BoI cuts back on mortgage business in the UK

Bank of Ireland is cutting back on its UK mortgage business in a move aimed at saving £30m a year, but which could cost up to 600 jobs.

As part of the retrenchment, it is planning to end the sale of residential mortgages through brokers, who currently handle some 80% of the business.

In future, home loans will be sold through the outlets provided by the bank’s joint venture with the UK Post Office as well as through its 44 branches in Northern Ireland.

The bank is also planning to close its mortgage processing centres in Reading and Solihull and to concentrate operations at its facility in Bristol.

It has not disclosed how many job cuts it is seeking pending consultations with staff, but analysts estimate that it could cut as many as 600 of the 1,000 who work in its residential mortgage sector.

This is the second financial institution covered by the Irish government’s guarantee scheme to signal a cutback in its operations in the UK, given the changed economic climate.

Irish Life & Permanent stopped writing new UK mortgages last year and a spokesman recently indicated that that policy will continue “for the foreseeable future”.

Some 35% of BoI’s UK mortgages are in the buy-to-let sector, with a further 18% taken out by self-certified borrowers – two market segments in which bad loans have been increasing.

According to the bank, the current retrenchment aims “to reduce dependency on wholesale funding through selective balance sheet de-leveraging and rigorous management of our cost base”.

The target is an annual saving of around £30m, with a one-off re-structuring cost of £40m.

The bank’s UK residential mortgage book currently stands at around £29bn and it is intended to reduce this significantly over the next five years.

The head of the bank’s operations in the Irish Republic, Richie Boucher, recently told a parliamentary committee meeting in Dublin that tough decisions about its overseas activities had to be taken because of the need to reduce the size of its balance sheet.

He added that the bank could continue to grow lending in Ireland by reducing its loan to deposits ratio overseas.

Like its main domestic rival Anglo Irish Bank, BoI is committed to raising €1bn from its shareholders as part of a recapitalisation plan, with the Irish government injecting €2bn into each bank.

Meanwhile, Nationwide Building Society has been given the go-ahead by the Irish financial regulator to operate in the Republic. It will start accepting deposits in March.

European securitisation transactions are getting bigger

European securitisation transactions are increasing in size as banks continue to access European Central Bank and Bank of England repo funding

Fitch Ratings estimates that the average European structured finance transaction size (excluding collateralised debt obligations) was €2.6bn in 2008 compared with £1.7bn in 2007.

Commenting on the growth in transaction sizes Stuart Jennings, structured finance risk officer at Fitch, said: “This is an apparent recognition that banks will have to continue to tap central bank funding for the foreseeable future. They are therefore readying themselves with retained transactions which can be quickly utilised for repo funding when needed.”

The agency emphasises that the securitisation of more esoteric assets, as well as the volume of transaction sizes, presents issues in terms of credit analysis. While such collateral may often be seasoned, other issues may outweigh this. For example, in residential mortgage-backed securities the collateral may consist of loans that offer borrowers a high degree of optionality or might involve mortgage borrowers who earn in a different currency to the one in which the loans are denominated.

Other assets may present data issues. With commercial mortgage-backed securities, banks have been reviewing their books and some are contemplating granular portfolios for securitisation. These were previously considered to have too many data hurdles.