By Padraic Halpin
(Reuters) - Bank Of Ireland's (I:BKIR) pension deficit increased in the first four months of the year as a result of European Central Bank quantitative easing, affecting its capital and denting its share price on Wednesday.
The bank said in a trading update that its Core Tier 1 capital - a measure of financial strength - fell to 14.6 percent from 14.8 percent at the end of December or to 11.7 versus 11.9 percent under the so-called fully loaded Basel III ratios.
That was mainly down to an increase in the deficit of the bank's defined benefit pension schemes to around 1.7 billion euros from 1 billion at the end of 2014. The interest rate on the bond to which the scheme's value is linked fell sharply on the ECB's bond-buying scheme.
"Notwithstanding the impact, the translation into the capital ratio has been more modest because of the gains we have made on other bonds and because of the profits the bank has made," Bank of Ireland Chief Financial Officer Andrew Keating told a shareholder meeting.
The low interest rate environment also allowed the bank to raise 1 billion euros of seven-year debt at 0.42 percent on Wednesday.
Analysts at Cantor Fitzgerald said the slip in capital ratios was a disappointing development and that the update was not as bullish as expected.
The bank's reiteration of plans to stop counting 1.3 billion euros of preference shares towards capital by July next year provided reassurance, Davy Stockbrokers wrote in a note.
Shares in the 14-percent state-owned bank, which made a profit last year for the first time since the 2008 financial crisis, were 5.9 percent lower at 0.35 euros by 1430 GMT.
The bank said loan volumes grew for the first time since the crisis - up to 85 billion euros from 82 billion in 2014 - but this was down solely to a rise in the value of sterling and the acquisition of loan books from its rivals.
Irish banks have struggled to grow their loan books with repayments and redemptions among heavily indebted lenders exceeding new lending. Bank of Ireland said its new lending continued to grow in line with expectations, with net interest margin expanding modestly.
The bank also signalled it would resist political pressure to cut variable rate mortgages after Finance Minister Michael Noonan said he would ask the country's banks to do so and expected them to follow his recommendation.
"We review our products on an ongoing basis but I would anticipate that going forward our emphasis will continue to be on fixed rates," Chief Executive Richie Boucher told the shareholder meeting.