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Bank of Ireland margins up as refinancing plans boosted

By Padraic Halpin

DUBLIN (Reuters) - Bank of Ireland's (ISE:BIR) net interest margin continued to grow in the third quarter and analysts welcomed clarification from a regulator over the refinancing of 1.8 billion euros (£1.57 billion) of state preference shares.

The 15 percent state-owned bank, the only Irish lender to escape nationalisation after a huge property crash, is recovering far quicker than rivals that are hampered by larger loan losses and weaker margins and will be slower to emerge from state bailouts.

It achieved an average net interest margin - a key metric showing how profitable its lending is - in excess of 1.90 percent in the quarter, the bank said on Friday, a day after Europe's top banking regulator handed it more flexibility on how it can deal with the preference shares.

The bank faces a March 2014 deadline to refinance them before a clause under its bailout kicks in, increasing the cost of buying the shares back by 25 percent, or 450 million euros.

Analysts said the European Banking Authority's ruling that preference shares would continue to count as common equity Tier 1 capital if sold to investors begins to clear the way for the state to place some or all of the shares with debt investors, and avoid a third major rights issue since 2010.

In a brief trading update, the bank said it continued to assess a range of options in relation to the shares as the central bank continues to assess the balance sheets of Ireland's lenders ahead of its exit from an EU/IMF bailout next month.

The assessment of impairment provisions and levels of risk-weighted assets is being carried out in tandem with Ireland's bailout lenders and will likely have to be completed before the bank can finalise any refinancing.

"The fact that the overall statement is light on numbers we believe reflects the bank's uncertainty over the outcome of the balance sheet assessment as it is ongoing," Stephen Lyons, a credit analyst at Davy Stockbrokers, wrote in a note.

"This uncertainty - which presumably the regulatory authorities share - explains why there is no progression over the next steps for a refinancing of the preference shares."

However, Lyons said any lingering fears of a large-scale rights issue would now be set aside, and that the repayment of the preference shares should be concluded by the end of the year, allowing the government to take another small step in cutting its exposure to the bailed-out sector.

Bank of Ireland escaped full state ownership following an unprecedented property crash after a group of North American investors led by Wilbur Ross and Prem Watsa bought a 35 percent stake just months after Ireland signed up to an EU/IMF bailout three years ago.

The bank's shares, which the investors bought for around 10 cents a little over two years ago, were down 5 percent at 25 cents by 1545 GMT.

The EBA's ruling is the latest in a run of positive news for the bank after better than expected half-year results, a deal to almost halve a 1 billion euro pension deficit and a removal of restrictions on the use of deferred tax assets.

The bank's net interest margin grew 31 basis points to an average of 1.65 percent in the first six months of the year, ending the period higher still. It is targeting 2 percent.

As pressure on the sector to deal with the country's home loan debt crisis increases from the central bank, Bank of Ireland said its arrears stabilised in the three months to the end of September, with the level of early arrears declining.

(Reporting by Padraic Halpin; editing by David Evans and Tom Pfeiffer)