfolio, an impairment charge of 76 million was incurred in the year ended March 31, 2009, including 36 million on the receivership of Washington Mutual and 25 million on the nationalisation and subsequent receivership of some Icelandic banks.
Corporate Banking delivered 565 million in operating profit before impairment charge in the year ended March 31, 2009, compared to 428 million in the prior year. This is driven by strong interest income growth of 30% reflecting volume growth and higher margins. Excluding costs associated with the downsizing initiatives, other operating expenses are 7% lower year on year, due to lower variable compensation and lower discretionary spend. Corporate Bankings profit before tax is 247 million for the year ended March 31, 2009, compared to 375 million in the prior year. The impairment charge, year on year, has increased from 48 million to 305 million in the year ended March 31, 2009, reflecting the current challenging economic conditions relative to the benign credit experience of the prior year. Over 60% of the increase relates to property, with the balance spread across the remaining portfolios
Global Markets, which delivers a comprehensive range of risk management products to the Group and its customer base, delivered operating profits before impairment charges of 309 million in the year ended March 31, 2009, which represents a 40% increase on the prior year. This profit growth was driven by growth in third party customer business, together with good positioning in a falling interest rate environment. Profit before tax after impairments of 246 million in the year to March 31, 2009, compares to 221 million in the prior year. The impairment charge of 63 million primarily relates to Washington Mutual (36 million) and Icelandic banks (25 million).
Asset Management Services reported a loss before tax of 326 million in the year ended March 31, 2009, compared to a profit of 66 million in the comparable prior period. The loss for the year to March 31, 2009, includes an impairment of goodwill and other intangibles assets charge of 304 million and costs related to the downsizing initiatives of 8 million. Lower income was due to reduced assets under management caused by weakness in global investment markets and some mandate losses, together with losses of 32 million associated with the collapse of Lehmans in September 2008.
Financial year ended March 31, 2008 compared to financial year ended March 31, 2007
PBT increased by 14% to 651 million for the year ended March 31, 2008. The Divisional performance for the year ended March 31, 2008 is not directly comparable with the year ended March 31, 2007 as the disposal of Davy in October 2006 impacts the year on year analysis; excluding the impact of Davy disposal PBT grew by 21% year on year.
Total operating income was 7% higher in the year ended March 31, 2008. Excluding the impact of the Davy disposal, total operating income grew by 17% to 1,120 million driven by strong lending volume growth in Corporate Banking and an excellent performance in our Global Markets business.
Net interest income grew by 54% while other income fell by 76%. However the year on year percentages for net interest income and other income are impacted by IFRS income classifications between net interest income and other income. The growth in net interest income was driven by strong volume growth and improved margins reflecting the mix of the loan book and improved pricing for risk in a number of loan portfolios. Other income growth was impacted by lower assets under management in Asset Management Services.
Total operating expenses decreased by 9% to 416 million; excluding the impact of the Davy disposal, operating expenses grew by 6%, the main drivers of growth being investment costs 1%, volume related growth 3% and inflation 2%.
Asset quality remains excellent with an impairment loss charge of 53 million or 21bps of average loans (7 million or 3 bps excluding the 46 million or 18bps impairment charge relating to SIVs), compared to 21 million or 10bps at March 31, 2007 and within the 10 year range to March 31, 2007 of 5bps to 26bps for the Division. We saw a significant improvement in the quality of the book with a lower level of specific cases requiring provision in the year ended March 31, 2008 compared to the prior year.
Corporate Banking has maintained its strong momentum with profit growth of 13% for the year ended March 31, 2008. The loan book increased by 22% between March 31, 2007 and March 31, 2008 across a broad range of portfolios.
Profit for the year ended March 31, 2008 increased by 54%. The performance of our markets / trading teams has been very strong in volatile market conditions and the result for the year has been positively impacted by above normal levels of trading profits of 30 million; the results also include a credit of 25 million arising from the widening in the credit spread of the Groups structured liabilities.
Our Asset Management businesses comprises Bank of Ireland Asset Management (BIAM), Bank of Ireland Securities Services (BoISS), Iridian Asset Management, Guggenheim Advisors (71.5%) and the 50% joint venture we established with private equity firm Paul Capital Partners in June 2006, Paul Capital Investments. Asset Management Services PBT for the year ended March 31, 2008 was 66 million, which is in line with the year ended March 31, 2007. Our fund administration business continued to drive strong growth in its niche activities while assets under management in BIAM are 33 billion at March 31, 2008 compared to 44 billion at March 31, 2007 weakness in global equity markets contributed significantly to this reduction.
UK Financial Services (UKFS) incorporates Business Banking, our Mortgage business and our Consumer Financial Services joint ventures with the UK Post Office.
UK Financial Services: Income Statement