Bank of Ireland shows the way to delever
On October 14 Bank of Ireland announced a series of asset sales that met roughly half its planned deleveraging target for the years up to 2013. It achieved this result in a little over three months after the plan was announced.
• In the US it sold a portfolio of loans secured on commercial real estate assets to Wells Fargo. The loans had a face value of $1.13 billion. • In the UK it sold a portfolio of loans secured on commercial real estate assets to Kennedy Wilson and institutional partners. The portfolio had a face value of £1.33 billion ($2.07 billion) and Bank of Ireland received £1.07 billion, a discount of 19.5% • In the UK as well it sold a portfolio of residential mortgage loans worth some £1.23 billion to a subsidiary of Nationwide Building Society for £1.13 billion, a discount of 8%. • It sold a portfolio of global project finance loans including both drawn and undrawn commitments to a GE subsidiary for some €670 million, representing 92% of both drawn and undrawn commitments and 89% of the value of the drawn commitments. The loans were for conventional and renewable energy projects in the UK, Europe, Middle East and North America. • It also saw the redemption of loans from its UK corporate banking portfolio, which added €700 million to its balance sheet.
The solid prices Bank of Ireland achieved for these assets meant that the bank took no hit to its capital ratios. This confounds the general assumption among European banks that to sell assets in this market would be foolhardy as it would crystallize losses and force them to raise new, expensive capital. The Bank of Ireland experience shows that this is not the case. "The Group continues to make good progress in relation to the sales processes in respect of other non-core loan portfolios including being in advanced discussions with potential purchasers in relation to its Burdale assets and other loan assets within its project finance loan portfolio," the bank stated at the time of the announcement. If it can sell more assets at prices that do not hit the balance sheet, it will be a powerful proof that the market can find a solution to Europe’s banking crisis.