Bank of Ireland laid bare the woes afflicting the country’s financial institutions on Friday as it warned that profits before impairment charges would fall by up to 40 per cent this year.

The bank, which is 36 per cent owned by the Irish government, also revealed that it had suffered a significant outflow of corporate deposits following a ratings downgrade by Standard & Poor’s earlier this year.

Analysts estimated that the bank had haemorrhaged €10bn (£8.5bn) of customer deposits from its capital markets business in September, which helped push up its loan-to-deposit ratio to 160 per cent from 145 per cent at the end of June.

Bank of Ireland said the sharp rise in bond yields on peripheral eurozone debt had made it difficult to source wholesale funding. It has had to rely on contingent collateral – such as packages of mortgage-backed bonds – from monetary authorities to make up for the deposit loss.

However, the outflow has calmed down since September and the bank’s retail deposit book has stabilised.

Fierce competition for retail deposits – which has kept savings rates at elevated levels – together with a jump in wholesale funding costs and higher fees relating to government guarantees have taken their toll on income.

The bank said its net interest margin – the profit it makes on lending – would fall by roughly 25 basis points this year. At the end of last year the margin was 164 basis points.

An extension of the guarantee scheme operated by the Irish government has also triggered significantly higher costs. The bank said related fees for the six months to December would be 150 per cent more than the €151m it paid in the first six months.

The combination of the lower net margin and these higher costs have outweighed the bank’s own cost cutting measures. As a result, it said full-year underlying operating profit before impairment charges would be 35-40 per cent lower than the €1.5bn it made in 2009.

Nevertheless, at the end of a dramatic week for Ireland, in which the country edged closer to another European bail-out after its bond yields hit the highest level since the introduction of the euro, Richie Boucher, the bank’s chief executive, offered some reassurance to a jittery market.

He said that while economic conditions were challenging, the bank still believed impairment charges had peaked in 2009 and would steadily fall.

The bank’s shares, which have fallen by more than 20 per cent since the start of November, rose 6.8 per cent to 41 cents on Friday.

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