Bank of Ireland. 1

Transcription

1 July 15, 2008 Bank of Ireland Primary Credit Analyst: Giles Edwards, London (44) ; Secondary Credit Analyst: Nigel Greenwood, London (44) ; Table Of Contents Major Rating Factors Rationale Outlook Profile: Top Tier Universal Bank At Home, Multi-Niche Elsewhere Support And Ownership Strategy: Focus On Managing The Balance Sheet Through A Difficult Period Risk Profile And Management: Irish And U.K. Property Markets Are Of Key Importance Profitability: Diversity And Cost Initiatives Should Support Resilience Capital: Improved, But Still Relatively Weak 1 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P's permission. See Terms of Use/Disclaimer on the last page

2 Major Rating Factors Strengths: Strong domestic franchise Good business diversity Consistent and good earnings track record Clear strategic focus Counterparty Credit Rating A+/Stable/A-1 Weaknesses: Significant exposure to property, construction, and specialist mortgage-related lending in the Republic of Ireland and the U.K. Relatively weak capitalization Rationale The ratings on Bank of Ireland (the trading name of The Governor and Company of the Bank of Ireland; BOI) reflect its very strong market position in Ireland, good business diversity, and sound track record. BOI's operations in the U.K. and selected international capital markets activities help to lessen the reliance on Ireland. Capitalization remains relatively weak, but is on an improving trend. Asset quality remains good across all of BOI's activities, helped by a strong risk management culture, but is now showing early signs of deterioration toward cyclical averages. BOI faces weaker near-term earnings prospects arising from the deterioration in the economic environment in Ireland and the U.K., but it is expected to remain solidly profitable. With total reported assets of 197 billion ($310 billion) at March 31, 2008, BOI ranks alongside its main competitor, Allied Irish Banks PLC (A+/Stable/A-1) as the leading player in Irish financial services. After years of buoyant economic growth, the immediate prospects on the domestic front are less bright. Competition has also become more meaningful. However, Standard & Poor's Ratings Services considers that BOI's strong domestic franchise, good long-term prospects for the Irish economy, and the bank's credible niche strategy elsewhere offer it a good future. Management's near-term priority is to balance the desire to grow the U.K. business and to take advantage of the better risk-adjusted returns now available with ongoing moves to further enhance capitalization and the funding base. BOI's U.K. division (UKFS) provides some diversity and represents one-quarter of group pretax profit. This division comprises four relatively distinct businesses, most with a modest market position, but earnings progress has been sound. The balance of international earnings comes from BOI's niche capital markets activities. A key strategic initiative, which appears plausible, is to source at least one-half of group profits from non-irish operations (currently 44%, up from 41% in full-year 2007). Profitability is good, core earnings represented 1.4% of average risk-weighted assets (RWAs) in the year to March 31, The now complete Strategic Transformation Programme (STP) has helped to move efficiency more in line with peers--the reported underlying cost-to-income ratio is now 51%, having been nearer to 60% four years ago. Combined with continued focus on cost control, this improved operating model also leaves BOI better placed to Standard & Poor s RatingsDirect July 15,

3 withstand the now weaker operating environment. Efficiency has the potential to move toward 45% over time if the international operations continue to grow and further efficiency-led investments in technology bear fruit. BOI's loan portfolio is less heavily weighted toward property and construction (P&C) related lending than some Irish peers, but it is nevertheless overweight in P&C when compared with banks in other developed countries. BOI's P&C lending is equally split between Ireland and the U.K., and represented 26% of BOI's total loan portfolio at March 31, Standard & Poor's continues to view broadly favorably BOI's large book of residential mortgages (45% of its loan portfolio). However, similar to Irish peers, a material proportion of new lending, both in the U.K. and Ireland, has been at high loan-to-value (LTV) ratios. BOI has also been active in the specialist segment (40% of its residential mortgages). Asset quality metrics remain very good, helped by a strong risk management culture, but prospects are less bright as a result of the economic slowdown and the falling values in the Irish and U.K. property markets. We expect asset quality to remain manageable through this cyclical downturn, however. Slower prospective asset growth, compared with growth typically in excess of 20% over the past several years, will lessen pressures on BOI's liquidity and capitalization. Continued focus on deposit gathering, combined with the efforts of recent years to materially lengthen tenor and diversity of wholesale funding have left BOI reasonably placed to manage the difficult funding environment. With a ratio of adjusted total equity (ATE) to RWA of 5.3% at March 31, 2008, BOI's capitalization is weaker than many peers, but is on an upward trend. Outlook The stable outlook reflects Standard & Poor's view that BOI's strong domestic franchise, good long-term prospects for the Irish economy, and the bank's credible multi-niche strategy overseas offer it a bright future. BOI's credit risk profile presents the potential for performance pressures in the coming 18 months, but we expect the bank to remain solidly profitable through the downturn, despite increased credit costs. Positive rating action could result if BOI's performance through the downturn exceeds our expectations. In particular, we are looking for continued sound revenue growth and franchise strengthening in the non-irish businesses, and asset-quality measures to remain satisfactory. Continued improvement in the bank's capitalization and funding profile would also strengthen the case for an upgrade. Negative rating action would most likely be prompted by a severe deterioration in asset quality, which materially impaired earnings. Other drivers would include a weakening of funding profile and/or capitalization. Profile: Top Tier Universal Bank At Home, Multi-Niche Elsewhere BOI comprises the following divisions: Retail Republic of Ireland. This includes all the group's branch banking and direct banking operations in Ireland. Market share across product lines is excellent. Bank of Ireland Life. Covers both branch and broker distribution. BOI has a strong position in the Irish life assurance market. UKFS. This division brings together direct mortgage lending via the Bristol & West and Bank of Ireland brands, BOI's business banking and retail operations in Great Britain and Northern Ireland, and two joint ventures with the U.K. Post Office, namely First Rate Exchange Services (FRES) and Post Office Financial Services (POFS). 3

4 BOI's U.K. mortgage market share is just over 2%. Capital Markets. This includes Corporate Banking, Global Markets, Asset Management Services (AMS), and Corporate Finance. International activities include leveraged acquisition finance, project finance, lending to major multinational corporates, and institutional fund management services. Group Centre, including earnings on surplus capital and unallocated central overheads. Earnings are well spread by division (see chart 1) and by geography: Ireland (56%), U.K. (34%), and the rest of world (10%). Chart 1 Support And Ownership The ratings on BOI do not include any uplift for external support. We classify Ireland as a "supportive" country, where the government relies on prudential policies to maintain a sound banking and building society sector. We give the credit ratings on private sector banks in supportive countries no uplift for potential external extraordinary support above the stand-alone credit quality. BOI is an Irish company incorporated under royal charter in Its full name registered in its charter is The Governor and Company of the Bank of Ireland. Its shares are listed on the Dublin, London, and New York stock Standard & Poor s RatingsDirect July 15,

5 exchanges. BOI is regulated and supervised by the Financial Regulator, which also supervises BOI's life assurance subsidiary. Strategy: Focus On Managing The Balance Sheet Through A Difficult Period BOI's strategic focus remains consistent and clear. That is, management has positioned the bank to focus on its leading position in Ireland, growth in the U.K., and useful portfolio of niche international businesses. Two key features of the strategy are the intention to increase its international source of group earnings to more than one-half and to drive the benefits of its common manufacturing platform in order to reduce the cost-to-income ratio to about 45%. Both aims appear plausible in the medium term. In the meantime, however, management focus will be on the competing challenges of continuing to invest and protect the Republic of Ireland (ROI) franchise while keeping a close eye on cost control, managing asset quality, and the bottom line. Growth opportunities remain quite good outside of the ROI, but the extent to which BOI seizes them will be determined by its success in growing deposits, the degree to which it focuses resources on its core domestic franchise, and the broader desire to maintain a balanced funding profile and enhance capitalization. BOI's business profile is underpinned by its very strong domestic franchise. While BOI has benefited from sustained growth in the Irish economy, competition has become more capable. The STP was a timely initiative, not only because it helps to achieve a lower cost operating model by creating a common manufacturing platform, but it also recognized that strong market share cannot be taken for granted. Retail Republic of Ireland's cost-to-income ratio has improved to 53% from more than 60% as a result. Scope remains for further enhancements as integration moves from an organizational to a productivity (people, systems and technology) focus. However, domestic earnings growth will be constrained in the near term by much slower loan growth, static or slightly weaker interest margins, and loan losses that are now rising from cyclical lows. BOI's franchise is inevitably weaker in Great Britain, although it ranks as one of the larger banks in Northern Ireland. Taken together, UKFS has a collection of several meaningful, but small, businesses which, to varying degrees, can build upon BOI's expertise in the ROI. UKFS income and profits show an encouraging trend since 2005, having previously been a mixed performer (see chart 2). In sterling terms, profit before tax rose 18% to 353 million in the year to March 31, Business Banking (which includes all activities in Northern Ireland) represents about one-half of this amount and recorded another year of strong growth--up 21%--driven by the continued strong expansion of lending in Great Britain. Growth in mortgage lending profit, about 40% of the total, was again flat, having been affected by margin pressures. UKFS offers good medium-term growth prospects as BOI is credible in its chosen niches and it remains a small player in a large market. However, similar to Ireland, near-term prospects for both these property-focused businesses are mixed--margins are improving, but loan losses are also rising, although from a very low base. The balance of divisional profit comes from Consumer Financial Services--principally FRES--but with the start-up consumer financial services joint venture with the U.K. Post Office now also in profit and likely to maintain an upward earnings trajectory. It also offers additional value to BOI as a source of noninterest income and stable, high-quality deposits. 5

6 Chart 2 Capital Markets is an important source of earnings to the group and, while focusing on just a few areas of core expertise, offers useful diversification to the bank's otherwise strong focus on the ROI and UK. Exceptional items make year on year comparisons of reported headline profitability difficult, but underlying profits (stripping out disposals, reclassifications, modest structured investment vehicles (SIVs), write-downs, and revaluation of own debt) saw good growth, rising 24%. Corporate banking, about 55% of divisional profit, remains the key driver and comprises a reasonable range of income sources. Global Markets increased its contribution to divisional profit to about one-third, the result of strong demand for risk management products from BOI's customer base and modest trading gains. AMS, which had another tough year and appears to have limited growth prospects, generated the remainder. Risk Profile And Management: Irish And U.K. Property Markets Are Of Key Importance BOI's risk profile is dominated by property-related credit risk in the U.K and Ireland, two markets which have been buoyant for the last decade or more. The bank also has a notable presence in the U.K. specialist mortgage market, Standard & Poor s RatingsDirect July 15,

7 although unlike some peers it has yet to see a material increase in arrears. Standard & Poor's takes comfort from BOI's relatively high mortgage weighting, its strong risk management focus, and excellent track record. The ongoing downturn in these property markets will test the strength of BOI's underwriting practices and risk management decisions and the bank's resilience to weak market conditions. Enterprise risk management The enterprise risk management of BOI is strong. BOI has a solid risk management framework with good stature within the organization. The Chief Risk Officer reports directly to the CEO and the involvement of executive management in the governance process is high. Credit risk BOI's property-related credit exposures are an area of potential concern given the weakening in the Irish and U.K. property sectors, to date there is no evidence of a material weakening in BOI's exposures. Standard & Poor's continues to view broadly favorably the fact that almost one-half of BOI's loan book relates to typically lower risk residential mortgage loans. However, similar to Irish peers, a material proportion of new mortgage lending, both in the U.K. and Ireland, has been at high LTV ratios and BOI has also been active in the specialist segment. The impact of weaker market conditions on BOI's treasury assets has been minimal and outstanding exposure to subprime assets and SIVs is very small. Overall, BOI's asset-quality indicators remain strong, but there are some signs of deterioration, particularly in the ROI, and loan losses, which tend to lag trends in the economic cycle, are expected to rise. The bank reported an impairment charge of 17 basis points (bps) in the year to March , a rise of eight bps, of which three bps related to exposures to SIVs. At that date, gross impaired loans represented 0.78% of customer advances, up from 0.54% the year before. While these measures still point to strong asset quality, the turn in the economic and credit cycle is clear and loan loss provisions will inevitably rise, driven by falling collateral values and higher arrears. The bank expects its impairment charge to rise to about 25 basis points in the year to March 31, While Standard & Poor's has some residual concerns about aspects of the loan book--higher LTV mortgages and the P&C bias to commercial lending--we expect asset quality to be manageable through this cyclical downturn. 7

8 Chart 3 BOI's loan book has been growing rapidly. Total customer loans stood at 136 billion on March 31, 2008, double the level at March 31, However, the rate of growth eased to 8.6% through the last financial year and can be expected to slow further henceforth, reflecting market conditions and the bank's renewed focus on maintaining a balanced funding profile. This more modest pace of growth is welcomed. The focus is now primarily on the performance of prominent property-related books. BOI's credit profile has evolved in recent years, with a higher focus on P&C lending (like its Irish competitors), increased international corporate lending, expansion into segments of the U.K. business banking markets, and a shift in the profile of its domestic and U.K. mortgage loan books toward buy-to-let (BTL) and, to a lesser degree, self-certified lending. Irish lending, in particular, is underpinned by BOI's strong knowledge and access to its customer base. Customer loans are split broadly equally between the ROI and the U.K., with the remainder (about 10% of the total) being international. The loan book is dominated by residential mortgages at 45% of total loans (see chart 4). This 61 billion mortgage book is split 55:45 U.K. and Ireland. To date, the book has continued to perform very well, with arrears in both markets barely rising year on year, despite their previous very low levels. At March 31, 2008, three months arrears were 0.60% on the U.K. book (compared with the U.K. sector average of 1.10% at Dec. 31, 2007) and 0.70% on the Irish book. Lending criteria and pricing are now hardening rapidly in the U.K., but also in Ireland. However, there are areas of concern: A material proportion of new lending, both in the U.K. and Ireland is high LTV lending, similar to peers. BOI states that in Ireland 5% of new advances in 2007/2008 and 3% of its book relates to 100% LTV product. Standard & Poor s RatingsDirect July 15,

9 BOI states that the average LTV of new lending is about 70% across the book, which is quite high. 18% of the U.K. book is self-cert and 31% is BTL. 31% of the Irish book is BTL. Houses prices are now falling in both countries, with prices now about 10% off their peak in Ireland and 5% in the U.K. Chart 4 Property-related lending, which is equally split between Ireland and the U.K., has steadily grown in importance to represent 26% of total loans, from 15% at March 31, Of this 36 billion book, BOI states that 37% is development related, a level below some Irish peers. This proportion is higher within the property finance unit of Capital Markets, which accounts for about one-quarter of the total. LTVs are, however, satisfactory after taking into account the fact that a number of deals benefit from recourse to principals or factor in the broader relationship with the bank. BOI has also become more active in leveraged acquisition finance. This book is well spread by geography and industry sector with quite small average deals, written on a buy and hold basis and with a heavy bias toward senior debt. Prospects appear challenging, but there is no major evidence of weakening in the profile of credit grades. BOI's 56% impairment provision coverage ratio, although less than some peers, remains satisfactory given the high level of collateral held against loans. Market risk Market risk appetite is modest, characterized by a small amount of proprietary interest rate and foreign exchange (FX) risk taken using vanilla instruments in the most liquid markets. Market risk is managed using a range of metrics, including 99%, one-day, value-at-risk (VAR) limits, stress tests, backtesting, and scenario analysis. This is 9

10 supplemented by further controls, including position limits and loss tolerances. In the year to March 31, 2008, the average traded VAR was 2.3 million for interest rate risk and 1.0 million for FX risk, with peak VAR twice the size for both risks. This risk exposure is broadly consistent with the previous year. BOI also runs a degree of structural FX risk, arising principally from its net investment in its sterling-based U.K. businesses. The result is that a stronger euro reduces the value of these assets, with the change being taken to reserves. In practice, euro appreciation resulted in a 712 million negative impact on reserves in the year to March 31, However, because BOI matches the currency composition of its capital with that of its RWAs, regulatory capital ratios have a low sensitivity to these exchange rate movements. Funding and liquidity risk BOI's funding profile became increasingly wholesale reliant following several years of high asset growth and the disposal of its U.K. branch-based deposit franchise in However, the combination of slower loan growth and an influx of deposits (up 19%), led a welcome reversal of the trend in the last financial year. The wholesale funding ratio (41% of total assets) and the loan-to-deposit ratio both improved as a result. Continued focus on deposit gathering, combined with the efforts of recent years to materially lengthen tenor and diversity of wholesale funding and the advent of the strict Irish regulatory liquidity regime in mid 2007 all leave BOI reasonably placed to manage the difficult funding environment. At March 31, 2008, BOI's loans-to-deposits ratio was 157%, which remains quite high when compared with some peers in Western Europe, but a marked improvement on a year before (174%) and now more in line with other U.K. and Irish banks (see chart 5). At this date, more than 82% of the loan book was funded by customer deposits and term funding with a maturity profile greater than one year. While two-thirds of wholesale funding matures within a year, resulting in a degree of funding risk, BOI has proven itself willing and able to manage this risk--for example, through deposit raising and term funding private placements--despite the dislocated credit markets. BOI's contingent liquidity strategy has strengthened as a result of enhancements to asset liability management over the past two years and the move to a mismatch approach regulatory liquidity regime. The bank now holds a significant buffer of liquid assets, is able to manufacture a further significant pool of collateral, and also has access to the European Central Bank, Bank of England, and Federal Reserve facilities (unused at year end). Standard & Poor s RatingsDirect July 15,

11 Chart 5 BOI's core customer deposit base, 86 billion, benefits from BOI's strong domestic franchise, relationship-led deposit gathering from its U.K. business banking clients, and striking success in attracting deposits from corporate and institutional clients, particularly over the past year. A small, but growing, part of the deposit base comes from its joint venture with the U.K. Post Office, where deposits now total 3.3 billion, although in a limited number of products. In recent years, BOI has significantly diversified its funding sources, lengthened tenor, and decreased interbank funding usage (see chart 6). The use of covered bonds and to a lesser extent securitization has been part of this strategy, although it has been by no means predicated on this. BOI's domestic residential mortgage portfolio (excluding the mortgage book of ICS, a building society subsidiary that sources mortgages directly and through brokers) is held in a wholly owned subsidiary, Bank of Ireland Mortgage Bank. This holds its own banking license and is registered as a designated mortgage credit institution, which is able to issue Irish covered bonds. 11

12 Chart 6 Profitability: Diversity And Cost Initiatives Should Support Resilience BOI's track record is very good, but earnings growth prospects are less promising, reflecting the likely impact of slower loan growth, higher funding costs, and rising impairment charges. However, the diversity of BOI's activities should still underpin sound earnings, while the benefits of BOI's enhanced cost focus and strong risk management should become more apparent. It should be noted that equity market movements (which affect the life and pensions business as well as AMS) and exchange-rate changes can affect reported profits from year to year. BOI reported underlying profit before tax of 1,794 million in the year to March 31, a 6% rise on the year before--supported by healthy performance across all business lines. BOI's risk-adjusted profitability, as measured by core earnings, compares satisfactorily with peers (see chart 7). Profitability continues to benefit from historically low impairment losses, although these doubled in the past year to 232 million or 17 bps and are expected to be a more material factor henceforth. Preprovision operating profits ( 2.2 billion in 2007/2008) offer a decent cushion against this, however. Standard & Poor s RatingsDirect July 15,

13 Chart 7 Margin pressure remains an issue, although the pace of decline has eased. BOI's reported margin, which excludes the impact of IAS39, fell three basis points to 1.66% in the past year. This compares with 1.94% in the year to March 31, The margin decline is in part due to asset mix (a greater proportion of mortgages and lower yielding treasury assets), but also pressure arising from the increased cost of wholesale and retail funding which has not been fully offset by the improvement in margins on new lending. No further material decline is expected. Noninterest income remains supportive, representing 36% of total income. BOI Life and BOI's useful domestic private banking franchise are beneficial in this respect, and growth in the U.K. joint venture with the Post Office could make a more meaningful contribution here over time. The role for market-sensitive income remains limited. The prospects for growth in noninterest income are somewhat limited in the short term due to the reduced investor appetite for investment products arising from the weakness in financial markets, and the transaction Bank of Ireland Life completed to reinsure a significant part of the annuity book, which will reduce risk, but also net premium income. BOI's reported underlying cost-to-income ratio, 51%, has now moved into line with peers having been previously much higher (see chart 8). When management established the STP in 2004, it targeted a 50.0% ratio by 2009, which Standard & Poor's considers to be better reflective of BOI's profile. This level remains achievable, although pushing down through the 50% threshold will likely be delayed by the tougher operating environment. 13

14 Chart 8 BOI had a modest exposure to those assets most severely affected by the market dislocation. In the last financial year it took a provision of 45 million against SIVs through the income statement and adverse mark-to-market movement on its asset-backed securities portfolio of about 150 million through reserves. The remaining exposure of 36 million (net) to SIVs, 43 million to collateralized debt obligations and 127 million to monolines is very manageable. Capital: Improved, But Still Relatively Weak Standard & Poor's considers BOI's capitalization to be relatively weak, but management initiatives and the expectation of much slower loan growth should ensure a gradual improvement in these measures henceforth. At March 31, 2008, BOI's ratio of ATE to RWAs was 5.31%. This represents an improvement on a low of 4.4% at March 31, 2006, but is still weaker than many peers (see chart 9). In October 2007, BOI completed a 400 million embedded value securities issue, which references the emergence of value in force (VIF) from the Life business. The realization of the VIF has the effect of increasing Tier 1, but has no impact on total capital or ATE. BOI's equity Tier 1 ratio improved by 40 basis points as a result. Standard & Poor s RatingsDirect July 15,

15 Chart 9 BOI's capitalization improved in owing to a combination of a reduction in the pension deficit, sale, and leaseback of some branches, and the sale of Davy's (a stockbroking and private client wealth management unit). The nonequity content of BOI's Tier 1 capital is relatively high, being 32% of Tier 1 capital at March 31, 2008, but management is expected to continue to gradually reduce this level. BOI's reported equity Tier 1 ratio on a Basel II basis at this date was 5.7% (6.0% on an internationally comparable basis as the Irish Regulator, unusually, deducts the proposed dividend from capital), against management's recently revised target of 5.5%-6.5%. The previous target was 5.5%-6.0% (Basel I basis). The main deduction from ATE relates to the proportion of group capital attributable to the assurance operations, and is not immediately available to support banking activities. In addition, the impact of BOI's mortgage securitization is also taken into account. Standard & Poor's notes that Bank of Ireland Life is well capitalized on a stand-alone basis--it focuses on unit-linked business where the equity risk is held by the investor rather than the life company, and that its market position is sound. Table 1 Bank of Ireland Balance Sheet Statistics --Year ended March 31-- Breakdown as a % of assets (adj.) (Mil. ) 2007* * Assets Cash and money market instruments 9,893 7,572 12,476 6,

16 Table 1 Bank of Ireland Balance Sheet Statistics (cont.) Securities 40,345 46,687 41,000 21, Trading securities (marked to market) 11,028 13,227 2,207 N.A N.A. Nontrading securities 29,317 33,460 38,793 21, Loans to banks (net) 0 0 (1) 2, Customer loans (gross) 136, , ,605 80, Other consumer loans N.A. N.A. 0 76,360 N.A. N.A All other loans 136, , ,605 3, Loan loss reserves Customer loans (net) 135, , ,246 79, Earning assets 180, , , , Equity interests/participations (nonfinancial) Inv. in unconsolidated subsidiaries (financial co.) Intangibles (nonservicing) Fixed assets 2,104 1,807 1,667 1, Derivatives credit amount 4,568 2, N.A N.A. Accrued receivables 1,831 1,990 1,819 1, All other assets 1,994 1,818 2,588 12, Total reported assets 197, , , , Less insurance statutory funds (8,529) Less nonservicing intangibles+ I/O strips (863) (943) (965) (316) (0.44) (0.50) (0.60) (0.27) Adjusted assets 196, , , , Breakdown as a % of liabilities + equity 2007* * Liabilities Total deposits 98,615 86,535 84,095 80, Noncore deposits 12,381 14,258 22,385 20, Core/customer deposits 86,234 72,277 61,710 60, Repurchase agreements 1,749 6,147 9,927 N.A N.A. Other borrowings 65,441 63,837 40,427 22, Other liabilities 21,673 21,755 19,417 16, Total liabilities 187, , , , Total shareholders' equity 9,956 10,539 8,488 7, Limited life preferred and quasi equity Preferred stock and other capital 3,060 3,319 2,709 1, Minority interest-equity Common shareholders' equity (reported) 6,702 7,004 5,556 4, Share capital and surplus 1,403 1,382 1,374 1, Revaluation reserve (289) (0.15) Reserves (incl. inflation revaluations) (111) (0.06) Retained profits 5,670 4,672 3,330 2, Other equity Standard & Poor s RatingsDirect July 15,

17 Table 1 Bank of Ireland Balance Sheet Statistics (cont.) Memo: Dividends (not yet distributed) (386) (376) (325) N.A. N.A. Total liabilities and equity 197, , , , Equity Reconciliation Table Common shareholders' equity (reported) 6,702 7,004 5,556 4,930 + Minority Interest (equity) Dividends (not yet distributed) (386) (376) (325) 0 - Revaluation reserves 289 (414) (428) (234) - Nonservicing Intangibles (863) (943) (965) (316) - Other equity adjustments N.A. Adjusted common equity 5,752 5,305 3,883 4,442 + Admissible Prefs and hybrids 1,898 1,751 1,281 1,466 - Equity in Unconsolidated Subsidiaries (70) (73) (75) (61) - Adjustment for Securitized Assets (903) (1,010) (795) 0 Adjusted total equity 6,677 5,973 4,294 5,847 *Year-end data for 2007 is at March 31, Year-end data for 2006 is at March 31, The same follows for previous years. N.A.--Not available. Table 2 Bank of Ireland Profit And Loss Statement Statistics --Year ended March 31-- Adj. avg. assets (%) (Mil. ) 2007* * Profitability Interest income 10,146 7,915 5,757 4, Interest expense 7,134 5,380 3,647 2, Net interest income 3,012 2,535 2,110 1, Operating noninterest income 1,239 1,355 1,436 1, Fees and commissions , Equity in earnings of unconsolidated subsidiaries Trading gains (270) (64) (0.14) (0.04) Other market-sensitive income 26 4 (14) N.A (0.01) N.A. Net insurance income Other noninterest income Operating revenues 4,251 3,890 3,546 3, Noninterest expenses 2,157 2,159 2,020 1, Personnel expenses 1,235 1,244 1,167 1, Other general and administrative expense Depreciation Net operating income before loss provisions 2,094 1,731 1,526 1, Credit loss provisions (net new) (21) (0.02) Net operating income after loss provisions 1,862 1,628 1,423 1, Nonrecurring/special income Nonrecurring/special expense Amortization of goodwill and intangibles

18 Table 2 Bank of Ireland Profit And Loss Statement Statistics(cont.) Pretax profit 1,933 1,958 1,599 1, Tax expense/credit Net income before minority interest 1,704 1,652 1,296 1, Minority interest in consolidated subsidiaries 5 1 (9) (1) (0.01) 0.00 Net income before extraordinaries 1,699 1,651 1,305 1, Net income after extraordinaries 1,699 1,651 1,305 1, Core Earnings Reconciliation Net Income (before Minority Interest) 1,704 1,652 1,296 1,080 - Nonrecurring/Special Income (71) (330) (176) (5) + Nonrecurring/Special Expense /- Tax Impact of Adjustments Amortization/ Impairment of Goodwill/ Intangibles Preferred dividends (8) +/- Other earnings adjustments Core earnings 1,641 1,380 1,167 1, * Asset quality Nonperforming assets 1, Nonaccrual loans 1, Net charge-offs Average balance sheet Average customer loans 130, ,717 93,075 70,148 Average earning assets 178, , ,989 95,226 Average assets 193, , , ,964 Average total deposits 92,575 84,564 75,475 65,581 Average interest-bearing liabilities 161, , ,907 86,289 Average common equity 6,853 6,280 5,243 4,664 Average adjusted assets 192, , , ,984 Other data Total assets under management 33,000 43,700 45,100 46,900 Off-balance-sheet credit equivalents 39,796 38,516 33,003 31,757 **Year-end data for 2007 is at March 31, Year-end data for 2006 is at March 31, The same follows for previous years. N.A.--Not available. Table 3 Bank of Ireland Ratio Analysis --Year ended March * ANNUAL GROWTH (%) Customer loans (gross) Loss reserves (32.42) (1.67) Adjusted assets Standard & Poor s RatingsDirect July 15,

19 Table 3 Bank of Ireland Ratio Analysis(cont.) Customer deposits Total equity (5.53) Operating revenues Noninterest expense (0.09) (0.24) Net operating income before provisions (3.79) 5.54 Loan loss provisions N.M. (124.42) (14.00) Net operating income after provisions Pretax profit (1.28) Net income PROFITABILITY (%) Interest margin analysis 2007* Net interest income (taxable equiv.)/avg. earning assets Net interest spread Interest income (taxable equiv.)/avg. earning assets Interest income on loans/avg. total loans Interest expense/avg. interest-bearing liabilities Revenue analysis Net interest income/revenues Fee income/revenues Market-sensitive income/revenues (5.74) (1.54) Noninterest income/revenues Personnel expense/revenues Noninterest expense/revenues Noninterest expense/revenues less investment gains Net operating income before provision/revenues Net operating income after provisions/revenues New loan loss provisions/revenues (0.65) 2.86 Net nonrecurring/abnormal income/revenues (3.23) Pretax profit/revenues Tax/pretax profit Core Earnings/Revenues * Other returns Pretax profit/avg. risk assets (%) Revenues/avg. risk assets (%) Net operating income before LLP/LLP ( ) Net operating income before loss provisions/avg. risk assets (%) Net operating income after loss provisions/avg. risk assets (%) Net income before minority interest/avg. adjusted assets Net income/employee ( ) 106, ,561 80,049 63,679 54,

20 Table 3 Bank of Ireland Ratio Analysis(cont.) Non-interest expenses/average adjusted assets Personnel expense/employee ( ) 77,062 77,984 72,082 59,906 54,879 Cash earnings/avg. tang. common equity (ROE) (%) Core earnings/average risk-weighted assets Core earnings/average adjusted assets Core earnings/ Average ACE (ROE) * FUNDING AND LIQUIDITY (%) Customer deposits/funding base Total loans/customer deposits Total loans/customer deposits + long-term funds Customer loans (net)/assets (adj.) * CAPITALIZATION (%) Adjusted common equity/risk assets Internal capital generation/prior year's equity Tier 1 capital ratio Regulatory total capital ratio Adjusted total equity/adjusted assets Adjusted total equity/adjusted assets + securitizations Adjusted total equity/risk assets Adjusted total equity plus LLR (specific)/customer loans (gross) Common dividend payout ratio * ASSET QUALITY (%) New loan loss provisions/avg. customer loans (net) (0.03) 0.15 Net charge-offs/avg. customer loans (net) Loan loss reserves/customer loans (gross) Credit-loss reserves/risk assets Nonperforming assets (NPA)/customer loans + ORE NPA (excl. delinquencies)/customer loans + ORE Net NPA/customer loans (net) + ORE (0.14) NPA (net specifics)/customer loans (net specifics) (0.14) Loan loss reserves/npa (gross) *Year-end data for 2007 is at March 31, Year-end data for 2006 is at March 31, The same follows for previous years. N.M.--Not meaningful. Ratings Detail (As Of July 15, 2008)* Bank of Ireland Counterparty Credit Rating Certificate Of Deposit Commercial Paper A-1 A+/Stable/A-1 A+/A-1 Standard & Poor s RatingsDirect July 15,

21 Ratings Detail (As Of July 15, 2008)*(cont.) Junior Subordinated Foreign Currency A- Preferred Stock A- Senior Unsecured A+ Subordinated Counterparty Credit Ratings History 30-Jun Jul Jan-1998 Sovereign Rating Ireland (Republic of) A A+/Stable/A-1 A+/Positive/A-1 A+/Stable/A-1 AAA/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com 21

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