The stormy AGM of Bank of Ireland is taking place right now at the Burlington Hotel in Dublin, and the old media is dominated by the decision of finance minister Michael Noonan to abstain from voting on CEO, Richie Boucher’s €843,000 package, covered in detail on here last week.There are other matters at BoI that should be causing us some concern. Last month, the bank published its annual report for 2012 and there was a total recognized loss for the year of €1.5bn and the detail of the accounts show that the BoI pension scheme now suffers from a €1.2bn deficit, up a stonking €0.8bn in 2012.
When a deficit arose at AIB last August 2012, the State shoveled €1.2bn of assets in to fill the hole. We are continuing to find out bits and bobs about the AIB pension bailout, we only recently found out it involved the transfer of €1.2bn of par value mortgages from EBS to the AIB pension fund. But there was uproar last year, because we have shoveled €21bn into AIB/EBS and its former senior executives who had been at the helm when the bank crashed, were still making out like bandits in retirement.
What about Bank of Ireland’s pension scheme? According to Minister Noonan last week, discussions are presently taking place in BoI to address the deficit. At least in the case of BoI, there will be close scrutiny on its decision-making, but the State remains exposed to the bank with its 15% shareholding and €1.5bn of preference shares.
The State is exposed to Bank of Ireland in other ways. The Central Bank has recently threatened banks who fail to meet targets to reach “sustainable solutions” to distressed mortgages will be forced to write down the value of the mortgage to the underlying property and with property prices down 50% from peak, such writedowns may be substantial. What happens if these write-downs eat into the banks’ capital bases and more capital is required. Who will pay?
A third matter of concern is the rumour, and no more than that, that Bank of Ireland may decide in the near future to pursue a rights issue to raise more capital from its shareholders,which include the North Americans who paid €1.1bn for 35% of BoI, buying shares at 10c a pop, shares which are worth 17c today. If BoI does pursue a rights issue, the State would be offered shares reflecting our 15% shareholding and if we declined, we would see our stake diluted. For the time being, Minister Noonan says that BoI has not indicated to the market or his Department that it is planning a rights issue, but if one were to be pursued, Minister Noonan would decide at that time whether or not to pour more money into Bank of Ireland.
So, although the headlines today will be dominated by Richie Rich’s pay packet, we may be facing multi billion decisions at Bank of Ireland imminently.
Information above is in part derived from parliamentary questions and responses last week.
Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the current deficit in the pension scheme of Bank of Ireland, in which he owns 15% of the shares and in which he owns a substantial preference shareholding; and if addressing the deficit may result in demands to the State to provide additional capital.
Minister for Finance, Michael Noonan: According to the 2012 Annual Report of Bank of Ireland which was published last month, the pension deficit at 31 December 2012 was €1.2bn, an increase of €0.8bn from 2011. The primary driver of this increase was a reduction in discount rates due to the significant fall in yields on high-quality corporate bonds rather than the underlying scheme assets which actually appreciated in value.
It is my understanding that the Chief Executive Officer of the bank is currently in discussions with his staff and the pension trustees regarding options to address the pension deficit. I will await the outcome of these discussions, however, I do not envisage the State having to inject more capital into the bank as a result.
Deputy Pearse Doherty: To ask the Minister for Finance if he will estimate the additional provision that will need to be made in the accounts of Bank of Ireland; if that Bank has to write down the value of non performing loans to the value of the underlying security; and if he will confirm that such a write-down will result in demands to the State to provide additional capital..
Minister for Finance, Michael Noonan: The Deputy may be aware that the rules relating to the correct level of provisioning are determined by the relevant accounting standards. It is the responsibility of the Bank’s Board of Directors to ensure that these rules, including the correct value of the underlying security for provisioning purposes, have been properly applied and that this is subject to independent external audit review. Nothing has been brought to my attention to suggest the Bank has not applied the rules correctly and accordingly I am not aware of any requirement for the State to provide additional capital.
Deputy Pearse Doherty: To ask the Minister for Finance his position regarding providing additional capital to Bank of Ireland, should that Bank decide to pursue a new rights issue.
Minister for Finance, Michael Noonan: Bank of Ireland has not indicated to the market or my Department that it has any intention to raise more capital from shareholders at this time. I can, however, confirm for the Deputy that, should Bank of Ireland decide to do so at some point in the future, I would naturally consider the options open to the State in this regard at that time. If the mechanism chosen was a rights issue, any decision in relation to exercise of rights attaching to our current holding would be made having assessed the best interests of the State.