DUBLIN, April 24 - Bank of Ireland said trading conditions were tough in the first quarter of the year due partly to high funding costs which put pressure on interest margins and operating income.

Ireland's largest bank, the only lender to avoid nationalisation after the country's property crash, said on Tuesday arrears in its Irish residential mortgage book continued to increase. But the bank still expects impairment charges to reduce from the 1.94 billion euros (1.58 billion pounds) reported last year.

Its private ownership means it will not be eligible to take part in a state plan to shift billions of euros worth of loss-making tracker mortgages from the balance sheets of the country's largest lenders, chief executive Richie Boucher said.

Trading conditions in the first quarter of 2012 remain challenging, the bank said in a statement ahead of its annual general meeting.

Whilst consumer confidence surveys have shown improvements in the first three months, domestic economic indicators remain weak, unemployment remains elevated, and residential property prices do not appear, as yet, to have fully stabilised.

Under the government's latest restructuring plans, Bank of Ireland will form the core of a much pared-down industry beside Allied Irish Banks. But the fact it is controlled by private investors may block it from some state support.

Dublin wants to shift mortgages that track the ECB interest rate from state-run Allied and Irish Life and Permanent but Boucher said that it did not come into the talks as it was not fully in state hands.

Boucher said the trackers were expensive and that the bank needed to concentrate on cutting costs, lowering its funding costs and weaning itself off expensive state guarantees to improve margins and limit their impact on the bank's balance sheet.


Since the start of the year, Bank of Ireland said it had begun to try to reduce deposit pricing even though competition for deposits was intense in the Irish market.

It said it has also kept operating costs under strict control and took 4.8 billion euros of cheap three-year loans offered by the European Central Bank (ECB) as part of its Long-Term Refinancing Operations (LTRO) at the end of February to ease bank funding strains in the euro zone.

The bank said it had sold a further 900 million euros of international corporate and residential mortgage loan portfolios in a sector-wide deleveraging process as part of Ireland's European Union/International Monetary Fund bailout after the financial crisis.

It has completed 9.5 billion euros or 95 percent of its divestment target.

The bank, which grew its deposit base by 8 billion euros ($11 billion) in the second half of 2011, said customer deposits fell to 70 billion euros from 71 billion at the end of 2011 due to seasonal fluctuations in accounts.

The bank's loans and advances to customers shrunk by 3 percent to 99 billion euros, while its loan-to-deposit ratio fell to 142 percent from 144 percent three months earlier.

That revenue pressures persist comes as little surprise — this is likely to be reflected in a dip in the net interest margin in H1 with some recovery in H2, Emer Lang, analyst at Davy Stockbrokers wrote in a note.

Overall this is a broadly reassuring statement. In particular, the fact that asset quality remains in line with the bank's expectations and that it has now completed 95 percent of its divestments at a discount of 7.6 percent is encouraging.

The bank's shares were 2.7 percent up at 11.30 euro cents by 11.30 a.m. British time. ($1 = 0.7619 euros)

(Reporting by Padraic Halpin; Editing by Jane Merriman and Elaine Hardcastle)