TRADING UPDATE:BANK OF Ireland's shares slumped the most in 19 years after it surprised investors by halving dividends on foot of falling profits.
The bank fell 14 per cent, its biggest one-day decline since July 1989, after cutting its half- and full-year payouts to shareholders in an effort to strengthen its capital which protects the bank against unforeseen losses.
The closing price of €3.96, its lowest level since 1997, valued the bank at just under €4 billion as lingering fears about the global banking sector added to the share-price decline yesterday.
The bank has shed €14 billion in value since its share price peaked at €18.65 in February 2007.
Bank of Ireland is departing from its policy of paying between 40 per cent and 45 per cent of annual profits in dividends as it expects bad debts to rise by as much as fivefold over the next 18 months from the charge in the year to March due to deteriorating economic conditions and the international financial turmoil.
The bank's unprecedented dividend cut, which reverses its decision in May not to reduce dividends, will save about €315 million this year and boost its equity tier-one capital ratio - the reserve banks keep to protect depositors against potential losses.
Bank of Ireland said in a trading statement that the move would maintain the ratio at about 6 per cent, within its target of 5.5 per cent to 6.5 per cent and at the desirable level expected in the UK banking sector.
The bank said trading conditions had become "increasingly difficult with slowing economies and the worsening global financial dislocation" in the past six months and particularly in recent months.
It has revised the forecast on its bad-debt charge to rise to about 0.45 per cent of loans, or about €643 million, for the year to the end of March 2009, from its forecast of 0.28 per cent in July.
It expects bad debts to rise in the year to March 2010 to between 0.6 per cent and 0.9 per cent of loans, or between €850 million and €1.3 billion.
"Significant challenges are expected to continue against a deteriorating economic background," the bank said, explaining the surge in its impaired loans.
It said that, against the backdrop of rising bad debts, it would slow lending and reduce the full-year dividend by 50 per cent, starting with the interim dividend.
This would mean an interim payout of 12.1 cent per share this year and full dividend of 31.8 cent per share based on last year.
"The overall tone of the statement was even more negative than we anticipated. The dividend cut looks sensible, although it may raise questions about how bad Bank of Ireland believes the situation may get," said NCB Stockbrokers in a research note.
Asked if the bank may need to raise capital, chief financial officer John O'Donovan told analysts at a conference call: "It is impossible to predict what is going to happen in the current markets, so I can't categorically rule out anything."
However, a bank spokesman said later that it had no plans to raise capital from shareholders.
Mr O'Donovan declined to say when the bank would be able to return to its policy of paying 40 per cent to 45 per cent of earnings in dividends due to "volatility in the markets".
The bank says it will grow deposits by 20 per cent and loans by 8 per cent in the six months to September 30th.
About 80 per cent of its €145 billion loan book is funded by deposits and wholesale funding maturing after more than a year.
