Bank of Ireland’s (BOI) underlying operating profit more than halved last year on high funding costs, a limited appetite for new credit and the selling off of higher-earning assets, though analysts said there were signs that the worst is now over. The only domestic lender to avoid nationalisation after an unprecedented property crash, the bank saw the still high cost of attracting deposits and higher cost of a government guarantee of its liabilities cut net interest margin by 8 per cent. Operating profit before provisions fell by 60 per cent to 411 million euros, although the underlying pretax loss more than halved to 1.5 billion euros. While the bank said it expected impairments to reduce over time, it saw them tick up a touch to 1.94 billion euros last year after it made provisions for 1.86 billion in 2010. After successfully attracting private capital to meet strict new central bank targets last year, Bank of Ireland is focused on restructuring its cost base, improving funding dynamics and weaning itself off the expensive state guarantee. By end-December last year, it had fully exited the costly emergency liquidity assistance (ELA) offered by Ireland’s central bank, reduced its dependency on European Central Bank funding to 23 billion euros from 33 billion a year earlier and cut its staff by 7 per cent year-on-year. “These results suggest the bank reached a trough in its pre-provision earnings in 2011 and are likely to experience improving trends as the bank has exited the more costly ELA borrowing, can look to terminate its own issued bonds programme and maintains a tight focus on costs,” Stephen Lyons, credit analyst at Davy Stockbrokers said. Chief Executive Richie Boucher added that the bank is still aiming to increase its net interest margin, the gap between what it charges for loans and what it pays to borrow, to 2 per cent in 2014 from 1.33 per cent in 2011 but said that the interest rate environment would make the target more difficult to achieve. ARREARS TO PEAK Under the government’s latest restructuring of its banking sector almost a year ago, Bank of Ireland will form the core of a radically pared-down industry along with Allied Irish Banks and on Monday’s results showed Boucher’s bank was having far more success attracting deposits. The bank said its deposits grew by 8 billion euros in the second half of last year to 71 billion, mostly thanks to its UK subsidiary, outstripping the 6 billion euro growth Ireland’s Department of Finance said the sector as a whole saw in the second half of 2011. After central bank figures last week showed that nearly one in seven Irish home loans were not being fully repaid, Bank of Ireland also bettered the industry average with its proportion of owner occupier loans in arrears for more than 90 days rising to 5.6 per cent from 3.7 a year ago but below the sector-wide headline figure of 9.2 per cent. The level of arrears among properties bought by investors to rent out, the most distressed part of its mortgage books, almost doubled to 10.8 per cent but with unemployment stabilising, albeit at high levels, Boucher said arrears would peak in 2012. “We don’t anticipate that they have peaked as yet. We think that the ratio of increase will start to ease during 2012 and will peak during 2012,” he said. After the bank used December’s injection of ultra-cheap ECB three-year loans to convert 7.5 billion euros of short-term drawings into medium term funds, Boucher said it was highly likely they would participate again in next week’s second round. He added that the bank was in talks over selling some of its remaining loans under a sector wide deleveraging process that helped push its loan to deposit ratio down to 144 per cent from 175 at the end of 2010 after it raised 8.6 billion euros of its 10 billion divestment target last year. He also said the 15 per cent state-owned bank will likely cut its staff numbers further as it continues to reduce the size of its businesses but would not specify by how much. The bank’s core Tier 1 solvency ratio stood at 15.1 per cent at the end of 2011. Last month it also converted 1.3 billion euros of bonds at favourable rates in an Irish sovereign debt.