20-F 1 u50756e20vf.htm FORM 20-F e20vf
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
         
(Mark One)
  o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
    x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2006
OR
    o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
    o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
        Date of event requiring this shell company report
        For the transition period from                 to 
Commission file number: 1-14452
THE GOVERNOR AND COMPANY OF
THE BANK OF IRELAND
(Exact name of registrant as specified in its charter)
IRELAND
(Jurisdiction of incorporation or organization)
LOWER BAGGOT STREET, DUBLIN 2, IRELAND
(Address of principal executive offices)
+353 1 6615933
(Telephone number of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
     
– Ordinary Stock (nominal value of 0.64 each)
  The New York Stock Exchange*
– American Depositary Shares, each representing four units of Ordinary Stock (nominal value of 0.64 each)
  The New York Stock Exchange
Not for trading, but only in connection with the registration of American Depositary Shares representing such Ordinary Stock, pursuant to the requirements of the Securities and Exchange Commission.
          Securities registered or to be registered pursuant to Section 12(g) of the Act: None
          Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of March 31, 2006:
Ordinary Stock (nominal value of 0.64 per unit): 947,903,170
Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.
YES  [X]      NO  [     ] 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES  [     ]      NO  [X] 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  [X]      NO  [     ] 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated file and large accelerated file” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated file    [X]  Accelerated filer    [     ]  Non-accelerated file    [     ] 
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17  [     ]      Item 18  [X] 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  [     ]      NO  [X] 
 
 


Table of Contents

[THIS PAGE INTENTIONALLY LEFT BLANK]

2


Table of Contents

The Governor and Company of The Bank of Ireland
ANNUAL REPORT ON FORM 20-F
Table of Contents
             
        Page
         
Item
 
Caption
       
        5  
        5  
        5  
        5  
        6  
 
           
 1
      7  
 2
      7  
 3
      7  
        7  
        11  
 4
      12  
        12  
        12  
        13  
        14  
        14  
        15  
        21  
        21  
        23  
        27  
 4A
      27  
 5
      27  
        28  
        30  
        31  
        51  
        56  
 6
      84  
        84  
        87  
        89  
        89  
        95  
        95  
        96  

3


Table of Contents

             
        Page
         
 7
      97  
        97  
        97  
        98  
        98  
 8
      99  
        99  
        99  
        99  
 9
      101  
        101  
 10
      102  
        102  
        107  
        107  
        110  
 11
      110  
        110  
        113  
 12
      122  
 
           
 13
      123  
 14
      123  
 15
      123  
 16
      123  
        123  
        124  
        124  
        124  
 
           
 17
      125  
 18
      125  
 19
      125  
 EX-4.1
 EX-4.4
 EX-12.1
 EX-12.2
 EX-13.1
 EX-13.2

4


Table of Contents

PRESENTATION OF INFORMATION
      In this Annual Report on Form 20-F, the term “Ordinary Stock” refers to units of Ordinary Stock of nominal value 0.64 per unit of the Bank and the term “ADSs” refers to American Depositary Shares each representing the right to receive four units of Ordinary Stock and evidenced by American Depositary Receipts (“ADRs”).
      The ADSs are listed on the New York Stock Exchange and are evidenced by ADRs issued by The Bank of New York as Depositary under a Deposit Agreement.
      Unless a specific source is identified, all information regarding market and other operating and statistical data provided in this document is based on the Group’s own estimates. In making estimates, the Group relies on data produced internally and, where appropriate, external sources, including information made public by other market participants or associations.
FORWARD-LOOKING INFORMATION
      Certain statements contained in this Annual Report, including any targets, forecasts, projections, descriptions of anticipated cost savings, including those relating to the strategic transformation programme we describe in this document, statements regarding the possible development or possible assumed future results of operations, any statement preceded by, followed by or that includes the words “believes”, “expects”, “aims”, “intends”, “will”, “may”, “anticipates” or similar expressions or the negatives thereof, and other statements that are not historical facts, are or may constitute forward-looking statements (as such term is defined in the U.S. Private Securities Litigation Reform Act of 1995). Because such statements are inherently subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include but are not limited to (i) risks and uncertainties relating to profitability targets, prevailing interest rates, the performance of the Irish and UK economies and the international capital markets, the Group’s ability to expand certain of its activities, competition, regulatory developments, our ability to achieve the estimated benefits under the transformation programme, the Group’s ability to address information technology issues and the availability of funding sources; and (ii) other risks and uncertainties detailed in this Annual Report, including under Item 3 “Key Information — Risk Factors” and under Item 11 “Quantitative and Qualitative Disclosures about Market Risk”. The Group does not undertake to release publicly any revision or update to these forward-looking statements to reflect events, circumstances or unanticipated events occurring after the date hereof.
DEFINITIONS
      For the purposes of this Annual Report, the term “Bank” means The Governor and Company of the Bank of Ireland and the terms “Group” and “Bank of Ireland Group” mean the Bank and its consolidated subsidiaries and, where the context permits, its interests in associated companies and joint ventures.
      Certain financial and statistical information in this Annual Report is presented separately for domestic and foreign activities. Domestic activities include transactions recorded on the books of the Group branches and offices located in Ireland. Foreign activities include transactions recorded on the books of the Group branches and offices in the United Kingdom, the United States of America (“U.S.”) and elsewhere outside of Ireland.
      Unless otherwise stated, for the purposes of this Annual Report, references to “Ireland” exclude Northern Ireland.
REPORTING CURRENCY
      The Group publishes consolidated financial statements in euro (“” or “EUR”). Each euro is made up of one hundred cent, each of which is represented by the symbol “c” in this Annual Report.
      References to “dollars”, “U.S.$”, “$” or “¢” are to United States (“U.S.”) currency, and references to “STG£”, “GBP£” and “pounds sterling” are to United Kingdom (“UK”) currency. Amounts in dollars, unless otherwise stated, for the current financial (fiscal) year have been translated from euro at the rate prevailing on

5


Table of Contents

March 31, 2006 as shown below under “Exchange Rates”. This rate should not be construed as a representation that the euro amounts actually denote such dollar amounts or have been, could have been, or could be converted into dollars at the rate indicated.
EXCHANGE RATES
      As a significant portion of the assets, liabilities, income and expenses of the Group is denominated in currencies other than euro, fluctuations in the value of the euro relative to other currencies have had an effect on the euro value of assets and liabilities denominated in such currencies as well as on the Group’s results of operations. The principal foreign currencies affecting the Group’s financial statements are sterling and the dollar. At August 31, 2006, the Noon Buying Rate (as defined below) was U.S.$1.2793 = 1.00.
      The following table sets forth, for the dates or periods indicated, the Noon Buying Rate in New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) and the rates used by the Group in the preparation of its consolidated financial statements:
                                         
    Year ended March 31,
     
    2006   2005   2004   2003   2002
                     
    (dollars per )
Euro/dollar rates:
                                       
March 31
    1.2139       1.2969       1.2292       1.0900       0.8717  
Average(1)
    1.2163       1.2653       1.1808       1.0033       0.8803  
High
    1.3093       1.3625       1.2848       1.1062       0.9535  
Low
    1.1667       1.1801       1.0621       0.8750       0.8370  
March 31 rate used by the Group(2)
    1.2104       1.2964       1.2224       1.0895       0.8724  
Average rate used by the Group(2)
    1.2126       1.2647       1.1796       1.0051       0.8804  
      The highest noon buying rate for each of the last six months was: August 2006: 1.2914, July 2006: 1.2822, June 2006: 1.2953, May 2006: 1.2888, April 2006: 1.2624, March 2006: 1.2197.
      The lowest noon buying rate for each of the last six months was: August 2006: 1.2735, July 2006: 1.2500, June 2006: 1.2522, May 2006: 1.2607, April 2006: 1.2091, March 2006: 1.1886.
                                         
    Year ended March 31,
     
    2006   2005   2004   2003   2002
                     
    (STG£ per )
Euro/sterling rates:
                                       
March 31 rate used by the Group(2)
    0.6964       0.6885       0.6659       0.6896       0.6130  
Average rate used by the Group(2)
    0.6826       0.6834       0.6926       0.6460       0.6145  
 
(1) The average of the Noon Buying Rates on the last day of each month during the financial year.
 
(2) The rates used by the Group in the preparation of its consolidated financial statements.

6


Table of Contents

PART 1
Item 1     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT & ADVISORS
      Not applicable.
Item 2     OFFER STATISTICS & EXPECTED TIMETABLE
      Not applicable.
Item 3     KEY INFORMATION
FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORT STANDARDS (“IFRS”)
      On April 1, 2004, the Group implemented the requirements of International Financial Reporting Standards as adopted by the European Union (“IFRS”) for the first time and these are used for the purpose of preparing the financial statements for the years ended March 31, 2006 and 2005. In all material respects, this is also in accordance with full IFRS (as issued by the International Accounting Standards Board “IASB”. For further details of the transition between IR GAAP and IFRS, please refer to note 47 of the Consolidated Financial Statements.
SELECTED FINANCIAL DATA
      The following tables present selected consolidated financial data which have been derived from the audited Consolidated Financial Statements of the Group. Tables 1 and 3 detail financial data under IFRS for the years ended March 31, 2006 and 2005. Table 2 details financial data under US GAAP for each of the five years in the five year period ended March 31, 2006.
      The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”) for the years ended March 31, 2006 and 2005 (except for the application of IAS 32, IAS 39 and IFRS 4 which apply with effect from April 1, 2005). Prior to April 1, 2005 the Group prepared its consolidated financial statements in accordance with Irish Generally Accepted Accounting Principles (“IR GAAP”), see pages F-88 and F-105 for details of the transitional impacts of moving to IFRS.
      The SEC Form 20-F requires the presentation of audited statements of income, changes in shareholders’ equity and cash flows for each of the past three financial years. However, the SEC has provided an accommodation, which the Group has applied, for first-time adopters of IFRS to present only two years of these financial statements. For the SEC Industry Guide 3 statistical disclosure by bank holding companies, which requires three to five years of presentation depending on the disclosure requirement, the Group has included March 31, 2006 and 2005 IFRS information and Irish GAAP for all earlier periods presented.
      The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, the Consolidated Financial Statements of the Group and the Notes thereto, which are included in this Annual Report. The financial results should not be construed as indicative of financial results for subsequent periods. See Item 5 “Operating & Financial Review and Prospects”.

7


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA
Table 1
                         
    At and for the Financial Year Ended
    March 31,
     
    2006(1)   2006   2005
    IFRS   IFRS   IFRS
             
    $m    
        (in millions, except per
        unit amounts and
        percentages)
Income Statement Data
                       
Amounts in accordance with IFRS:
                       
Interest income
    7,617       5,954       4,263  
Interest expense
    (4,666 )     (3,647 )     (2,332 )
Net interest income
    2,951       2,307       1,931  
Insurance net premium income
    1,661       1,298       1,791  
Fees and commissions income
    1,167       912       1,163  
Fees and commissions expense
    (217 )     (170 )     (263 )
Net trading income
    38       30       66  
Life assurance investment income and gains
    800       625       695  
Other operating income
    210       165       138  
Profit on disposal of business activity
    225       176       11  
Total Operating Income
    6,835       5,343       5,532  
Increase in insurance contract liabilities and claims paid
    (2,131 )     (1,666 )     (2,222 )
Total Operating Income, net of Insurance Claims
    4,704       3,677       3,310  
Operating expenses
    (2,584 )     (2,020 )     (2,051 )
Impairment losses
    (132 )     (103 )     21  
Share of profit of associated undertakings and joint ventures
    58       45       30  
Profit before taxation
    2,046       1,599       1,310  
Taxation
    (388 )     (303 )     (256 )
Profit for the period
    1,658       1,296       1,054  
Profit attributable to minority interests
    (12 )     (9 )     (1 )
Profit attributable to stockholders
    1,670       1,305       1,055  
Per Unit of Ordinary Stock
                       
Earnings per unit of 0.64 ordinary stock
    174.5c       136.4c       111.1c  
Diluted earnings per unit of 0.64 ordinary stock
    173.2c       135.4c       110.2c  
Dividends(2)
    67.2c       52.5c       45.6c  
Number of shares used in EPS calculation (in millions)
    947       947       942  
Number of shares used in Diluted EPS calculation (in millions)
    954       954       950  
Balance Sheet Data
                       
Amounts in accordance with IFRS:
                       
Total assets
    207,699       162,354       127,780  
Loans and advances to customers (net of allowance for losses on loans and advances)
    129,524       101,246       79,836  
Loans and advances to banks
    13,530       10,576       8,347  
Allowance for losses on loans and advances
    (459 )     (359 )     (319 )
Deposits by Banks
    41,337       32,312       20,865  
Customer Accounts
    78,946       61,710       60,185  
Debt Securities in issue
    47,096       36,814       21,217  
Subordinated liabilities
    8,306       6,493       4,086  
Minority interests
    58       45       135  
Share capital
    848       663       663  
Share premium account
    981       767       767  
Retained profit
    4,261       3,330       2,424  
Other reserves
    1,027       803       629  
Own shares held for the benefit of life assurance policyholders
    (301 )     (235 )     (206 )
Stockholders’ equity
    6,816       5,328       4,277  

8


Table of Contents

Table 2
                                                   
    At and for the Financial Year Ended March 31,
     
        2005   2004   2003   2002
    2006   2006(1)   (restated)   (restated)   (restated)   (restated)
                         
    $m   (in millions, except per unit amounts and percentages)
Amounts in accordance with U.S. GAAP:(9)
                                               
Net income attributable to holders of ordinary stock:
    1,027       803       814       912       1,114       681  
Net income per unit of ordinary stock
                                               
 
Basic
    108.5c       84.8c       86.4c       94.9c       112.4c       68.7c  
 
Diluted
    107.7c       84.2c       85.7c       94.3c       111.4c       68.1c  
Stockholders’ equity
    6,380       4,976       4,730       4,499       4,235       4,260  
Total assets
    206,865       161,702       127,547       108,349       91,386       88,542  
Table 3
                 
    At and for the
    Financial Year Ended
    March 31,
     
    2006   2005
    IFRS   IFRS
         
    (in percentages)
Other Financial Data
               
Return on average total assets(3)
    0.9       0.9  
Return on average stockholders’ equity(4)
    27.3       23.5  
Net interest margin(5)
    1.8       2.0  
Cost/income ratio(6)
    54       61  
Allowance for loan losses to total loans
    0.4       0.4  
Provisions for bad and doubtful debts to average total loans
    0.1       0.1  
Tier 1 capital ratio(7)
    7.5       7.9  
Total capital ratio(7)
    11.4       10.9  
Stockholders’ equity to assets(8)
    3.3       3.3  
Dividend payout ratio
    36       40  
 
(1) Translated solely for convenience into dollars at 1.00 = U.S.$1.2793, the Noon Buying Rate on August 31, 2006.
 
(2) See Item 8 “Financial Information — Dividend Policy” for details of dividends per unit of Ordinary Stock in dollars.
 
(3) Return on average total assets represents profit attributable to the ordinary stockholders as a percentage of average total assets. The calculation of the average balances for all years includes daily, weekly or monthly averages for certain reporting units. See Item 5 “Operating & Financial Review and Prospects — Average Balance Sheet and Interest Rates”. The Group considers these average balances to be representative of the operations of the Group.
 
(4) Return on average stockholders’ equity represents profit attributable to the ordinary stockholders as a percentage of average stockholders’ funds, excluding minority interests.
 
(5) Net interest margin represents net interest income as a percentage of average interest earning assets.
 
(6) The cost/income ratio is determined by dividing the total expenses before goodwill impairment of the Group by the total income of the Group including income from associated undertakings and joint ventures. The Group’s management believes that cost/income ratio provides valuable information to readers of its financial statements because it enables the reader to focus more directly on the underlying performance of the Group’s businesses and this measure also reflects an important way in which performance is monitored by the Group’s management. However, while management believes this measure is useful in the evaluation of

9


Table of Contents

the Group’s performance, it should not be viewed as a replacement for, but rather as complementary to, the most directly comparable GAAP measure, which is the cost/income ratio determined by dividing the total expenses including goodwill impairment by the total income of the Group. In the two years ended March 31, 2006, there was no goodwill impairment. The cost/income ratio on a statutory basis would have been the same as presented in the table above.
 
(7) The target standard risk-asset ratio set by the Basel Committee is 8%, of which the Tier 1 element must be at least 4%. The minimum risk-asset ratio is set by Financial Regulator and satisfies capital adequacy requirements of the European Union. The ratio given for 2005 is at April 1, 2005.
 
(8) Stockholders’ equity excludes minority interests.

(9)
                                 
    2005   2004   2003   2002
                 
Previously reported net income
    814       892       767       667  
Derivatives (ii)
    18       9       70       (16 )
Foreign Exchange differences on AFS securities (iii)
    (18 )     11       277       30  
                         
Restated net income
    814       912       1,114       681  
                         
Previously reported shareholders equity
    4,531       4,318       4,063       4,157  
Leasing (i)
    106       106       106       106  
Derivatives (ii)
    93       75       66       (3 )
                         
Restated stockholder funds
    4,730       4,499       4,235       4,260  
                         
      Certain information has been restated in the previously reported US GAAP reconciliations as a result of matters relating to:
  (i) Leasing: there was a one-off gain relating to certain lease structures arising from the falling corporation tax rates in Ireland in 1998 which was not recognized in that year under US GAAP. The effect of this is an increase in stockholders equity under US GAAP for the earliest year in the five year summary above.
 
  (ii) As part of the transition process to IFRS the Bank discovered that the valuation of a small portfolio of derivatives did not take account of a specific legal clause resulting in an understatement of previously reported net income under US GAAP for the year 31, March 2005 of 18m (20m pretax) and stockholders funds under US GAAP as at 31, March 2005 of 93m (106m pretax).
  The Five Year Financial Summary (above) has been restated for US GAAP financial data for these valuations resulting in an increase to net income of 9m and 70m for the years to 31 March 2004 and 31 March 2003 and an increase in stockholders funds of 75m and 66m for the same periods. In the year to 31 March 2002 the restatement resulted in a reduction to net income of 16m and stockholders funds of 3m.
  (iii) Under US GAAP foreign exchange differences on available for sale (AFS) securities were included in net income in previous years, rather than taken to reserves in accordance with EITF-96-15. Under IFRS the translation of foreign currency denominated AFS debt securities into the functional currency of the legal entity in which they are held is recognized directly in the income statement. Net income under US GAAP in the Five Year Financial summary has been reduced for the year to 31 March 2005 by 18m (21m pretax) and increased for the three years to 31 March 2004, 2003, and 2002 by 11m (12m pretax), 277m (315m pretax) and 30m (34m pretax). There is no change to stockholders equity.

10


Table of Contents

RISK FACTORS
      Set out below is a discussion of certain factors, which could affect the Group future results and financial position and cause them to be materially different. The factors discussed below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties because there may be risks and uncertainties of which the Group is not aware or which the Group now does not consider significant but which in the future may be of greater significance.
Risks concerning borrower credit quality and general economic conditions are inherent in the Group’s business.
      Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of the Group’s businesses. Adverse changes in the credit quality of the Group’s borrowers and counterparties or a general deterioration in Irish, UK or global economic conditions, or arising from systemic risks in the financial systems, could reduce the recoverability and value of the Group’s assets and require an increase in Group’s level of provisions for bad and doubtful debts. An adverse change in economic conditions, particularly in Ireland, could also adversely affect the level of banking activity and the Group’s interest and other income.
Market risks associated with fluctuations in short- and long-term interest rates, foreign exchange rates and equity prices are inherent in the Group’s business.
      Interest rates and interest-rate spreads are the most significant market factors to which the Group’s earnings are exposed. In addition, earnings and the value of Group net worth can be exposed to changes in foreign exchange rates, particularly the euro-sterling rate, and movements in equity markets. Changes in the general level of interest rates can affect the net interest rate margin realized between lending and borrowing costs and can also affect earnings attributable to free funds (net non-interest bearing liabilities). It is Group policy to invest its free funds, passively, in a portfolio of fixed rate assets with an average life of the order of 4 years. Changes in currency rates, particularly in the euro-sterling exchange rate and, to a much lesser extent, the euro-dollar rate, can affect the value of assets and liabilities denominated in foreign currencies, the Group’s capital ratios and earnings reported by the Group’s non-euro denominated business. The Group has implemented risk management methods to mitigate and control the impact of exchange-rate movements on its capital ratios. The Group does not ordinarily seek to mitigate the impact of exchange rates on reported earnings. See Item 11 “Quantitative and Qualitative Disclosures about Market Risk — Risk Management and Control” for a discussion on these risks.
Operational risks are inherent in the Group’s business.
      The Group’s business depends on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate or failed internal control processes, and systems, human error, fraud or from external events that interrupt normal business operations. Although the Group has implemented risk controls and loss mitigation actions and substantial resources are dedicated to developing efficient procedures and training to staff, it is only possible to be reasonably, but not absolutely certain that such procedures will be effective. See Item 11 “Quantitative and Qualitative Disclosures about Market Risk — Risk Management and Control — Operational risk”.
The Group’s businesses are subject to substantial legal, regulatory and governmental requirements and oversight.
      The Group is subject to financial services laws, regulations, administrative actions and policies in each location in which the Group operates. The nature and impact of these changes are unpredictable and outside the control of the Group. Changes in supervision and regulation, in particular in Ireland and the UK, could materially affect the Group’s business, the products and services offered or the value of assets. In recent times there have been significant regulatory changes in Ireland, the UK and the US, which have resulted in increased compliance responsibilities. In the past year in particular there has been a marked increase in the cost and resources required

11


Table of Contents

to manage these changes across different jurisdictions and the Group has a number of separate projects underway related to these changes.
Risks associated with strategic decisions regarding organic growth, the competitive environment and potential acquisitions are inherent in the Group’s business.
      The Group devotes substantial management and planning resources developing strategic plans for organic growth and identifying possible acquisitions. If the outcome of these plans does not match expectations, the Group’s earnings may not develop as forecasted. In addition, the market for financial services within which the Group operates is highly competitive; the Group’s ability to generate an appropriate return for its shareholders depends significantly upon management’s response to the competitive environment. See Item 4 “Information on the Company — Business Overview” for additional information.
The Group’s insurance businesses are subject to inherent risk regarding claims provisions.
      Claims in the Group’s life assurance businesses may be higher than expected as a result of changing trends in claims experience arising from changes in demographic developments, mortality and morbidity rates and other factors outside the Group’s control. Such changes could affect the profitability of current and future insurance products and services.
Item 4     INFORMATION ON THE COMPANY
GENERAL
      The Governor and Company of the Bank of Ireland was established as a chartered corporation by an Act of the Irish Parliament of 1781/2 and by a Royal Charter of King George III in 1783. The Bank of Ireland Group is one of the largest financial services groups in Ireland with total assets of 162.4 billion at March 31, 2006. The address of the principal executive offices is Lower Baggot Street, Dublin 2 (Telephone +353-1-6615933).
      The Group provides an extensive range of banking and other financial services. All of these services are provided by the Group in Ireland, but not all are currently offered in the United Kingdom.
      The Group has a network of retail branches in Ireland and the United Kingdom. Its international business has centres in Dublin, London and the U.S. and a branch in Paris and Frankfurt.
      The Group provides fund management services through the Asset Management Services Division and in addition to its commercial banking business, the Group has an instalment finance business, operated through its business unit, Bank of Ireland Finance. Other subsidiaries include Bank of Ireland Life Holdings plc, a life assurance and pensions company in Ireland, ICS Building Society a home mortgage businesses in Ireland and Bank of Ireland Home Mortgages Limited (“BIM”) and Bristol & West in Britain.
      The Group also holds 90.44% of the equity shares and 49% of the voting shares of J&E Davy Holdings Limited, the holding company for J&E Davy Stockbrokers (“Davy Stockbrokers”), a leading Irish stockbroker. The remaining equity and voting interests in J&E Davy Holdings Limited are held by the management of J&E Davy Holdings Limited.
PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES
Acquisitions
      The principal acquisitions in the two years to March 31, 2006 consist of the following:
Guggenheim Advisors
      On December 20, 2005 Bank of Ireland announced its intention to acquire a 71.5% interest in Guggenheim Advisors from Guggenheim Partners. The transaction closed on January 31, 2006. The final cash consideration for the transaction was dependent on the performance of the business to April 1, 2006 and August 1, 2006. The final price has yet to be agreed however subject to terms of the agreement the Bank has paid US$139.7 million to date. Guggenheim Advisors management and Guggenheim Partners both retain holdings in the company and

12


Table of Contents

these holdings are subject to put and call arrangements in the medium term on an agreed basis. These options if exercised are required to be settled in stock in the Governor and Company. In accordance with the Group’s accounting policy in respect of transactions of this nature with minorities no liability has been recognised for these options.
Iridian Asset Management LLC
      In January 2006, the Group acquired an additional 8% stake in Iridian Asset Management LLC (“Iridian”) for U.S.$22 million, increasing its stake to 84% which as noted below was increased to 92% in August 2006. The Group had previously acquired an additional 15% stake in Iridian in June 2004 for $40.3 million, thus increasing its stake to 76% from the 61% initially acquired in September 2002.
Burdale Financial Holdings Limited
      On January 5, 2005, Bank of Ireland announced that its wholly owned subsidiary BOI UK Holdings Limited acquired a 100% interest in Burdale Financial Holdings Limited for a consideration of Stg£49 million (70 million).
Divestitures
      The principal capital divestitures in the last two years to March 31, 2006, consist of the following:
Bristol & West Branch Network
      The Group concluded the sale of the Bristol & West branch network to Britannia Building Society on September 21, 2005 for a pre-tax gain of £124 million.
EuroConex Technologies Limited
      Profit of 31 million on the sale of the Group’s 50% shareholding in EuroConex Technologies Limited to Nova EuroConex Holdings BV a subsidiary of US Bancorp, on June 29, 2004.
Chase de Vere Financial Solutions plc and Moneyextra Mortgages Limited
      On March 18, 2005, the Group completed the sale of Chase de Vere Financial Solutions plc and Moneyextra Mortgages Limited to AWD plc, part of AWD Holdings AG. The sale proceeds were 28.4 million (£19.4 million), which after charging for certain costs and provisions associated with the disposal, has resulted in a net loss on disposal of 20.0 million (£13.7 million).
RECENT DEVELOPMENTS
      In June 2006 the Group announced a joint venture with Paul Capital Partners (“PCP”), a leading U.S. private equity firm, to provide private equity fund of funds products and advisory services to institutional and other investors worldwide. The new joint venture will be called Paul Capital Top Tier Investments, LLC (PCTTI) and will be based in San Francisco, California.
      The Group has paid U.S.$25 million in cash for a 50% share in PCTTI and may increase its shareholding up to 70% no earlier than 2008 on a pre-agreed basis. The Group has paid U.S.$5 million in respect of interests in existing funds of funds. PCP has contributed its existing private equity fund of funds business (Assets under management U.S.$1.1 billion), including the firm’s fund of funds team and associated investment resources and facilities in return for a 35% interest. Key management own the remaining equity.
      In August 2006 the Group acquired a further 8% stake in Iridian for U.S.$24.7 million bringing its current stake to 92%.
      Following a strategic review of its branch property portfolio, management has decided to proceed with a sale and leaseback of approximately 36 of its larger branch locations. Bank of Ireland commenced the marketing of the proposed properties in early September and the tender date for the sales will be early October 2006. The Bank

13


Table of Contents

has 253 branches in the Republic of Ireland in prime locations in cities and towns around the country. The proceeds of these sales will be used to strengthen the Bank’s capital base and to facilitate ongoing growth and investment in the business.
      The Group continues to explore and execute similar transactions including acquisitions, disposals and joint ventures.
BUSINESS OVERVIEW
      The Group provides a broad range of financial services in Ireland to all major sectors of the Irish economy. These include checking and deposit services, overdrafts, term loans, mortgages, business and corporate lending, international asset financing, leasing, instalment credit, debt factoring, foreign exchange facilities, interest and exchange rate hedging instruments, executor, trustee, stock broking, life assurance and pension and investment fund management, fund administration and custodial services and financial advisory services, including mergers and acquisitions and underwriting. The Group provides services in euro and other currencies.
      The Group markets and sells its products on a domestic basis through its extensive nationwide distribution network in Ireland, which consisted of 253 full-time branches and 1,088 ATMs at March 31, 2006, its direct telephone banking service, direct sales forces and its on line services.
      In the United Kingdom the Group operates mainly through a grouping of businesses, UK Financial Services, whose functional currency is sterling. The grouping consists of Bristol & West, the branch networks in Northern Ireland and Britain and Bank of Ireland Home Mortgages. UK Financial Services provides lending, savings and investment products to customers. The Group is building on the Joint Venture agreement with the UK Post Office distributing a number of products through the Post Office network. UK Financial Services includes First Rate Exchange Services which is jointly owned with the UK Post Office and is the market leading provider of B2B foreign exchange to the UK market.
      Operations in the rest of the world are undertaken by
  Bank of Ireland Asset Management which provides investment management services to institutions and pension funds in the U.K., the U.S., Australia, Canada and Japan;
 
  Iridian Asset Management which provides investment management services to US institutional clients primarily in the foundation, endowment and corporate sectors;
 
  Guggenheim Advisors which provides fund of hedge funds investment services to US institutional and high net worth clients;
 
  Paul Capital Top Tier Investments (a joint venture with Paul Capital Partners) which will provide private equity investment and advisory services to institutional investors worldwide; and
 
  Corporate Banking which is engaged in international lending, with offices located in the U.K., Paris, Frankfurt and the U.S.
STRATEGY
      The strategy of the Group is based on geographical and business diversification and is aimed at:-
  maximising the return from our leading position in the Irish market;
 
  substantially reshaping and growing our business in the UK; and
 
  developing our portfolio of international, niche skill-based businesses.
      To realise the full potential of this growth and expansion strategy, we announced the implementation of a significant strategic transformation programme in 2005 designed to reduce our costs and deliver a consolidated operating model. This will be achieved by transforming our support services and retail manufacturing infrastructure and will ensure we have the efficiency and flexibility to enhance our competitiveness and to capitalise on growth opportunities.

14


Table of Contents

      The overall programme is expected to deliver an annual reduction in costs of 120 million over three years and a reduction of 2,100 in the Group’s staff numbers from 2004/05 cost and employee base. Year 1 of the programme has been successfully completed with cost savings of 35 million against a target of 30 million.
      The achievement of this transformation initiative is a key component of our strategy of building a more competitive business capable of maximising the returns from our existing markets and enabling us to exploit considerable growth opportunities.
      The Group believes that the achievement of its strategy is supported by an excellent credit culture, a commitment to the highest standards of corporate governance and behaviour, and a focus on the development of the management and people skills that are essential to progress in the modern financial services environment.
CORPORATE STRUCTURE
      The Group organises its businesses into Retail Republic of Ireland, Bank of Ireland Life, Wholesale Financial Services, UK Financial Services, Asset Management Services and Group Centre. The Group’s operations extend geographically throughout Ireland and the United Kingdom. The Segmental Analysis note is shown in Note 2 to the Consolidated Financial Statements, on pages F-31 – F-34 and outlines a detailed analysis of profit contributions by both geographic segments and by business classes.

15


Table of Contents

      The following tables shows the profit contribution by business for the two years ended March 31, 2006 and the total assets at March 31, 2006 and 2005. For further details on the adjustments falling after Profit before taxation, please refer to Item 5 — Operating & Financial Review and Prospects.
                                                                 
    Year ended March 31, 2006
     
    Retail    
    Republic       Wholesale   UK   Asset    
    of   BOI   Financial   Financial   Management   Group    
    Ireland   Life   Services   Services   Services   Centre   Eliminations   Total
                                 
    m   m   m   m   m   m   m   m
Net interest income
    1,119       8       454       722       7       (3 )           2,307  
Insurance net premium income
          1,264                         34             1,298  
Other income
    351       681       243       94       215       (22 )           1,562  
Profit on disposal of business activities
                      176                         176  
                                                 
Total income
    1,470       1,953       697       992       222       9             5,343  
Insurance claims
          (1,655 )                       (11 )           (1,666 )
                                                 
Total income, net of insurance claims
    1,470       298       697       992       222       (2 )           3,677  
Operating expenses
    (790 )     (92 )     (271 )     (448 )     (133 )     (120 )           (1,854 )
Depreciation and amortisation
    (81 )     (3 )     (17 )     (33 )     (4 )     (28 )           (166 )
Impairment losses
    (54 )           (23 )     (26 )                       (103 )
Income from associates and joint ventures
    5                   40                         45  
                                                 
Profit before taxation
    550       203       386       525       85       (150 )           1,599  
Sale of business activities
                      (176 )                       (176 )
Gross up of policyholder tax in the Life business
          (69 )                                   (69 )
Hedge ineffectiveness on transition to IFRS
                                  7             7  
Restructuring programme
                                  32             32  
                                                 
Group profit before tax excluding the impact of above items
    550       134       386       349       85       (111 )           1,393  
                                                 
Total assets(1)
    77,935       12,326       136,774       54,580       2,906       19,533       (141,700 )     162,354  
                                                 

16


Table of Contents

                                                                 
    Year ended March 31, 2006
     
    Retail    
    Republic       Wholesale   UK   Asset    
    of   BOI   Financial   Financial   Management   Group    
    Ireland   Life   Services   Services   Services   Centre   Eliminations   Total
                                 
    m   m   m   m   m   m   m   m
Net interest income
    1,019       6       302       617       4       (17 )           1,931  
Insurance net premium income
          1,755                         36             1,791  
Other income
    318       709       310       246       252       (36 )           1,799  
Profit on disposal of business activities
                      (20 )           31             11  
                                                 
Total income
    1,337       2,470       612       843       256       14             5,532  
Insurance claims
          (2,216 )                       (6 )           (2,222 )
                                                 
Total income, net of insurance claims
    1,337       254       612       843       256       8             3,310  
Operating expenses
    (729 )     (89 )     (227 )     (504 )     (128 )     (197 )           (1,874 )
Depreciation and amortisation
    (85 )     (4 )     (13 )     (47 )     (3 )     (25 )           (177 )
Impairment losses
    (51 )           (38 )     10             100             21  
Income from associates and joint ventures
    (2 )                 32                         30  
                                                 
Profit before taxation
    470       161       334       334       125       (114 )           1,310  
Sale of business activities
                      20             (31 )           (11 )
Gross up of policyholder tax in the Life business
          (26 )                                   (26 )
Hedge ineffectiveness on transition to IFRS
                                               
Loan loss write back
                                  (100 )           (100 )
Restructuring programme
    4                   2             117             123  
                                                 
Group profit before tax excluding the impact of above items
    474       135       334       356       125       (128 )           1,296  
                                                 
Total assets(1)
    57,830       8,977       101,203       42,941       2,980       18,113       (104,264 )     127,780  
 
(1) Total assets by division include intra-group items, which are required to be deducted in arriving at Group total assets.
Retail Republic of Ireland
      Retail Republic of Ireland includes all the Group’s branch banking operations in the Republic of Ireland. The branches offer a wide range of financial products and services in addition to the deposit, lending, checking account and other money transmission services traditionally offered by banks. It also includes ICS Building Society (“ICS”), Private Banking, instalment credit and leasing facilities, as well as a direct telephone banking unit, credit card operations and commercial finance/ factoring businesses.
      As at March 31, 2006, Branch Banking Republic operated 253 full-time branches. A full range of banking services is provided to all major sectors of the Irish economy including small- and medium-sized commercial and industrial companies. Branches provide checking accounts, demand and term deposit accounts, overdrafts, term loans and home loans as well as customary money transmission and foreign exchange services. Also available

17


Table of Contents

through branches are credit cards and assurance and investment products as well as the loan and deposit products of other Group businesses.
      As a building society, ICS is mainly involved in the collection of deposits and the making of loans secured by residential properties. Its mortgage business is generated by its own mortgage stores and by referrals from intermediaries. ICS’s deposits are generated by referrals from Bank branches. In addition, ICS operates a mortgage servicing centre which processes the Group’s mortgage portfolio as well as its own.
      Bank of Ireland Mortgage Bank was incorporated in Ireland under the Companies Acts, 1963 to 2003 on May 21, 2004 as a public limited company under the name Bank of Ireland Mortgage Bank p.l.c. It was subsequently re-registered as a public unlimited company under the name Bank of Ireland Mortgage Bank. The bank obtained an Irish banking licence under the Irish Central Bank Act, 1971 (as amended) and was registered as a designated mortgage credit institution under the Act on July 1, 2004 and is a wholly owned subsidiary of Bank of Ireland.
      With effect from July 5, 2004 The Governor and Company of the Bank of Ireland transferred its Irish residential mortgage business and substantially all of its Irish residential mortgage loans and their related security to Bank of Ireland Mortgage Bank, trading as Bank of Ireland Mortgages. The Bank’s principal activities are the issuance of Irish residential mortgages and Mortgage Covered Securities in accordance with the Asset Covered Securities Act, 2001. Such loans may be made directly by the bank or may be purchased from Bank of Ireland and other members of the Group or third parties. As at March 31, 2006, the total amounts of principal outstanding in respect of mortgage covered securities issued was 4.3 billion. The value of the pool including mortgage assets and cash at March 31, 2006 securing these assets was 4.8 billion.
      Bank of Ireland Private Banking provides wealth management solutions to high net worth individuals in Ireland. It offers a complete private banking service utilising an extensive range of investment, fiduciary and banking products.
      Bank of Ireland Finance provides instalment credit and leasing facilities. Its products are marketed to the personal, commercial and agricultural sectors by a direct sales force, through the Bank’s branches and by intermediaries such as dealers, brokers, retailers and professionals with whom it has established relationships. Its products include secured instalment credit, leasing, and insurance premium finance. It also provides current asset financing through invoice discounting, factoring and export credit finance and stock purchasing.
      Card Services is responsible for the Group’s credit card activities in the Republic of Ireland and in Northern Ireland. It provides MasterCard, VISA and American Express cards and is supported by Bank branches in marketing its services.
      Banking 365, a direct selling operation, offers personal loan facilities by telephone, outside as well as during normal business hours and it also operates a call centre, which deals with customer queries and processes transactions.
Bank of Ireland Life
      The Group operates in the life and pensions market through Bank of Ireland Life and offers life assurance, protection, pension and investment products primarily to Group customers in Ireland, throughout the Group’s extensive branch banking network and it also operates through the broker channel and its direct sales force, to access the domestic life assurance and pensions markets.
Wholesale Financial Services
      The principal constituents of this division are Corporate Banking, Global Markets, Davy and IBI Corporate Finance.
      Corporate Banking provides an integrated relationship banking service to a significant number of the major Irish corporations, financial institutions and multi-national corporations operating in or out of Ireland. The range of lending products provided includes, but is not limited to, overdraft and short-term loan facilities, term loans, project financing, structured finance and leasing. Corporate Banking is also engaged in international lending, with

18


Table of Contents

offices located in the UK, France, Germany and the U.S. Its international lending includes acquisition finance, global project finance, investment grade lending and other asset based financing, principally in the UK, Continental Europe and the U.S.
      Global Markets is responsible for managing the Group’s liquidity and funding requirements, in addition to managing the Group’s interest rate and foreign exchange risks. Global Markets trades in a range of market instruments on behalf of the Group itself and the Group’s customers. Activities include, but are not limited to, dealing in foreign exchange spot and forward contracts, inter-bank deposits and loans, financial futures, bonds, swaps and forward rate agreements and equity tracker products. Global Markets is also represented overseas in the UK and the U.S.
      Davy is one of the largest institutional, corporate and private client brokers in Ireland. It provides a comprehensive range of stockbroking and related financial services, including but not limited to, bond and equity trading, research, private client wealth management and corporate finance advisory services.
      IBI Corporate Finance provides independent financial advice to public and private companies on take-overs, mergers and acquisitions, disposals and restructurings, in addition to fund raising, public flotation’s and stock exchange listings.
UK Financial Services
      UK Financial Services (“UKFS”) brings together all of the Group’s significant activities in the sterling area. The UKFS structure facilitates the operation of business units by customer segments and needs rather than by traditional brand considerations. The Group believes that the combination of businesses in UKFS provide attractive opportunities for growth within the UK Financial Services marketplace.
      Bristol & West provides standard and non-standard residential mortgages, savings and investment products to retail customers and is based in Bristol. Bristol & West also operates through broker and intermediary channels in sourcing residential mortgages.
      On September 21, 2005 Bank of Ireland sold its Bristol & West branch network and associated deposit base to Britannia Building Society which resulted in a pre-tax gain of £124 million.
      Bank of Ireland retains the Bristol & West brand and all other parts of the Bristol & West business.
      Bristol & West’s principal subsidiary is Bank of Ireland Home Mortgages, a centralised mortgage lender.
      Business Banking UK, operating out of both Great Britain and Northern Ireland, offers deposit, lending, checking account and other money transmission services traditionally offered by banks. In addition, it offers instalment credit and leasing. Business banking units provide loan facilities for medium to large corporate clients while also providing international banking, treasury, current asset financing and electronic banking services.
      Post Office Financial Services sells financial products through the Post Office distribution network. The products offered include personal loans, credit cards, saving bonds and car and home insurance.
      Offshore deposit taking services are offered through the Isle of Man and Guernsey operations.
Asset Management Services
      Asset Management Services provides comprehensive investment management, custody and administration services to investors globally. The division is comprised of Bank of Ireland Asset Management (“BIAM”), Bank of Ireland Securities Services (“BOISS”), and its holdings in Iridian Asset Management (“Iridian”), Guggenheim Advisors (“GA”) and Paul Capital Top Tier Investments (“PCTTI”).
      BIAM provides active and passive investment services for Irish institutional clients and active management of equities and fixed interest securities for international clients. It also acts as sub-advisor for a number of retail distributors in Ireland and overseas. The company’s head office is located in Dublin and it has eight international offices servicing clients across five continents. It had assets under management of 45.1 billion at March 31, 2006.

19


Table of Contents

      BOISS is the investment administration and custodial arm of the Group. It has offices in Dublin’s IFSC and provides a full range of fund administration services to leading international fund managers and it supplies a full range of custody services for all Irish and UK instruments to an international and domestic client base. It also offers a full administration out-sourcing service to fund managers and provides third-party based securities lending capabilities. Assets under administration/custody were 111 billion at March 31, 2006.
      Iridian is a specialist U.S. domestic equity manager, operating in the largest product segment of the U.S. market. The Group currently owns 92% of Iridian (including 8% acquired in August 2006) and plans to acquire the remaining 8% next year. (See Note 44 to the Consolidated Financial Statements on page F-83). Iridian had assets under management of US$10.7 billion at March 31, 2006.
      The Group completed the acquisition of 71.5% of Guggenheim Advisors on January 31, 2006, a U.S. fund of hedge funds manager focusing on institutional and high net worth clients. The final cash consideration for the transaction was dependent on the performance of the business to April 1, 2006 and August 1, 2006. The final price has yet to be agreed however subject to terms of the agreement the Bank has paid US$139.7 million to date. Guggenheim Advisors management and Guggenheim Partners both retain holdings in the company and these holdings are subject to put and call arrangements in the medium term on an agreed basis. These options if exercised are required to be settled in stock in the Governor and Company. In accordance with the Group’s accounting policy in respect of transactions of this nature with minorities no liability has been recognised for these options. Assets under management at Guggenheim Advisors were U.S.$2.9 billion at March 31, 2006.
      On June 20, 2006 the Group and Paul Capital Partners, a leading U.S. private equity specialist, announced the establishment of a joint venture called Paul Capital Top Tier Investments LLC (“PCTTI”) to provide private equity fund of funds products and advisory services to institutional and other investors worldwide. The Group initially acquired a 50% share in PCTTI and may increase its shareholding up to 70% no earlier than 2008 on a pre-agreed basis. Assets under management at PCTTI were U.S.$1.1 billion at June 20, 2006.
Group Centre
      Group Centre mainly includes earnings on surplus capital, and unallocated central overheads.
Material Subsidiaries
      The principal group undertakings at March 31, 2006 were:
                     
        Country of   Statutory
Name   Principal activity   incorporation   year end
             
Bank of Ireland Asset Management Limited
  Asset management     Ireland       March, 31  
Bank of Ireland International Finance Limited*
  International asset financing     Ireland       March, 31  
Bank of Ireland Life Holdings plc*
  Life assurance and pensions     Ireland       December, 31  
Bank of Ireland Mortgage Bank*
  Mortgage lending and mortgage covered securities     Ireland       March, 31  
Bristol & West plc
  Mortgages, savings and investments     England       March, 31  
ICS Building Society*
  Building society     Ireland       December, 31  
IBI Corporate Finance Limited*
  Corporate finance     Ireland       March, 31  
J & E Davy Holdings Limited
  Stockbroking     Ireland       December, 31  
 
* Direct subsidiary of The Governor and Company of the Bank of Ireland.
      All the Group undertakings are included in the consolidated accounts. The Group owns 90.44% of the equity of J & E Davy Holdings Limited and holds 49% of its voting shares. The Group owns 100% of the equity share capital of the other principal group undertakings and 100% of the voting shares of all these undertakings and in the case of ICS Building Society, 100% of the investment shares.

20


Table of Contents

DESCRIPTION OF PROPERTY
      At March 31, 2006, the Bank operated 306 full-time retail bank branches of which 253 were in Ireland, 44 in Northern Ireland and 9 full service branches in Britain. Operations in the rest of the world are undertaken by Bank of Ireland Asset Management and are located in the U.S., U.K., Australia, Canada and Japan and Corporate Banking have offices located in the U.K., France, Germany and the U.S. The majority of these premises are owned directly by the Group with the remainder being held under commercial leases. The premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for the Group’s current and anticipated operations. Full details of acquisitions and disposals during the year are given in Note 23 to the Consolidated Financial Statements under the heading “Property, Plant and Equipment”.
      The Bank of Ireland Group headquarters, located at Lower Baggot Street, Dublin, Ireland, comprises a complex of three buildings constructed in the 1970s having approximately 20,439 square metres (220,000 square feet) net floor space. The freehold interest in the Group’s headquarters had been held in trust for the Group’s principal pension fund, but was sold to a consortium of clients of Quinlan Private in August 2006. The Group also occupies approximately 56,686 square metres (610,165 square feet) net for central functions in Dublin.
      The Bank occupies approximately 24,000 square metres (260,000 square feet) net floor space in the U.K., for business centres and administrative support functions. The majority of these premises are held on individual leases with different expiry dates.
      Bristol & West’s Head Office is located at Temple Quay, Bristol, England. Bristol & West’s administrative buildings occupy approximately 21,400 square metres (230,000 square feet) net floor space.
      The Head Office of New Ireland Assurance Company PLC, trading as Bank of Ireland Life, is located at 9/12 Dawson Street, Dublin, Ireland. The Head Office and administrative buildings occupy approximately 5,413 square metres (58,270 square feet) net floor space. It has a network of 16 operational branches.
      Bank of Ireland Asset Management occupies approximately 9,400 square metres (101,181 square feet) net floor space in 40 Mespil Road, Dublin 4, Ireland, held on a commercial lease, which expires in June 2028. The premises is shared with other Group units including Bank of Ireland Private Banking, Bank of Ireland Business Banking and IBI Corporate Finance.
COMPETITION
      The Bank of Ireland Group faces strong competition in all of its major markets. Other financial services groups compete for the provision of services to customers in the larger financial markets while local banks and other domestic and foreign financial services companies compete within each national market.
Ireland and Northern Ireland
      The Group provides a full range of banking services in Ireland and Northern Ireland. It is subject to competition from various types of institutions within the financial services area. The main competition across the full range of banking activity is from other banks, in particular Allied Irish Banks plc, Ulster Bank Ltd, National Irish Bank Ltd (in Ireland), Northern Bank Ltd (in Northern Ireland) and Irish Life and Permanent plc. Allied Irish Banks plc, which also has its head office in Dublin, is the largest competitor in Ireland. Irish Life and Permanent plc, whose retail banking operations trade as Permanent TSB, is also based in Dublin whereas Ulster Bank Ltd, Northern Bank Ltd and AIB Group (UK) plc (which trades as First Trust Bank and is wholly owned by Allied Irish Banks, plc) are the main competitors in Northern Ireland. Ulster Bank Ltd and Northern Bank Ltd are both based in Belfast. Ulster Bank Ltd is a subsidiary of The Royal Bank of Scotland Group plc and Northern Bank Ltd and National Irish Bank Ltd are subsidiaries of Den Danske Bank.
      The Group also competes in the corporate and investment banking services areas with a range of other domestic and foreign banks. There is also competition from the building societies, the Post Office, credit unions and national savings organizations in both Ireland and Northern Ireland. The general competitive environment in Ireland has been affected by the operation of the Competition Act, 2002 which is modeled closely on Articles 81 and 82 of the EC Treaty, and by the implementation of EC Directive 89/646 of December 15, 1989 (as amended)

21


Table of Contents

(known as the “Second Banking Coordination Directive”), which permits in Ireland the establishment of branches and the provision of cross border services by banks headquartered elsewhere in the European Union.
Britain
      The Bank of Ireland Group’s operations in Britain are not generally associated with large market shares but instead focuses on specific niches. Britain has a very highly competitive and sophisticated financial market with over 500 licensed banking institutions with extensive retail networks. In addition, there are approximately 80 building societies, and the major insurance companies, which also operate nationwide branch networks.
      In Britain, the Group’s principal competitors include, in addition to building societies, other providers of personal financial services, such as banks and insurance companies. Each of these types of financial service providers has expanded the range of services offered in recent years.
Inquiries
      On December 14, 2004, the Irish Competition Authority published a report and draft recommendations on competition in the provision of non-investment banking services in Ireland. The report focused on two areas: personal current accounts (PCAs) and lending to small and medium enterprises (SMEs). The Competition Authority announced a public consultation on the report, which was carried out by LECG, consultants to the Competition Authority and invited all interested parties to respond to the consultation. The Group made such a response and the Authority’s final report, together with copies of all submissions made, was published on September 22, 2005. The report contained a number of recommendations, which are under consideration by, and in conjunction with, relevant stakeholders.
      On May 26, 2005 the Office of Fair Trading (OFT) in the UK announced that it has referred the market for personal current account (PCAs) banking services in Northern Ireland to the Competition Commission (CC) for further investigation under section 131 of the Enterprise Act 2002.
      The CC has invited evidence from all interested parties. The CC published an Emerging Thinking document (and related working papers) on April 28, 2006 on the basis of the evidence examined to date by the CC. The CC invited comments both on the Emerging Thinking document and on the working papers from all interested parties. The Bank provided its response to the CC on May 19, 2006. The CC has powers to seek undertakings and make orders that are binding on any person operating in a market; the remedies can be structural (for example, requiring a firm to divest a business or assets) or behavioral (for example, requiring firms to discontinue some practices or adopt certain practices such as displaying prices or terms and conditions more prominently). Further information has been sought by the CC and further hearings are planned with interested parties and a provisional findings report is expected in the Autumn. Further information is available on www.competition-commission.org.uk.
      The EU Commission announced on June 13, 2005 that it had decided to commence two Sector Inquiries under Article 17 of Council Regulation (EC) No 1/2003 in the financial services sector relating to:
  Retail Banking; and
 
  Business insurance.
      These Inquiries are being carried out in close co-operation with credit institutions, financial institutions, other institutions providing retail banking services and products, including providers of payment services, as well as providers of infrastructure and upstream services, insurance companies financial services intermediaries, users of financial services, including consumer organisations, where appropriate, industry associations, governments and national competition authorities. The EU Commission has addressed questionnaires to interested parties and published Interim Report I on Payment Cards on April 12, 2006 and Interim Report II on Current Accounts and Related Services. The Commission intends to publish the Final Report at the end of 2006.

22


Table of Contents

SUPERVISION AND REGULATION
IRELAND
      In respect of banking operations in Ireland, the provisions of the Central Bank Acts, 1942 to 2001, the Central Bank and Financial Services Authority of Ireland Act, 2003, the Central Bank and Financial Services Authority of Ireland Act 2004, the European Communities (Consolidated Supervision of Credit Institutions) Regulations, 1992 (as amended) (the 1992 Consolidated Supervision Regulations) and the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 (as amended) (the 1992 Licensing Regulations) apply to the Group.
      Banking activities in Ireland are regulated and supervised by the Irish Financial Services Regulatory Authority (the “Financial Regulator”). The Irish banking law regulations consist primarily of the Central Bank Acts, 1942 to 2001, the Central Bank and Financial Services Authority of Ireland Act, 2003, the Central Bank and Financial Services Authority of Ireland Act, 2004, regulations made by the Irish Minister for Finance under the European Communities Act, 1972, and regulatory notices issued by the Financial Regulator. These ministerial regulations and regulatory notices implement EU directives relating to banking regulation, including Council Directive No. 77/780/ EEC of December 12, 1977, as amended (the First Banking Co-ordination Directive), Council Directive 89/646/ EEC of December 15, 1989, as amended (the Second Banking Co-ordination Directive), the Capital Adequacy Directive, the Solvency Ratio Directive, the Own Funds Directive, Council Directive 92/121/ EEC of December 21, 1992 (the Large Exposures Directive), Council Directive 94/19/ EC of May 30, 1994, as amended (the Deposit Guarantee Scheme Directive), Council Directive 92/30/ EEC of April 6, 1992 (the Consolidated Supervision Directive) and European Parliament and Council Directive 95/26/ EC of June 29, 1995 (the Post BCCI Directive). To the extent that areas of banking activity are the subject of EU directives, the provisions of Irish banking law reflect the requirements of those directives.
      The Bank of International Settlements 1988 Accord (Basle I) capital adequacy standards as adopted at EU level under the EU Own Funds/ Solvency Ratio Directives form part of Irish banking law. Regulatory capital, which is required to be held by an Irish bank to cover credit risks comprises Tier 1 (original own funds) and Tier 2 (additional own funds) capital. In the case of certain risks associated with an Irish bank’s trading book and foreign currency exchange risk, regulatory capital also includes Tier 3 (supplementary own funds) capital. Although a minimum solvency ratio of 8 per cent. applies to Irish licensed banks, in practice the Financial Regulator generally requires Irish licensed banks to have a higher minimum solvency ratio to be determined on a case-by-case basis.
      Liquidity requirements for EU credit institutions are not the subject matter of EU directives. In Ireland, the Financial Regulator, as a general rule, requires Irish licensed banks to hold a minimum ratio of liquid assets to total borrowings of 25 per cent. The liquid assets must be of a kind acceptable to the Financial Regulator. In June 2006 the Financial Regulator published revised liquidity requirements that require Irish licensed banks to move to a maturity mismatch approach for reporting of regulatory liquidity. This will require Irish credit institutions to ensure that for defined timebands cash inflows cover a stipulated percentage of cash outflows. The new requirement is being introduced in parallel with the existing system from January to July 2007 and will replace the current minimum ratio from that date. The Group is currently engaged in implementing the new requirements.
      The Central Bank and Financial Services Authority of Ireland Act, 2003 brings under one supervisory umbrella all of the financial services activities in Ireland. The Financial Regulator is a constituent part of the Central Bank and Financial Services Authority of Ireland (the Authority) but has no responsibility either for contributing to the stability of the financial system or promoting the efficient and effective operating of payment and settlement systems (the responsibility of the Authority) or for holding and managing the foreign reserves of Ireland, promoting the efficient and effective operations of settlement systems or for the performance of functions imposed on the Authority under the Rome Treaty or the European System of Central Banks Statute (the sole responsibility of the Governor of the Authority). By contrast, the Financial Regulator is entrusted with the supervisory activities of the former Central Bank of Ireland. Two particular features of the Central Bank and Financial Services Authority of Ireland Act, 2003 should be noted. First, it established as a separate function the office of the Consumer Director with particular responsibility for the administration of the Consumer Credit Act, 1995, and the consumer protection provisions of other supervisory enactments. The Consumer Credit Act had

23


Table of Contents

been administered by a separate office, the Director of Consumer Affairs, since that Act’s implementation on May 13, 1996. Second, it established the Irish Financial Services Appeal Tribunal, which will hear and determine appeals under any of the designated enactments or statutory instruments referred to above that have the effect of imposing a sanction or liability on any person. The provisions relating to the Irish Financial Services Appeal Tribunal became effective on August 1, 2004.
      All Irish licensed banks are obliged to draw up and publish their annual accounts in accordance with the European Communities (Credit Institutions: Accounts) Regulations, 1992 (as amended by the European Community (Credit Institutions) (Fair Value Accountancy) Regulations 2004. As a listed entity Bank of Ireland is required to prepare its financial statements in accordance with International Financial Reporting Standards (“IFRS”) endorsed by the European Union and with those parts of the Companies Acts 1963 to 2005 applicable to companies reporting under IFRS and Article 4 of the EU Council Regulation 1606/2002 of the 19th July 2002.
      Subject to the provisions of the 1992 Licensing Regulations relating to mutual recognition of credit institutions authorised elsewhere in the EU, the Central Bank Act, 1971 (as amended) (the 1971 Act) restricts the carrying-on of banking business in Ireland to holders of licenses granted under the 1971 Act. The 1971 Act stipulates that license holders must maintain a minimum deposit with the Authority. The Financial Regulator has a qualified discretion to grant or refuse a license and may attach conditions to any licenses granted. Bank of Ireland holds a license granted under the 1971 Act with one condition attached — that Bank of Ireland must notify the Financial Regulator of its intention to close any branch in Ireland. The Financial Regulator, after consultation with the Minister for Finance, may revoke a license under certain circumstances specified in the 1971 Act.
      The Financial Regulator has statutory power to carry out inspections of the books and records of license holders and to obtain information from license holders about their banking and bank-related business. Pursuant to this power, the Financial Regulator carries out regular review meetings and periodically inspects licensed banks. The Financial Regulator is also empowered by law to obtain information from license holders about their banking and bank-related business.
      The Financial Regulator may also prescribe ratios to be maintained between, and requirements as to the composition of, the assets and liabilities of licensed banks, and to make regulations for the prudent and orderly conduct of banking business of such banks. The 1992 Licensing Regulations set forth minimum start-up and ongoing capital requirements for banks licensed by the Regulator and require applicants for a license to notify the Financial Regulator of the identity of certain shareholders and the size of their holdings in the applicant. The Financial Regulator also sets requirements and standards from time to time for the assessment of applications for licenses. The most recent requirements and standards were published initially in the Quarterly Review of the Central Bank of Ireland, Winter 1995, have been updated regularly and are non-statutory requirements which are applied by the Financial Regulator to credit institutions as a supplement to the statutory requirements referred to generally in this section but do not purport to interpret or refer comprehensively to the statutory provisions applicable to credit institutions.
      The Group is also subject to EU Directives relating to capital adequacy, and in the area of monitoring and control of large exposures. These EU Directives, which have been implemented in Ireland by way of administrative notice, were codified into a single text by Directive 2000/12/ EC of March 20, 2000 (the EU Codified Banking Directive).
      The Group’s operations in overseas locations are subject to the regulations and reporting requirements of the regulatory and supervisory authorities in the overseas locations with the Financial Regulator having overall responsibility for their regulation and supervision. The Financial Regulator is required to supervise the Group on a consolidated basis, i.e., taking account of the entire Group activities and relationships.
      Licensed banks must notify their existing fees and charges and related terms and conditions, and any changes therein from time to time to the Consumer Director of the Financial Regulator, who can direct that no fees, charges or increases or changes therein be made without his or her approval.
      All credit institutions are obliged to take the necessary measures to counteract money laundering effectively in accordance with the Criminal Justice Act, 1994 (as amended) and the Guidance Notes for Credit Institutions,

24


Table of Contents

which were issued with the approval of the Money Laundering Steering Committee. Revised guidance notes were issued in 2003.
      Under the European Communities (Deposit Guarantee Schemes) Regulations, 1995 (as amended) the Financial Regulator also operates a statutory depositor protection scheme to which both licensed banks (including the Issuer) and building societies are required to make contributions amounting to 0.2 per cent, of their total deposits. The maximum level of compensation payable to any one depositor is 90 per cent of the aggregate deposits held by that depositor subject to a maximum compensation of 20,000.
      In 2001 the Central Bank issued a Code of Practice for Credit Institutions (setting down standards of good banking practice to be followed by banks in their dealings with consumers), a Code of Conduct for Investment Business Services of Credit Institutions and advertising requirements applicable to Credit Institutions.
      In July 2006 the Financial Regulator published a Consumer Protection Code and Minimum Competency Requirements. The Consumer Protection Code came into force on August 1, 2006 and applies to banks and building societies, insurance undertakings, investment business firms, mortgage intermediaries and credit unions. The Code requires regulated entities to know their customers and their suitability for products or services, to prepare terms of business and minimum levels of information for customers, including disclosure requirements and customer record obligations, to identify all charges, fees or other rewards connected with the supply of a service and to establish processes to deal with errors, complaints and conflicts of interest. There are also detailed rules on the fairness of advertising, and specific sectoral rules on banking products, loans, insurance services and investment products. The Minimum Competency Requirements will enter into force on January 1, 2007 and will require employees of regulated entities who provide advice on or sell retail financial products to acquire the competencies set out in the Requirements, and to engage in continuing professional development on an ongoing basis.
      A financial services ombudsman’s bureau and a financial services ombudsman council have been established under the Central Bank and Financial Services Authority Act of 2004. That Act also sets out the functions and powers of that council and bureau, respectively, and establishes consultative panels to advise the Financial Regulator on matters relating to its statutory functions.
UNITED KINGDOM
      In respect of its banking operations in Northern Ireland and Britain, Bank of Ireland has the status of “European institution” under the UK Banking Coordination (Second Council Directive) Regulations 1992 (the UK 2BCD Regulations) and is entitled to carry on in the United Kingdom any of the listed activities in the Second Banking Co-ordination Directive which it is authorised to carry on in Ireland.
      The powers of the UK Financial Services Authority (“FSA”) in relation to European institutions are less extensive than those in relation to UK institutions because, pursuant to the principle of “home country” control incorporated in the Second Banking Co-ordination Directive, the Financial Regulator, as the competent authority in Ireland, has primary responsibility for the supervision of credit institutions incorporated in Ireland. The FSA, however, has a specific responsibility to cooperate with the Financial Regulator in ensuring that branches of European credit institutions from Ireland maintain adequate liquidity in the United Kingdom. The FSA also has the responsibility to collaborate with the Financial Regulator in ensuring that Irish credit institutions carrying on activities listed in the Second Banking Co-ordination Directive in the United Kingdom take sufficient steps to cover risks arising from their open positions on financial markets in the United Kingdom. In addition, it has the power to make rules about the conduct of financial business in the UK by European institutions. For example, in relation to deposit taking, it has made rules about the approval of advertisements, the handling of complaints and the avoidance of money laundering.
      Under the UK 2BCD Regulations, the FSA is empowered in specified circumstances to impose a prohibition on, or to restrict the listed activities of, a European institution. Consistent with the allocation of supervisory responsibilities in the Second Banking Co-ordination Directive, the FSA would usually exercise its power only after consulting the Authority, which, inter alia, expresses willingness of the respective authorities to exchange information in order to facilitate the effectiveness of the supervision of credit institutions in the European Union.

25


Table of Contents

It also provides for the exchange of information in crisis situations and in cases where the authorities become aware of contraventions of the law by institutions covered by the 2BCD operating in their territory. The FSA can also enforce its conduct of business rules and has certain other enforcement powers under UK legislation.
      Because Bank of Ireland has established a place of business in England, it is subject to the provisions of the UK Companies Act 1985, which affect overseas companies. Equally, on account of its having established a place of business in Northern Ireland in connection with its operations there, Bank of Ireland is subject to the provisions of Part XXIII of the Companies (Northern Ireland) Order 1986 which apply to companies incorporated outside Northern Ireland which have established a place of business in Northern Ireland.
      In respect of its banking operations in Northern Ireland, Bank of Ireland is empowered under the Bank of Ireland Act, 1821 to issue bank notes as local currency, and is subject to the provisions of the Bankers (Northern Ireland) Act, 1928, the Bank of Ireland and Subsidiaries Act, 1969 and the Financial Services and Markets Act, 2000 in respect thereof.
      In addition to the role of the FSA in relation to the Group as a European Institution described above, the FSA is also the home country regulator of a number of the Group’s UK incorporated subsidiaries. These include Bristol & West plc (an authorised bank and successor to Bristol & West Building Society) and Bank of Ireland Home Mortgages. Since December 1, 2001 the FSA’s power and responsibilities derive from the Financial Services and Markets Act 2000 (“FSMA”), which gave effect to a major overhaul of the regulatory system in the UK. The scope of the FSMA was extended in 2004 to include retail mortgage lending and general insurance intermediation, and relevant Group subsidiaries have been authorised or had their permissions extended where appropriate. In January 2005 Post Office Limited became an appointed representative of Bristol & West plc in respect of its activities in relation to the Post Office Financial Services Joint Venture with Bank of Ireland.
      The FSA’s basic method of supervising banks involves the regular reporting of statistical information and a regular set of returns giving balance sheet and consolidated statement of income and data, material on the maturity structure of assets and liabilities, sectoral analysis of business and details of concentration of risk in assets and deposits. Review meetings are held by the FSA with the management of regulated firms. Under the risk-based approach introduced in 2001 (ARROW) the FSA’s supervision of banks is based on a systematic analysis of the risk profile of each bank. The FSA also publishes requirements it expects banks to meet on matters such as capital adequacy, limits on large exposures to individual entities and groups of closely connected entities and liquidity.
      In order to maintain authorisation under the FSMA, regulated firms must be able to demonstrate that they have adequate resources and that they are fit and proper. In addition, firms must meet the FSA’s requirements with regard to senior management arrangements, systems and controls, conduct of business, training and competence, money laundering and complaints handling.
      In addition to various powers to make rules and issue guidance, the FSMA also gives the FSA power to gather information, undertake investigations and to impose sanctions both on regulated firms and on certain of their directors and managers. For example, under FSMA section 166 the FSA may require an authorised firm to provide it with a report from a skilled person (for example an accountant) in relation to the exercise of the FSA’s functions.
      Various members of the Group hold licences from the UK Director General of Fair Trading under the UK Consumer Credit Act, 1974 in relation to regulated consumer credit lending and mortgage broking. The Director General of Fair Trading has certain powers in relation to these activities.
UNITED STATES
      The Bank of Ireland is in the process of establishing a branch in Connecticut for which it has received all necessary approvals. The branch will be licensed by the Connecticut Department of Banking and will be subject to regulation and examination by the Department. In addition, the Board of Governors of the Federal Reserve System will exercise examination and regulatory authority over the branch. The regulation of our branch will impose restrictions on its activities, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including the Bank of Ireland and its subsidiaries and affiliates. The branch will not accept retail

26


Table of Contents

deposits and its deposits and obligations will not be insured by the U.S. Federal Deposit Insurance Corporation or any other agency.
      The Connecticut Department of Banking has the authority to take possession of the business and property of the Group located in Connecticut in certain circumstances relating to the branch. Such circumstances generally include violation of law, unsafe business practices and insolvency.
      In addition to the direct regulation of the branch, operating the branch subjects Bank of Ireland and its subsidiaries to regulation by the Board of Governors of the Federal Reserve System under various laws, including the International Banking Act of 1978 and the Bank Holding Company Act of 1956. In this regard, Bank of Ireland has been designated a “financial holding company” under the Bank Holding Company Act of 1956. Financial holding companies may engage in a broader spectrum of activities, including underwriting and dealing in securities and merchant banking activities. To maintain its financial holding company status, Bank of Ireland is required to meet or exceed certain capital ratios and its branch is required to meet or exceed certain examinations ratings. The failure to maintain financial holding company status could limit the activities of Bank of Ireland and its subsidiaries in the U.S. and have other adverse consequences.
      A major focus of US governmental policy relating to financial institutions in recent years has been aimed at combating money laundering and terrorist financing. Regulations applicable to the Group impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, verify the identity of their customers and comply with U.S. economic sanctions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, as well as violations of such economic sanctions, could have serious legal and reputational consequences for the institution.
THE IRISH ECONOMY
      Ireland is a small economy with a population of 4.1 million people. It was a founding member of the European Monetary System in 1979 and was in the first group of countries to participate in the European Monetary Union in 1999. Total Gross Domestic Product (GDP) in the calendar year 2005 was 160 billion and is estimated by the Government that it will be 173 billion in the calendar year 2006. The Irish economy has expanded very strongly over the past decade, with real GDP growth averaging 6.7% per annum between 1996 and 2005. Growth has been broadly based, with consumption, investment and external trade all making a strong contribution over the period.
      The economy grew by 5.5% in real terms in 2005, with strong gains in personal consumption and fixed investment, and the Irish Central Bank expects GDP growth of around 5% in 2006 and 2007. Consumption has been supported by strong gains in household income, in turn boosted by healthy wage increase and buoyant employment growth. The unemployment rate has remained in a 4%-5% range since 1999, and labour force growth has been augmented by substantial immigration. The latter has also contributed to population growth at a pace significantly above the EU norm. Consumer price inflation was 2.5% in 2005, in line with the euro area norm, against a broad 4-6% range from 2000 to 2003.
Item 4A     UNRESOLVED STAFF COMMENTS
      None.
Item 5     OPERATING & FINANCIAL REVIEW AND PROSPECTS
Overview
      The year to March 31, 2006 was one of strong profit growth for the Bank of Ireland Group. We achieved this through record business levels in our main divisions, aggressive cost management and by beginning to reap the benefits of our focused investment strategy. We also met our goal of stepping up the implementation of our business strategy where we made significant progress on a number of fronts. We are ahead of target in Year 1 of our Strategic Transformation Programme and we are creating clear differentiation with our competitors through

27


Table of Contents

our “Changing for You” customer service programme. This highly satisfactory performance for the year has been achieved while maintaining excellent asset quality.
      Total profit before tax increased 22% from 1,310 to 1,599 million with basic earnings per share up 23% from 111.1c to 136.4c. Results for the years ended March 31, 2005 and 2006 are not directly comparable as IFRS 4, IAS 32 and IAS 39 were not effective until April 1, 2005, and therefore to achieve greater clarity of the progress made by Bank of Ireland Group, adjustments are made to significantly eliminate the effect of not applying IFRS 4, IAS 32 and IAS 39 for the year to March 31, 2005 (termed “pro-forma” accounts). Total profit before tax increased 31% to 1,599 million with basic earnings per share also up 31% to 136.4c on a pro-forma IFRS basis. However this performance also includes certain items which management believe are non-operating in nature and therefore may obscure the true trends inherent in the business, these items are labelled “Non Core Items”. The profit before tax amount of these items are:
Non Core Items
                 
    March 31, 2006   March 31, 2005
         
    million   million
a)   Profit on sale of the Bristol and West Branch Network during 2005/06
    176        
b)   Profit on sale of EuroConex and Chase de Vere
          11  
c)  Gross up of policyholder tax in the Life business
    69       26  
d)   Release of restructuring provisions
          13  
e)  Costs associated with restructuring programmes
    (32 )     (136 )
f)   Hedge Ineffectiveness arising on transition to IFRS
    (7 )      
g)   Impairment loss write back
            100  
             
     Total non-core items before tax
    206       14  
             
     Total non-core items after tax
    141       (9 )
             
      Profit before tax excluding the above non-core items (“underlying profit”), on a pro-forma IFRS basis, increased 16% to 1,393 million with underlying earnings per share at 118.5 cent, also an increase of 16% on the previous year. The Group cost/income ratio reduced by almost 3% in line with our goal of improving efficiency and our impairment loss charge at 11 basis points (bps) reflects strong underwriting skills and the benign credit environment. These results made this our 15th consecutive year of profit growth and our 14th successive year of dividend growth. A reconciliation of the impact of non-core items excluded from underlying profit before tax in the income statement lines is included on page 48 of this document.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
      The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
(a) Impairment losses on loans and advances
      The Group reviews its loan portfolios at least on a quarterly basis to assess impairment. In determining whether an impairment loss should be recorded in the income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio, when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

28


Table of Contents

(b) Fair value of derivatives
      The fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (e.g. models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data, however areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments.
(c) Retirement Benefits
      The Group operates a number of defined benefit pension schemes. In determining the actual pension cost, the actuarial value of the assets and liabilities of the scheme are calculated. This involves modelling their future growth and requires management to make assumptions as to price inflation, dividend growth, salary and pensions increases, return on investments and employee mortality. There are acceptable ranges in which these estimates can validly fall. The impact on the results for the period and financial position could be materially different if alternative assumptions were used.
(d) Life Assurance Operations
      The Group accounts for the value of the shareholder’s interest in long-term assurance business using the embedded value basis of accounting. Embedded value is comprised of the net tangible assets of Bank of Ireland Life and the present value of its in-force business. The value of in-force business is calculated by projecting future surpluses and other net cash flows attributable to the shareholder arising from business written up to the balance sheet date and discounting the result at a rate which reflects the shareholder’s overall risk premium, after provision has been made for taxation.
      Future surpluses will depend on experience in a number of areas such as investment returns, lapse rates, mortality and investment expenses. Surpluses are projected by making assumptions about future experience, having regards to both actual experience and forecast long-term economic trends. Changes to these assumptions may cause the present value of future surpluses to differ from those assumed at the balance sheet date and could significantly affect the value attributed to the in-force business. The value of in-force business could also be affected by changes in the amounts and timing of other net cash flows (principally annual management charges and other fees levied upon the policyholders) or the rate at which the future surpluses and cash flows are discounted. In addition, the extent to which actual experience is different from that assumed will be recognised in the profit and loss account for the period.
(e) Taxation
      The taxation charge accounts for amounts due to fiscal authorities in the various territories in which the Group operates and includes estimates based on a judgement of the application of law and practice in certain cases to determine the quantification of any liabilities arising. In arriving at such estimates, management assesses the relative merits and risks of tax treatments assumed, taking into account statutory, judicial and regulatory guidance and, where appropriate, external advice.
(f) Goodwill
      The Group capitalises goodwill arising on the acquisition of businesses, as disclosed in the Accounting policies. The carrying value of goodwill as at March 31, 2006 was 375 million (2005: 219 million). Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
      For the purposes of impairment testing goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying value of a cash-generating unit with its recoverable amount. The

29


Table of Contents

recoverable amount is the higher of the unit’s fair value and its value in use. Value in use is the present value of expected future cash flow from the cash-generating unit. Fair value is the amount obtainable for the sale of the cash-generating unit in an arm’s length transaction between knowledgeable, willing parties.
      Impairment testing inherently involves a number of judgemental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of the separable assets of each business whose goodwill is being reviewed.
LIQUIDITY AND CAPITAL RESOURCES
      The Group’s overall liquidity policy and control is the responsibility of the asset and liability committee (“ALCO”) and is managed by Global Markets to ensure that the Group can meet its current and future re-financing needs at all times and at acceptable costs. The Group believed that its liquidity position was strong at March 31, 2006. Bank of Ireland is currently unaware of any terms, conditions or circumstances that could significantly impair the Group’s ability to raise short or long-term funding.
      Liquidity management within the Group has two main strands. The first is day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. These include replenishment of existing funds as they mature or are withdrawn to satisfy demands for additional borrowings by customers. The second is maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow.
      A significant part of the liquidity of the banking businesses in Ireland and the United Kingdom arises from their ability to generate customer deposits. A substantial proportion of the customer deposit base is made up of current and savings accounts, which, although repayable on demand, have traditionally provided a stable source of funding. These customer deposits are supplemented by the issue of subordinated loan capital and wholesale funding sources in the capital markets, as well as from direct customer contracts. Wholesale funding sources include deposits taken on the inter-bank market, certificates of deposit, sale and repurchase agreements, Commercial Paper Programmes, a Euro Medium Term Note programme and the Mortgage Covered Securities Programme.
      Monitoring and reporting take the form of cash flow measurement and projections for future periods, with the next week and one month as key periods for liquidity management.
      The ability to sell assets quickly is also an important source of liquidity to BOI Group’s banking business. BOI Group holds sizeable balances of marketable treasury and other eligible bills and debt securities which could be disposed of to provide additional funding should the need arise.
      The following table sets out the amounts and maturities of the Group’s contractual cash obligations at March 31, 2006.
                                         
        Between   Between        
    Within   one and   two and   Over five    
    one year   two years   five years   years   Total
                     
    m   m   m   m   m
Longterm debt — dated
                806       2,807       3,613  
Debt securities in issue
    22,596       4,689       6,523       3,006       36,814  
Operating leases
    48       46       115       542       751  
Capital commitments
    17                         17  
      In addition, the Group takes deposits and other liabilities in the normal course of its banking business. The maturity of deposits by banks, customer accounts and debt securities in issue is given in Note 33 to our Consolidated Financial Statements.

30


Table of Contents

Capital Resources
      As at March 31, 2006, Bank of Ireland Group had 2,880 million of Undated Loan Capital and 3,613 million of Dated Loan Capital, a total of 6,493 million in aggregate of subordinated liabilities. Of the Dated Loan Capital 2,815 million is repayable in five or more years. The cost and availability of subordinated debt are influenced by credit ratings. A reduction in the ratings assigned to the Group’s securities could increase financing costs and reduce market access. The credit ratings of Bank of Ireland Group at August 31, 2006 are as follows:
         
    Senior Debt
     
Moodys
    Aa3 (stable)  
Standard & Poors
    A+ (positive)  
Fitch
    AA- (stable)  
      These credit ratings are not a recommendation to buy, hold or sell any security and each rating should be evaluated independently of every other rating. These ratings are based on current information furnished to the rating agencies by Bank of Ireland and information obtained by the rating agencies from other sources. The ratings are accurate only as of August 31, 2006 and may be changed, superseded or withdrawn as a result of changes in, or unavailability, of such information.
Off Balance Sheet Arrangements
                 
    March 31,
     
    2006   2005
         
Contingent Liabilities   Total   Total
         
    m   m
Acceptances and endorsements
    37       34  
Guarantees and assets pledged as collateral security
               
— Assets pledged
           
— Guarantees and irrevocable letters of credit
    1,354       1,268  
Other contingent liabilities
    675       643  
             
      2,066       1,945  
Lending commitments
    30,937       29,296  
             
Total contingent liabilities and commitments
    33,003       31,241  
             
      Lending commitments are agreements to lend to customers in accordance with contractual provisions; these are either for a specified period or, as in the case of credit cards and overdrafts, represent a revolving credit facility which can be drawn down at any time, provided that the agreement has not been terminated. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.
ANALYSIS OF RESULTS OF OPERATIONS
Basis of Preparation and Presentation
      The Group has implemented International Financial Reporting Standards (“IFRS”) from April 1, 2005 and the Financial Statement and other financial information in the Form 20-F has, for the first time, been prepared in accordance with IFRS adopted by the International Accounting Standards Board (IASB), and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB and endorsed by the European Union (EU). Herein referred to as “Statutory” IFRS. In all material respects, this is also in accordance with full IFRS (as issued by the International Accounting Standards Board “IASB”).
      Comparative figures for the year ended March 31, 2005 have been restated under IFRS. The Group has availed itself of the option in IFRS 1 (First Time Adoption of International Financial Reporting Standards) not to apply IAS 32 (Financial Instruments: Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition

31


Table of Contents

and Measurement) and IFRS 4 (Insurance Contracts) to the comparative figures for the year ended March 31 2005. Accordingly statutory comparative information in respect of Financial Instruments and Insurance Contracts is prepared on the basis of the Group’s accounting policies under Irish Generally Accepted Accounting Principles (“IR GAAP”). A consolidated opening balance sheet incorporating the initial effect of implementing IAS 32, IAS 39 and IFRS 4 as at April 1, 2005 is presented on page F-94.
      However, given the impact of IAS 32, IAS 39 and IFRS 4, the Group is also providing detailed comparative information on a pro-forma basis that includes the estimated effect of these standards for the year ended March 31, 2005 to facilitate inter-period comparison. These standards impact the accounting for derivatives, income recognition on loans (Effective Interest Rate (EIR)), accounting for insurance contracts, impairment provisioning and the classification of financial instruments. The pro-forma comparative information for the twelve months to March 31, 2005 does not adjust for the impact of accounting for derivatives (hedge accounting) and impairment provisioning. Herein referred to as “Pro-forma”.
      The results for the year to March 31, 2006 with pro-forma comparatives for the year to March 2005 are presented on page 48. A reconciliation of the Group Income Statement for the twelve months to March 31, 2005 on a statutory IFRS basis to a pro-forma basis is set out on page 49.
      The Group and Divisional results for the year ended March 31, 2005 have been prepared on a pro-forma basis to ensure that the underlying performance trends inherent in the business are explained. To further enhance comparability between both periods certain non-core items are excluded from our analysis of Group and Divisional performance. These non-core items are set out on pages 48 & 49 of this document. Statutory profit before tax less non-core items is referred to as “Underlying” profit before tax.
      The divisional profit before tax impact of these non core items is also reconciled on pages 16 & 17 of the Corporate Structure section of this document. A Group income statement line item reconciliation of the non-core items are also set out on pages 48 & 49 of this document.
      In order to best explain the performance trends, the review of the Group and Divisional performance that follows explains where relevant, for each item
  the change in statutory profit
 
  the impact on statutory profit of non-core items (i.e. underlying profits)
 
  the impact of acquisitions and disposals and
 
  the impact of the move to IFRS.
      The following terms will be used in the analysis of results and operations that follows and are defined below:
      Statutory amounts: These are amounts determined in accordance with IFRS as adopted by the European Union and as presented in the audited IFRS financial statements.
      Proforma amounts: These are amounts relating to the year ended March 31, 2005 determined in accordance with IFRS as adjusted to apply IAS 32, IAS 39 and IFRS 4 with the exception of the aspects of those standards that relate to accounting for derivatives (hedge accounting) and impairment provisioning.
      Non-core items: Certain items which the Group considers to have a distorting impact on the underlying performance.
      Underlying amounts: These amounts represent statutory or proforma amounts which have been adjusted to exclude non-core items.

32


Table of Contents

Results of Operations — Group Analysis
Review of Group Performance
Group Income Statement
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
     million    million    million
Net interest income
    2,307       1,971       1,931  
Other income (net of insurance claims)
    1,370       1,257       1,379  
                   
Total operating income (net of insurance claims)
    3,677       3,228       3,310  
Operating expenses
    (2,020 )     (2,059 )     (2,051 )
Impairment losses on loans and advances
    (103 )     21       21  
Share of associated undertakings and joint ventures (post tax)
    45       30       30  
                   
Total profit before tax
    1,599       1,220       1,310  
Taxation
    (303 )     (237 )     (256 )
Minority interest
    9       7       1  
Dividends to preference stockholders
    (13 )     (10 )     (8 )
                   
Profit attributable to ordinary stockholders
    1,292       980       1,047  
                   
Basic EPS c per share
    136.4c       103.9c       111.1c  
Underlying EPS c per share
    118.5c       102.3c        
Income
Net Interest Income
                           
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
     million    million    million
Net interest income
    2,307       1,971       1,931  
 
•   Acquisitions: Burdale & Guggenheim Advisors
    (15 )     (3 )     (3 )
 
•   Disposals: Chase de Vere & Bristol & West branch network
    (18 )     (47 )     (47 )
 
•   IAS 32 and 39 impact
    (78 )           0  
                   
Net interest income excluding impact of acquisitions and disposals & IAS 32 and 39
    2,196       1,921       1,881  
                   
      Statutory Net interest income increased by 19% or 376 million, from 1,931 million to 2,307 million, for the year to March 31 2006. This performance has been impacted by the distorting effect of:
      Acquisitions: the effect on income streams associated with the recently acquired entities of Burdale and Guggenheim Advisors (2006: 15 million; 2005: 3 million)
      Disposals: the effect on income streams associated with the recently divested entities of Chase de Vere and Bristol and West branch network (2006: 18 million; 2005: 47 million)
      IAS 32 and IAS 39 impact: the reclassification of income between Net Interest Income and Other Income following the application of derivative, hedging and fair value accounting requirements of IAS 39. (2006: 78 million)
      Net Interest Income, excluding the impact of the above items, increased by 17% from 1,881 million to 2,196 million in the year to March 31, 2006. Of this increase, approximately 40 million or 3% was due to the first time adoption of IAS 32 and IAS 39 by the Group on April 1, 2005 and excluding the impact of this first time adoption of IAS 32 and IAS 39 impact, Net Interest Income grew by 14% or 275 million from

33


Table of Contents

1,921 million to 2,196 million. This was driven by strong loan and resource growth. Loans to customers increased by 27% and resources grew by 3% (15% excluding the impact of the disposal of Bristol & West branch network and its related deposit book). Loan growth was strong across all businesses in the Group. Exposure to strongly performing economies, together with the delivery from our investment in our UK Business Banking and Corporate Banking teams, have been key drivers of this performance. Strong resource growth in Ireland of 12% was largely offset by the disposal of the Bristol & West deposit book resulting in Group resource growth of 3% for the year to March 31, 2006. The strength of our domestic franchise, supported by the scale of our multi-channel distribution network, is key to the continued strong performance of our Retail volumes in Ireland.
Group Net Interest Margin
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
Average interest earning assets (billion)
                       
Domestic
    84       64       59  
Foreign
    45       38       38  
                   
Total
    129       102       97  
                   
Margin (%)
                       
Domestic net interest margin
    1.87       2.09       2.21  
Foreign net interest margin
    1.63       1.69       1.68  
                   
Group net interest margin
    1.79       1.94       2.00  
IAS 32 and 39 impact
    (0.06 )            
                   
Adjusted net interest margin
    1.73       1.94       2.00  
                   
      The Group net interest margin decreased by 15bps to 1.79% at March 31, 2006 compared to 1.94% at March 31, 2005 on a pro-forma IFRS basis. Excluding the impact of IAS 32 and IAS 39, the margin decline was 21 bps. The main drivers of margin attrition are:
  Balance sheet structure where there was an increase in wholesale funding as loan growth continued to outpace deposit growth. Wholesale funding has increased from 35% to 46% of total funding over the year to March 31, 2006, with 6% of this increase due to the sale of Bristol & West branch network and its related deposit book.
 
  The lower returns being earned on the investment of credit balances (customer funds held in non interest-bearing current accounts) in the current low interest rate environment. The Bank of Ireland policy is to re-invest credit balances on average over a four year investment horizon. As interest rates remain low we are re-investing funds, that are maturing from a higher interest rate environment at lower rates. The low interest rate environment also has an impact on other liability margins.
 
  Product mix where the impact of volumes in lower margin products, including mortgages and corporate banking loans, growing faster than higher margin products.
 
  Competitive pressure impacting lending and deposit pricing in Ireland.
      Net interest margin has also been impacted by the re-pricing of the UK mortgage back-book which is now complete and the sale of the Bristol & West deposit book. The pace of margin attrition going forward is expected to decline as the rate of loan growth relative to resource growth is likely to moderate and the increasing interest rate environment starts to positively impact liability margins.

34


Table of Contents

      The following tables set forth the prevailing average interest rates and average interest earning assets for each of the years ended March 31, 2006 and 2005.
Average Interest Earning Assets
                         
    For the Financial Year Ended
    March 31,
     
    2006   2005   2005
    Statutory   Pro-forma   Statutory
    IFRS   IFRS   IFRS
             
    (in billions)
Group
    129       102       97  
Domestic
    84       64       59  
Foreign
    45       38       38  
      The following table shows interest rates in effect at March 31, 2006 and 2005.
                   
    For the Financial
    Year Ended
    March 31,
     
    2006   2005
         
    (percentages)
Ireland
               
European interbank offered rate:
               
 
One month Euribor
    2.65       2.13  
 
Three month Euribor
    2.81       2.18  
United Kingdom
               
London interbank offered rate:
               
 
One month
    4.59       4.87  
 
Three month
    4.61       4.98  
United States
               
Prime Rate
    7.75       5.75  
                           
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Other Income
    1,370       1,257       1,379  
 
•   Non Core items
    (238 )     (50 )     (50 )
 
•   Acquisitions: Burdale & Guggenheim Advisors
    (12 )     (1 )     (1 )
 
•   Disposals: Chase de Vere & Bristol & West branch network
    (13 )     (80 )     (80 )
 
•   IAS 32 and IAS 39 impact
    78              
                   
Underlying other income excluding impact of acquisitions and disposals & IAS 32 and IAS 39
    1,185       1,126       1,248  
                   
      Other income fell by 9 million or 1% to 1,370 million from 1,379 million during the twelve months to March 31, 2006. This performance was impacted by a number of factors highlighted in the table above:
      Non Core Items: these items include profit on disposal of business segments, gross up of policyholder tax in the Life business and hedge ineffectiveness on transition to IFRS (see items a); b); c); d) and f) of the overview section on page 28 of this document. An income statement line item reconciliation also appears on page 48 (2006) and page 49 and 250 (2005) of this document.
      Acquisitions: the effect on income streams associated with the recently acquired entities of Burdale and Guggenheim Advisors (2006: 12 million; 2005: 1 million)

35


Table of Contents

      Disposals: the effect on income streams associated with the recently divested entities of Chase de Vere and Bristol and West branch network (2006: 13 million; 2005: 80 million)
      IAS 32 and IAS 39 impact: the reclassification of income between Net Interest Income and Other Income following the application of derivative, hedging and fair value accounting requirements of IAS 39. (2006: 78 million)
      Other Income, excluding these items, decreased by 63 million or 5% from 1,248 million to 1,185 million in the year to March 31, 2006. The first time adoption of IAS 32, IAS 39 and IFRS 4 by the Group on April 1, 2005 (excluding the impact of derivative, hedging and fair value option requirements of IAS 39) resulted in a decrease of approximately 122 million, with the remaining increase in Other income of 59 million from 1,126 million to 1,185 million driven by the excellent performance from our Life business, fee growth from our Retail businesses in Ireland where the branch network, Private Banking and Credit Card businesses performed particularly well. Our joint ventures with the UK Post Office delivered an excellent sales performance. This overall strong performance was partly offset by the decline in income from BIAM.
Operating Expenses
Total Operating Expenses
                           
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Operating expenses
    2,020       2,059       2,051  
 
•   Non Core Items
    (32 )     (136 )     (136 )
 
•   Acquisitions: Burdale & Guggenheim Advisors
    (18 )     (2 )     (2 )
 
•   Disposals: Chase de Vere & Bristol & West branch network
    (37 )     (131 )     (131 )
                   
Underlying operating expenses excluding the impact of acquisitions and disposals
    1,933       1,790       1,782  
                   
      Total Operating Expenses decreased by 31 million or 2% from 2,051 million to 2,020 million during the twelve months to March 31, 2006. These performances are not directly comparable as the cost base in both years included the impact of:
      Non-core items relating to costs associated with restructuring programme (2006: 32 million; 2005: 136 million). An income statement line item reconciliation also appears on page 48 (2006) and pages 49 and 50 (2005) of this document.
      Acquisitions: Costs relating to the acquisition of Burdale and Guggenheim Advisors (2006: 18 million; 2005: 2 million)
      Disposals: Costs relating to the disposal of Chase de Vere and Bristol & West branch network (2006: 37 million; 2005: 131 million).
      Operating expenses, excluding the impact of these items, increased by 8% from 1,782 million to 1,933 million for the year to March 31, 2006. Of this increase, approximately 8 million was due to the first time adoption of IAS 39 by the Group on April 1, 2005, with the remainder of the increase explained by the analysis below.
      Operating Expenses during the year were also impacted by:
  a) Increased compliance costs associated with the introduction of the Basel II and Sarbanes-Oxley (SOx) initiatives. The increase in expenditure relating to the introduction of these programmes is one percentage point of the increase in total Operating Expenses in the current year. Increased expenditure relating to these initiatives is expected to continue into next year.

36


Table of Contents

  b) Increased pension costs arising from IAS 19 added two percentage points to total Operating Expenses as a result of the lower discount rate applied to the value of pension liabilities. Under IFRS, the accounting deficit relating to the liabilities of the pension fund are carried on the balance sheet, and the costs associated with this deficit are charged through the income statement and equity.
 
  c) Investment costs The Group continues to exploit growth opportunities both in our domestic markets and internationally. In Business Banking UK we expanded our Relationship Management Team. Wholesale Financial Services continued to expand the geographic scope of its operations with investment in the UK, Paris, Frankfurt and the US. These investment costs contributed two percentage points to cost growth for the year.
      Excluding these items, our “business as usual” cost growth for the year was 5%. The main drivers of this cost growth during the year were salary inflation, performance-related pay and volume-related cost increases.
      Our focus on cost management has delivered a significant reduction in our cost/income ratio, which is down 2.8 percentage points from 59.9% to 57.1%.
      The Strategic Transformation Programme has delivered cost savings at Group level of 35 million against our target for the year of 30 million for the year to March 31, 2006.
      A new streamlined operating model is now firmly established, consolidating previously fragmented though analogous activities into unified management and operating structures. These include the creation of the Group Manufacturing function and the consolidation of previously disparate support functions, including HR & Learning, Procurement and Facilities, under distinct leadership structures.
      In our Irish Retail Division we have realised cost efficiencies in our back office and closed eight outlets. In addition new technology has enabled the streamlining of services, for example, our branch cashier system, which eliminates errors and speeds up end of day processes. The process of consolidating specialist-underwriting activities in our UK mortgage business into scale-efficient locations is also well underway.
      This year the creation of our Group Manufacturing function brought together all employees in our customer operations and IT areas under one management structure. Within Manufacturing the consolidation of our Contact Centre and Credit Operations is progressing well, and a number of further optimisation, consolidation and automation initiatives are now underway. This consolidation enables business growth to be supported on lower employee numbers.
      In relation to the Group’s support infrastructure, we have outsourced our Learning and Procurement functions to achieve significant efficiencies and build strategic capability. In addition, the Group has reached an agreement in principle with a third party provider to outsource Facilities Management services for Ireland. We have also made progress at consolidating and streamlining our Human Resources function and have delivered significant efficiencies within a number of other Head Office functions.
      During the year we successfully concluded consultation with employee representatives, to facilitate implementation of staff aspects of the Strategic Transformation Programme.
Impairment of Loans and Advances
      Asset quality across all loan portfolios remains excellent in the continuing benign credit environment.
      The impairment charge for the year to March 31, 2006 amounts to 103 million or 11 bps when expressed as a percentage of average loans. Impairment losses on loans and advances are at historically low levels, while advances and loans to customers continue to grow strongly. We continue to maintain a satisfactory level of provisions against impaired loans, with a coverage ratio of 45%, a level we are comfortable with as mortgages represent 47% of our total lending.
      Total balance sheet provisions were 359 million at March 31, 2006, compared to 319 million in March 2005.

37


Table of Contents

Asset Quality
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
Total average customer advances (bn)
    93       74       74  
Impaired loans (m)
    796       710       710  
Impairment provision (m)
    359       319       319  
Coverage ratio
    45%       45%       45%  
Impairment losses on loans and advances (m)
    103       79       79  
Impairment losses on loans and advances — bps
    11bps       11bps       11bps  
Share of Associated Undertakings and Joint Ventures
      Profit after tax from associated undertakings and joint ventures increased by 50% to 45 million. FRTS, our personal foreign exchange travel service joint venture with the UK Post Office, is the largest contributor to this result (40 million) and continued to perform strongly during the year.
Balance Sheet — Capital and Funding
      The favourable economic backdrop, together with the investment in our business building capability, in particular in our Wholesale and UK Financial Services Divisions, has driven strong loan growth across all Divisions. Growth was particularly strong in Corporate Banking, UK Business Banking and mortgages in Ireland.
      Total assets increased 27% from 128 billion to 162 billion in the year to March 31, 2006. Customer loans and advances increased by 27% and total resources increased by 3%. Resources were significantly impacted by the disposal of the Bristol & West branch network and its associated deposit base. Excluding this impact, resources grew by 15%.
      Risk weighted assets grew 28% from 75.9 billion to 97.5 billion.
Division
                         
    % Growth March 2006 over March 2005
     
    Risk Weighted   Loans and advances    
    Assets   to customers   Resources
             
Retail Ireland
    22       23       15  
Wholesale (corporate loans)
    32       35       15  
UK Financial Services
    31       29       (27 )
                   
Group
    28       27       3  
                   
Capital
      Bank of Ireland has maintained a strong capital position. In March 2006, our Total Capital Ratio was 11.4% compared to 10.9% in March 2005. Our Tier 1 Ratio at March 31, 2006 was 7.5% compared to 7.9% in March 2005. Our capital raising programme continued during the year with both Tier 1 and Tier 2 issues being raised across a range of currencies and maturity horizons.
                 
    March 31, 2006   March 31, 2005
         
Tier 1 –  billion
    7.3       6.0  
Tier 1 Ratio – %
    7.5       7.9  
Total Capital Ratio – %
    11.4       10.9  
Non-equity Tier 1 Ratio –  billion
    2.6       1.8  
Risk-weighted Assets –  billion
    98       76  
      The Group has strong capital resources and we believe our approach to capital management ensures that we have adequate capital to support our business plans.

38


Table of Contents

Funding
      Funding sourced from the wholesale markets has increased from 35% to 46% of total balance sheet (excluding Bank of Ireland Life assets held on behalf of policyholders) between March 31, 2005 and March 31, 2006. This increase results from the strength of loan growth in our core markets and also from the one-off impact of the sale of the Bristol & West branch network and the loss of the associated deposit book of £4.4 billion.
Balance Sheet Funding
                 
    March 31, 2006   March 31, 2005
         
    %   %
Deposits by banks
    23       18  
CP/ CDs
    12       10  
Senior Debt/ ACS
    11       7  
Wholesale Funding
    46       35  
Customer Deposits
    41       50  
Capital/ Sub Debt
    8       7  
Other
    5       8  
             
Total
    100       100  
             
      Wholesale Funding is managed to ensure maximum diversification across maturity, investor type and geography and to minimise the concentration of funding within each particular market segment. The wholesale market continued to be characterised by strong investor demand for Bank of Ireland paper. Our new issuance programmes included:
  A Canadian Commercial Paper Programme
 
  A French Certificate of Deposit Programme
 
  A US Extendible Note Transaction.
      Within our existing Asset Covered Security Programme, we launched a second tranche of 2 billion with approximately 10% of the issue placed into Asia, where we also completed a private placement of Medium Term Notes.
      The Group remains well placed to access wholesale funding sources. The Group funding strategy remains to grow core customer deposits and to access wholesale funding in a prudent, diversified and efficient manner.

39


Table of Contents

Taxes
      The following table sets forth a reconciliation of taxes chargeable at the statutory Irish corporation tax rate and the Group’s effective tax rate for the years ended March 31, 2005 and 2006. The effective tax rate is obtained by dividing taxes by profit on ordinary activities before tax and exceptional items.
                 
    For the Financial year ended
    March 31,
     
    Statutory   Statutory
    2006   2005
         
    (in  millions,
    except percentages)
Average statutory corporation tax rate
    12.5%       12.5%  
             
Profit on ordinary activities before tax multiplied by the standard rate of
Corporate tax in Ireland
    200       165  
Effects of:
               
Levy on certain financial institutions
    20       26  
Foreign earnings subject to different rates of tax
    78       49  
Life Assurance — different basis of taxation
    61       31  
Tax exempted income and income at a reduced Irish tax rate
    (71 )     (18 )
Non-deductible expenses
    12       1  
Prior year adjustments
    5       5  
Share of associated undertakings and joint ventures
    (6 )     (5 )
Other adjustments for income tax purposes
    4       2  
             
Income tax charge
    303       256  
             
Effective tax rates
    18.9%       19.5%  
Financial year ended March 31, 2006 compared to financial year ended March 31, 2005
      The tax charge for the year, at an effective rate of 18.9%, was lower than the corresponding year mainly due to the reduction in the financial levy from 26m to 20m and the benefit from the non-taxable gains in relation to the disposal of the Bristol & West branch network, which was partially offset by the increase in the Bank of Ireland Life grossing-up for policyholder tax required under IFRS.
Divisional Performance: Profit Before Tax
                         
        Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Retail Republic of Ireland
    550       461       470  
Life
    203       107       161  
Wholesale Financial Services
    386       325       334  
UK Financial Services
    525       310       334  
Asset Management Services
    85       125       125  
Group Centre
    (150 )     (108 )     (114 )
                   
Profit before tax
    1,599       1,220       1,310  
                   

40


Table of Contents

Divisional Performance: Underlying Profit Before Tax
                         
        Pro-forma    
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Retail Republic of Ireland
    550       465       474  
Life
    134       81       135  
Wholesale Financial Services
    386       325       334  
UK Financial Services
    349       332       356  
Asset Management Services
    85       125       125  
Group Centre
    (111 )     (122 )     (128 )
                   
Underlying Profit before tax
    1,393       1,206       1,296  
                   
Retail Republic of Ireland
      Retail Republic of Ireland profits before tax grew by 17% or 80 million, from 470 million to 550 million. This performance is not directly comparable as it includes:
      Non core items: certain items which management believe are non-core, such as costs relating to restructuring programmes (2005: (4 million)). A reconciliation of the divisional profit before tax impact of the non-core items is included on page 16 of this document.
      First time adoption of IAS 32, IAS 39 and IFRS 4: IAS 32, IAS 39 and IFRS 4 were adopted by the Group from April 1, 2005 and therefore the statutory performance to March 31, 2005 does not include impact of these items. ((9 million))
      Excluding the impact of these items, Retail Republic of Ireland profits before tax increased by 18% or 85 million from 465 million to 550 million and are explained by the following analysis.
      Total operating income rose by 11% and expenses rose by 6% representing a very satisfactory income/cost relative performance. This achievement reflects the continuing strength of our domestic franchise and customer proposition and has been driven by strong volume growth, higher fee income, well-managed costs and strong asset quality.
Retail Republic of Ireland: Income Statement
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Net interest income
    1,119       1,020       1,019  
Other income*
    356       314       316  
                   
Total operating income
    1,475       1,334       1,335  
Total operating expenses
    (871 )     (818 )     (810 )
Impairment losses on loans and advances
    (54 )     (51 )     (51 )
                   
Underlying profit before tax
    550       465       474  
Non Core items
          (4 )     (4 )
                   
Profit before tax
    550       461       470  
                   
 
* Includes share of associated undertakings/joint ventures.
      Performance reflected a continuing favourable economic environment and demographics in Ireland:
  clear strategic focus on service excellence delivered through our “Changing for You” Customer Programme

41


Table of Contents

  highly effective and responsible sales model
 
  leading multi-channel distribution capability
      Lending and resources volumes in the Division grew by 23% and 15%, respectively. In Business Banking, targeting of the Small and Medium Enterprise sector delivered impressive results with loan growth of 23% recorded for the year. We maintained our number one position in the mortgage market with book growth of 27%, while new advances also grew by 29%. Personal lending volumes increased by 13% for the year.
      Net Interest Income rose by 10% reflecting volume growth as well as a further narrowing of net interest margin. Net interest margin in the Division continues to be impacted by:
  the affect of the low interest rate environment on liability margins
 
  the higher rate of loan growth compared with resources leading to higher wholesale borrowings
 
  changing product mix
 
  competition.
      Other Income, including the income from associated companies and joint ventures, rose by 13% driven particularly by strong growth in business banking, private banking and credit cards.
      The impairment losses on loans and advances were 54 million or 15 bps as a percentage of advances, down from 18 bps in the prior year.
      Costs were well managed with the cost/income ratio for the Division down over two percentage points to 59.1%. Cost growth of 6% included a significant increase in the pension charge arising from IAS 19. Excluding this IAS 19 impact, costs growth was 4% — a very satisfactory performance.
Bank of Ireland Life
IFRS Performance
Bank of Ireland Life: Income Statement
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Income
    208       172       212  
Costs
    (95 )     (93 )     (93 )
                   
Operating Profit
    113       79       119  
Investment variance
    17       2       16  
Discount rate change
    4              
                   
Underlying profit before tax
    134       81       135  
Non Core Items
    69       26       26  
                   
Profit before tax
    203       107       161  
                   
      Profits in Bank of Ireland Life, the Group’s Life and Pension business, increased by 42 million from 161 million to 203 million. This performance is not directly comparable as it includes:
      Non core items: Gross up of policyholder tax. (2006: 69 million; 2005: 26 million) A reconciliation of the divisional profit before tax impact of the non- core items is included on page 16 of this document.
      First time adoption of IAS 32, IAS 39 and IFRS 4: IAS 32, IAS 39 and IFRS 4 were adopted by the Group from April 1, 2005 and therefore the statutory performance to March 31, 2005 does not include the impact of these items. ((54 million)) The impact of these standards is to no longer account for the value of inforce business asset relating to life assurance investment contracts.

42


Table of Contents

      The impact of these standards is to no longer account for the value of inforce business asset relating to life assurance investment contracts.
      Excluding the impact of these items, Bank of Ireland Life’s profit before tax increased 65% or 53 million from 81 million to 134 million and an increase in operating profits of 43%. The ongoing success of our sales effectiveness model and strength of our multi-channel distribution network increased our market share by a further one percentage point to 25%.
      The life business achieved excellent APE (annual premium equivalent) sales volumes growth of 30% to 387 million, and experienced continued favourable mortality and persistency variances together with rising equity markets. Profitability benefited from a positive investment variance of 17 million, and a reduction in the risk discount rate (the rate at which we discount future insurance liabilities) of 0.5% to 7.5%. Bank of Ireland Life continues to invest significantly in its administrative platforms to improve efficiency and has recently completed the move to a single platform for administering our sales and applications processing for the life business.
      The economic and demographic backdrop to our life business in Ireland is very supportive: a strong economy, a growing population, significant job creation, rising incomes, an excellent savings ratio and the need for substantial investment in personal pension provision providing significant opportunities. The outlook remains very positive.
Embedded Value Performance
      The alternative method (which is widely used by the life insurance industry) of presenting the performance of our Life business is on an embedded value basis. The embedded value basis translates estimated future distributable earnings to a present value and is set out in the following table. Under this method operating profit increased 22% and profit before tax increased 51%. Both new business and existing business performed well, with growth of 32% and 16% respectively, in the year to March 31, 2006. The impact of economic environment changes, such as a strong equity market and low interest rates, also had a positive impact.
Bank of Ireland Life: Embedded Value Income Statement
                   
    March 31, 2006   March 31, 2005
         
    million   million
New business profits
    78       59  
Existing business profits
    94       81  
             
 
•   Planned return on capital
    66       59  
 
•   Experience variance
    20       18  
 
•   Assumption changes
    8       4  
             
Investment income on free funds
    5       5  
Inter-company payments
    (32 )     (26 )
             
Operating Profit
    145       119  
Investment variance
    51       16  
Discount rate change
    8        
             
Profit before tax
    204       135  
             
      The Embedded Value for the Life business, includes a Value of Inforce asset both in respect of contracts classified as Insurance and contracts classified as Investment. In contrast, the IFRS statutory result, include a Value of Inforce asset in respect of insurance contracts only. The Value of Inforce is the discounted value of future after tax profits that will arise from insurance and investment business in the long-term fund. The key assumptions used in the calculation of this asset are the discount rate of 7.5% (2005: 8.0%), the future growth rate on unit-linked assets of 5.5% (2005: 6.0%) and the rate of tax assumed to be levied on shareholder profits of 12.5% (2005: 12.5%). Actuarial assumptions are also required in relation to mortality, morbidity and persistency rates and these have been derived from the Company’s experience.

43


Table of Contents

Wholesale Financial Services
      Our Wholesale Division (WFS) comprises Corporate Banking, Global Markets, Davy Stockbrokers and IBI Corporate Finance. WFS’s profit before tax increased by 16% from 334 million to 386 million, an increase of 52 million. The first time adoption of IAS 32 and IAS 39 accounted for a decrease in profit before tax of 9 million. Excluding the impact of IAS 32 and IAS 39 profit before tax in WFS increased by 19% from 325 million to 386 million, for the year to March 31, 2006. The analysis below explains the drivers of this 19% growth on an income statement line item basis.
Wholesale Financial Services: Income Statement
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    million   million   million
Net interest income
    454       325       302  
Other income
    243       278       310  
                   
Total operating income
    697       603       612  
Total operating expenses
    (288 )     (240 )     (240 )
Impairment losses on loans and advances
    (23 )     (38 )     (38 )
                   
Profit before tax
    386       325       334  
                   
      Total operating income rose by 16% from 603 million to 697 million for the year to March 31, 2006 driven by strong lending volumes and higher margin in Corporate Banking. In addition, income figures for Burdale, our UK asset-based lender that we acquired in January 2005, have been included for a full year for the first time. Lending volumes increased by 35% and margins improved reflecting a shift in loan mix towards the higher margin business in acquisition finance, property and asset-based lending.
      The application of IAS 32 and IAS 39 , in relation to derivatives, hedging and the fair value option in the current year has the effect of recognising certain income streams as Net Interest Income, which in the prior year would have been recognised as Other Income (38 million). Excluding the impact of IAS 32 and IAS 39 Net Interest Income rose by 28% with Other Income broadly in line with the prior year.
      There were two main drivers of Operating Expenses within the Division; investment costs and staff related costs.
      Investment costs in Corporate Banking and Global Markets added 8% to total cost growth with an increase in front line staff, opening of offices in Paris and Frankfurt, the expansion of our activities in the UK and the US and the inclusion of the costs of Burdale for a full year.
      Increased staff costs across the Division arising from salary inflation and performance related pay added 8% to total Operating Expenses. Pension costs arising from IAS 19 and increased compliance costs arising from initiatives under IFRS, Basel II and Sarbanes-Oxley (SOx) added a further 2% to the operating costs of the Division. In total, these costs together with other volume related costs contributed cost growth within the Division of 20%.
      Credit quality remains excellent with impairment losses on loans and advances of 23 million, or 12bps when expressed as a percentage of the loan portfolio. This compares to 38 million or 26bps in the prior year. Our continued strong credit performance is being driven by the benign credit environment supported by our active approach to credit management.
      The strategy in Corporate Banking is to continue to grow both our domestic franchise and to broaden our international business by focusing on niche skills based activities.
      Our niche-lending teams are enabling the successful expansion into sectors such as media, asset-based lending and UK and European property. Our new offices in Paris and Frankfurt, together with the increased resources in the UK and US, provide us with greater presence and diversification in these important markets. In addition, we are increasingly taking lead roles in the arranging and structuring of syndicated transactions.

44


Table of Contents

      Our Global Markets business delivers a comprehensive range of risk management products to the Group’s customer base and acts as Treasurer for the Group. We have retained our leading market position with 27% share of the commercial customer foreign exchange market in Ireland. Our focus for the year has been to broaden the geographic scope of our activities with the opening of a treasury operation in London, further build on our technical capability with the recruitment of highly-skilled teams and work closely with other Group divisions to deliver an integrated service to our customers.
      The other businesses within the Division, Davy and IBI Corporate Finance continued to perform well.
UK Financial Services (UKFS)
(local currency)
UK Financial Services: Income Statement
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
    £ million   £ million   £ million
Net interest income
    493       429       421  
Other income
    63       135       159  
                   
Total operating income
    556       564       580  
Total operating expenses
    (329 )     (366 )     (366 )
Impairment losses on loans and advances
    (17 )     7       7  
Share of associated undertakings & JV (profit after tax)
    28       22       22  
                   
Underlying profit before tax
    238       227       243  
Non-core items
    120       (15 )     (15 )
                   
Profit before tax
    358       212       228  
                   
      The exchange rate applied by the Group in converting the above Sterling amounts to Euro for the purposes of preparing the consolidated financial statements was 0.6826 to 31, March 2006 and 0.6834 to 31, March 2005.
      During the year some organisational changes were made to further streamline the management and reporting of our activities in the UK:
  Post Office Financial Services (POFS) was transferred to our UKFS Division.
 
  First Rate Travel Services (FRTS), our personal foreign exchange travel service joint venture with the UK Post Office, was transferred from our Wholesale Division to our UKFS Division.
      The UKFS Division now comprises Mortgages, Business Banking and Consumer Financial Services. The latter represents a grouping of our businesses with the UK Post Office (POFS and our 50% share of FRES).
      Profit before tax in UKFS increased by 57% from £228 million to £358 million an increase of £130 million. This performance is not directly comparable as it includes:
      Non core items: relating to the disposal of the business activities (2006:£120 million; 2005: (£14 million)) and cost relating to restructuring programme (2005:(£1 million)) A reconciliation of the divisional profit before tax impact of the non-core items is included on page 16 of this document.
      First time adoption of IAS 32, IAS 39 and IFRS 4: IAS 32, IAS 39 and IFRS 4 were adopted by the Group from April 1, 2005 and therefore the statutory performance to March 31, 2005 does not include impact of these items (£16 million).
      Excluding the impact of these items, UKFS increased by 5% from £227 million to £238 million. This performance is explained by the income statement line item analysis below.
      The Divisional performance is not directly comparable, particularly at Income Statement line item level, as the disposal of the Bristol and West branch network in the current year and Chase de Vere in the prior year impact the year-on-year analysis of income and cost growth.

45


Table of Contents

      Net Interest Income rose by 15% from £429 million to £493 million for the year to March 31, 2006. Excluding the impact of the disposals mentioned above and the impact of the income reclassification between Net Interest Income and Other Income following the application of IAS 32 and IAS 39 in the current year, Net Interest Income grew by 13%. Strong volume growth of 29% was a key driver of this performance, with volume gains being partially offset by margin attrition arising from the continuing impact of asset growth outpacing the growth of liabilities, the disposal of the Bristol and West branch network together with the impact of mortgage back book re-pricing which has now finished.
      Other Income fell by 53% from £135 million to £63 million, and was again impacted by the effect of the disposals and the reclassification of income between Net Interest Income and Other Income following the first time application of IAS 32 and IAS 39. Excluding the impact of these items Other Income was up 7% compared to the prior year.
      Operating Expenses fell by 10% to £329 million for the year to March 31, 2006. Excluding the impact of disposals, Operating Expenses grew by 10% in the year due to investment costs, marketing expenditure relating to new product launches in POFS and other volume related expenditure.
      Impairment losses on loans and advances are £17 million for the twelve months to March 31, 2006 compared with a £7 million credit in the prior year, due to an impairment loss provision release. Excluding the impact of this impairment loss provision release the March 31, 2005 impairment loss represented a charge of £3 million. The current year’s charge of £17 million represents 5 bps of the average advances in UKFS.
      The Mortgage business grew its loan book by 22% with particularly strong growth in both our self-certified and buy-to-let specialist portfolios, which increased 48% and 36% respectively. The specialist book now represents 45% of the mortgage portfolio. Our commitment to service excellence, and a particular focus on the intermediary channel which represents 90% of our overall business, has resulted in this strong mortgage book growth. The book margin remained stable and the quality of our loan book remains high with loan arrears significantly below the industry average.
      Our investment in the recruitment of experienced relationship managers has delivered excellent results with year on year loan growth of 46% and resources growth of 10%. Throughout the year we have continued to focus on the achievement of balanced growth in the property, mid-corporate and SME markets and have further developed our expertise in selected niches including healthcare, hotels and debtor finance.
      Consumer Financial Services comprises our joint venture businesses with the Post Office following the strategic divestment of the Bristol & West branch network during the year. POFS continued to build its customer base from 100,000 in May 2005 to 475,000 in May 2006. The insurance customer base reached 290,000 and there was a strong response to its new 2-in-1 credit card product, the first of its kind in the UK market. FRES performed well during the year with the continued roll-out of the network expansion for the foreign exchange service through the UK Post Office branch network. FRES has established a leading market position in the UK with 30% market share of the personal foreign exchange market.
Asset Management Services
Asset Management Services: Income Statement
                         
    Statutory   Pro-forma   Statutory
    March 31, 2006   March 31, 2005   March 31, 2005
             
     million    million    million
Net interest income
    7       4       4  
Other income
    215       252       252  
                   
Total operating income
    222       256       256  
Total operating expenses
    (137 )     (131 )     (131 )
                   
Profit before tax
    85       125       125  
                   

46


Table of Contents

      Asset Management Services (“AMS”) comprises Bank of Ireland Asset Management (“BIAM”), Bank of Ireland Securities Services (“BoISS”) and our holdings in Iridian Asset Management (84%) and Guggenheim Advisors (71.5%). Profit before tax for the Division for the year to March 31, 2006 was 85 million, a decrease of 32% over the prior year, reflecting the full year impact of the mandate losses since September 2004.
      Fund outflows from BIAM continued, but at a slower pace, with funds under management at the year-end of 45.1 billion compared to 44 billion on September 30, 2005 and 46.9 billion on March 31, 2005. While the performance of equity markets broadly offset the impact of these fund outflows, the outflows from our international business have been at higher margins than the new assets flowing into our domestic business.
      BOISS, the custody and fund administration arm of the Group, continued to develop its niche positioning in the securities services arena. During the year, BoISS added 10 new substantial relationships to its international client base, which is drawn from more than 20 countries globally.
      Iridian Asset Management is our US based investment manager of large cap and mid cap US equities which focuses on foundations and the not-for-profit sector. Funds under management increased by 4% to US$10.7 billion. We acquired a further 8% of Iridian during the year and plan to acquire the remaining 16% in equal tranches over the next 2 fiscal years. (Of which 8% has been acquired since March 31, 2006)
      We completed the acquisition of 71.5% of Guggenheim Advisors on January 31, 2006, a US fund of hedge funds manager focusing on institutional and high net worth clients. Funds under management at Guggenheim Advisors were US$2.9 billion at March 31, 2006.
      The Asset Management Division is an important part of the Group’s ambition to broaden our activities in international skills-based businesses. Our strategy is to build a diversified portfolio of discrete investment boutiques and to distribute their products through the global distribution platform that we have built up over the years. Considerable progress has been made in achieving this ambition with a particular focus on alternative investments, as demonstrated by the investment in Guggenheim Advisors.
Group Centre
      Group Centre, which comprises earnings on surplus capital, unallocated central and support costs and some smaller business units, loss before tax increased from 114 million of a loss to 150 million of a loss, an increase of 36 million. This performance is distorted by the following items:
      Non core items: Hedge ineffectiveness on transition to IFRS (2006: (7 million)), costs associated with restructuring programmes (2006: (32 million); 2005: (117 million)), impairment loss provision write back (2005: 100 million) and profit on disposal of business activities (2005: 31 million) A reconciliation of the divisional profit before tax impact of the non-core items is included on page 16 of this document.
      First time adoption of IAS 32, IAS 39 and IFRS 4: IAS 32, IAS 39 and IFRS 4 were adopted by the Group from April 1, 2005 and therefore the performance to March 31, 2005 does not include the impact of these items. (6 million)
      Excluding these items loss before tax in Group Centre decreased by 11 million due to improved income of 22 million driven by the impact of higher retentions partly offset by funding costs arising from additional capital raised during the year. This was offset by higher costs of 11 million, largely due to increased compliance-related spend (predominantly SOx and Basel II).

47


Table of Contents

Income Statement March 31, 2006 — Business Segments
Year ended March 31, 2006
                                                                                 
                        Total income,       Impairment   Share of    
    Net   Insurance net               net of       losses on   income   Profit
    Interest   premium   Other   Total   Insurance   insurance   Operating   loans &   from   before
    Income   income   Income   Income   Claims   claims   expenses   advances   associates   taxation
                                         
     millions
Retail Republic of Ireland
    1,119             351       1,470             1,470       (871 )     (54 )     5       550  
BOI Life
    8       1,264       612       1,884       (1,655 )     229       (95 )                 134  
Wholesale Financial
                                                                               
Services
    454             243       697             697       (288 )     (23 )           386  
UK Financial Services
    722             94       816             816       (481 )     (26 )     40       349  
Asset Management Services
    7             215       222             222       (137 )                 85  
Group Centre
    (3 )     34       (15 )     16       (11 )     5       (116 )                 (111 )
                                                             
Group — underlying
    2,307       1,298       1,500       5,105       (1,666 )     3,439       (1,988 )     (103 )     45       1,393  
Sale of business activities
                176       176             176                         176  
Gross up of policyholder tax in the Life business
                69       69             69                         69  
Hedge ineffectiveness on transition to IFRS
                (7 )     (7 )           (7 )                       (7 )
Restructuring programme
                                        (32 )                 (32 )
                                                             
Group — statutory
    2,307       1,298       1,738       5,343       (1,666 )     3,677       (2,020 )     (103 )     45       1,599  
                                                             
      The reconciliation shows the Group and Divisional underlying income statements with a reconciliation of the impact of the non-core items in arriving at the Group Income Statement.
Pro-forma Income Statement March 31, 2005 — Business Segments
Year ended March 31, 2005
                                                                                 
        Other Income                                
        including           Total income,           Impairment   Share of    
    Net   insurance net           net of       Depreciation   losses on   income   Profit
    Interest   premium   Total   Insurance   insurance   Operating   and   loans &   from   before
    Income   income   Income   Claims   claims   expenses   amortisation   advances   associates   taxation
                                         
     millions
Retail Republic of Ireland
    1,020       316       1,336             1,336       (737 )     (81 )     (51 )     (2 )     465  
BOI Life
    6       914       920       (746 )     174       (89 )     (4 )                 81  
Wholesale Financial
                                                                               
Services
    325       278       603             603       (227 )     (13 )     (38 )           325  
UK Financial Services
    628       198       826             826       (489 )     (47 )     10       32       332  
Asset Management Services
    4       252       256             256       (128 )     (3 )                 125  
Group Centre
    (12 )     1       (11 )     (6 )     (17 )     (80 )     (25 )                 (122 )
                                                             
Group — underlying
    1,971       1,959       3,930       (752 )     3,178       (1,750 )     (173 )     (79 )     30       1,206  
Profit on sale of business activities
          11       11             11                               11  
Gross up of policyholder tax in the Life business
          26       26             26                               26  
Impairment loss release
                                              100             100  
Restructuring programme
          13       13             13       (136 )                       (123 )
                                                             
Group — total
    1,971       2,009       3,980       (752 )     3,228       (1,886 )     (173 )     21       30       1,220  
                                                             
      The reconciliation shows the Group and Divisional underlying pro-forma income statements with a reconciliation of the impact of the non-core items in arriving at the Group Pro-forma Income Statement.

48


Table of Contents

Statutory IFRS Income Statement March 31, 2005 — Business Segments
Year ended March 31, 2005
                                                                                 
        Other Income           Total                    
        including           income,           Impairment   Share of    
    Net   insurance net           net of       Depreciation   losses on   income   Profit
    Interest   premium   Total   Insurance   insurance   Operating   and   loans &   from   before
    Income   income   Income   Claims   claims   expenses   amortisation   advances   associates   taxation
                                         
    ( millions)
Retail Republic of Ireland
    1,019       318       1,337             1,337       (729 )     (81 )     (51 )     (2 )     474  
BOI Life
    6       2,438       2,444       (2,216 )     228       (89 )     (4 )                 135  
Wholesale Financial
                                                                               
Services
    302       310       612             612       (227 )     (13 )     (38 )           334  
UK Financial Services
    617       233       850             850       (489 )     (47 )     10       32       356  
Asset Management Services
    4       252       256             256       (128 )     (3 )                 125  
Group Centre
    (17 )           (17 )     (6 )     (23 )     (80 )     (25 )                 (128 )
                                                             
Group — underlying
    1,931       3,551       5,482       (2,222 )     3,260       (1,742 )     (173 )     (79 )     30       1,296  
Profit on sale of business activities
          11       11             11                               11  
Gross up of policyholder tax in the Life business
          26       26             26                               26  
Impairment loss release
                                              100             100  
Restructuring programme
          13       13             13       (136 )                       (123 )
                                                             
Group — statutory
    1,931       3,601       5,532       (2,222 )     3,310       (1,878 )     (173 )     21       30       1,310  
                                                             
      The reconciliation shows the Group and Divisional underlying income statements with a reconciliation of the impact of the non-core items in arriving at the Group Income Statement.
Reconciliation of IFRS Statutory to Pro-forma IFRS Consolidated Income Statement for Year Ended March 31, 2005
                                         
    IFRS   Effective Interest           IFRS
    Statutory   Rate   Debt/Equity   Life   Proforma
                     
    ( millions)
Net interest income
    1,931       44       (4 )           1,971  
Other income
    3,601       (68 )           (1,524 )     2,009  
                               
Total operating income
    5,532       (24 )     (4 )     (1,524 )     3,980  
Insurance claims
    (2,222 )                 1,470       (752 )
                               
Total operating income net of Insurance Claims
    3,310       (24 )     (4 )     (54 )     3,228  
Operating expenses
    (2,051 )     (8 )                 (2,059 )
Impairment losses on loans & advances
    21                         21  
Income from associates and joint ventures
    30                         30  
                               
Profit before taxation
    1,310       (32 )     (4 )     (54 )     1,220  
Non core items
                                       
Disposal of business activities
    (11 )                       (11 )
Grossing up for policyholder tax in the
                                       
Life business
    (26 )                       (26 )
Restructuring programme
    123                         123  
Release of impairment loss provision
    (100 )                       (100 )
                               
Profit before tax — excluding
non core items
    1,296       (32 )     (4 )     (54 )     1,206  
                               

49


Table of Contents

      The Pro-forma accounts restate the IFRS statutory performance, as if the effective interest method, accounting for investment contracts in the life assurance business and classification of financial instruments, had been applied for the year to March 31, 2005. The pro-forma income statement has not been restated for the impact of accounting for derivatives (hedge accounting) and impairment provisions. The pro-forma adjustments are described below.
      Effective Interest Rate (EIR). On transition to IFRS, IAS 32 and 39 required the recognition of interest income and expenses to the income statement using the effective interest rate. The application of IFRS has resulted in certain upfront fees and expenses being included in interest income and spread over the expected life of the underlying asset, rather than being taken upfront. This reclassification can be seen in the table above, with Net Interest Income increasing by 44 million and Other Income being reduced by 68 million. The overall impact of our application of EIR in the proforma accounts to March 31, 2005 was to reduce profit before tax by 32 million.
      Life (IFRS 4/ IAS 39). On transition to IFRS certain long-term contracts written by the Life business were required to be classified as either insurance or investment contracts. Income recognition for those contracts which meet the IFRS 4 criteria for insurance contracts was unaffected on transition to IFRS. Those contracts which meet the IFRS 4 criteria for investment contracts are accounted for on the basis of IAS 39. IAS 39 requires that income earned and costs incurred will be recognised over the life of the investment contract. The overall impact of our application of IFRS4/ IAS 39 was to reduce the March 31, 2005 profit before tax by 54 million.
      Debt/ Equity (IAS 32). IAS 32 requires that instruments that have the characteristics of debt must be classified as liabilities, with the associated interest costs taken to income statement. The profit before tax impact of the application of this standard was to reduce the March 31, 2005 profit before tax by 4 million.

50


Table of Contents

AVERAGE BALANCE SHEET AND INTEREST RATES
      The following tables show the average balances and interest rates of interest earning assets and interest bearing liabilities for each of the three years ended March 31, 2006, 2005 and 2004. The calculations of average balances are based on daily, weekly or monthly averages, depending on the reporting unit. The average balances used are considered to be representative of the operations of the Group. The figures for March 31, 2006 and 2005 are presented using data prepared in accordance with IFRS while the figures for the year ended March 31, 2004 are presented using data prepared in accordance with IR GAAP.
TABLE 1
                                                 
    2006   2005
    IFRS   IFRS
         
    Average       Average    
    Balance   Interest   Rate   Balance   Interest   Rate
                         
    (in millions)   %   (in millions)   %
ASSETS
                                               
Loans to banks
                                               
Domestic offices
    9,268       226       2.4       6,834       179       2.6  
Foreign offices
    238       12       5.0       987       36       3.6  
Loans to customers(1)
                                               
Domestic offices
    49,969       2,309       4.6       38,671       1,784       4.6  
Foreign offices
    43,106       2,264       5.3       35,634       1,781       5.0  
Central government and other eligible bills
                                               
Domestic offices
    126       1       0.8       7              
Foreign offices
                                   
Debt Securities
                                               
Domestic offices
    24,380       869       3.6       13,307       426       3.2  
Foreign offices
    1,518       64       4.2       1,125       57       5.1  
Other financial assets at fair value through P/L
                                               
Domestic offices
    152       1       0.7                    
Foreign offices
    232       10       4.3                    
                                     
Total interest-earning assets
                                               
Domestic offices
    83,895       3,406       4.1       58,819       2,389       4.1  
Foreign offices
    45,094       2,350       5.2       37,746       1,874       5.0  
Net swap interest
          34                          
                                     
      128,989       5,790       4.5       96,565       4,263       4.4  
Allowance for impairment losses
    (341 )                   (443 )              
Non interest earning assets(2)
    18,615                     21,181                
                                     
Total Assets
    147,263       5,790       3.9       117,303       4,263       3.6  
                                     
Percentage of assets applicable to foreign activities
    31.8%                       34.2%                  

51


Table of Contents

AVERAGE BALANCE SHEET AND INTEREST RATES (Continued)
TABLE 2
                         
    2004
    IR GAAP
     
    Average    
    Balance   Interest   Rate
             
    (in millions)   %
ASSETS
                       
Loans to banks
                       
Domestic offices
    7,385       171       2.3  
Foreign offices
    755       26       3.4  
Loans to customers(1)
                       
Domestic offices
    28,987       1,394       4.8  
Foreign offices
    29,533       1,494       5.0  
Central government and other eligible bills
                       
Domestic offices
    9              
Foreign offices
                 
Debt Securities
                       
Domestic offices
    8,942       268       3.0  
Foreign offices
    1,453       63       4.3  
Instalment credit
                       
Domestic offices
    502       35       7.0  
Foreign offices
    869       61       7.0  
Finance lease receivables
                       
Domestic offices
    2,043       114       5.6  
Foreign offices
    194       5       2.4  
                   
Total interest-earning assets
                       
Domestic offices
    47,868       1,982       4.1  
Foreign offices
    32,804       1,649       5.0  
                   
      80,672       3,631       4.5  
Allowance for loan losses
    (496 )                
Non interest earning assets(2)
    17,447                  
                   
Total Assets
    97,623       3,631       3.7  
                   
Percentage of assets applicable to foreign activities
    35.4%                  

52


Table of Contents

AVERAGE BALANCE SHEET AND INTEREST RATES (Continued)
TABLE 1
                                                 
    2006   2005
    IFRS   IFRS
         
    Average       Average    
    Balance   Interest   Rate   Balance   Interest   Rate
                         
    (in millions)   %   (in millions)   %
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Deposits by banks
                                               
Domestic offices
    17,038       478       2.8       18,882       399       2.1  
Foreign offices
    2,041       74       3.6       1,245       38       3.1  
Customer accounts
                                               
Domestic offices
    35,817       446       1.2       24,136       219       0.9  
Foreign offices
    20,579       1,100       5.3       21,929       918       4.2  
Debt securities in issue
                                               
Domestic offices
    23,800       827       3.5       13,977       354       2.5  
Foreign offices
    6,393       301       4.7       3,769       179       4.7  
Subordinated liabilities
                                               
Domestic offices
    2,955       120       4.1       2,248       119       5.3  
Foreign offices
    2,284       137       6.0       1,442       106       7.4  
                                     
Total interest bearing liabilities
                                               
Domestic offices
    79,610       1,871       2.4       59,243       1,091       1.8  
Foreign offices
    31,297       1,612       5.2       28,385       1,241       4.4  
                                     
      110,907       3,483       3.1       87,628       2,332       2.7  
Non interest bearing liabilities
                                               
Current accounts
    10,578                     8,886                
Other non interest bearing liabilities(2)
    20,987                     16,340                
Stockholders’ equity
    4,791                     4,449                
                                     
Total liabilities and stockholders’ equity
    147,263       3,483       2.4       117,303       2,332       2.0  
                                     
Percentage of liabilities applicable to foreign activities
    31.8%                       34.2%                  
 
(1) Loans to customers include non-accrual loans and loans classified as problem loans.
 
(2) The balance sheets of the life assurance companies have been consolidated and are reflected under “Non interest earning assets” and “Other non interest bearing liabilities”.

53


Table of Contents

AVERAGE BALANCE SHEET AND INTEREST RATES (Continued)
TABLE 2
                         
    2004
    IR GAAP
     
    Average    
    Balance   Interest   Rate
             
    (in millions)   %
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Deposits by banks
                       
Domestic offices
    13,946       388       2.8  
Foreign offices
    1,028       34       3.3  
Customer accounts
                       
Demand deposits
                       
Domestic offices
    10,936       124       1.1  
Foreign offices
    8,449       240       2.8  
Term deposits
                       
Domestic offices
    9,640       73       0.8  
Foreign offices
    9,893       504       5.1  
Other deposits
                       
Domestic offices
    550       39       7.1  
Foreign offices
    14       1       5.0  
Interest bearing current accounts
                       
Domestic offices
    850       8       1.0  
Foreign offices
    2,312       61       2.6  
Debt securities in issue
                       
Domestic offices
    8,049       131       1.6  
Foreign offices
    3,037       107       3.5  
Subordinated liabilities
                       
Domestic offices
    1,566       75       4.8  
Foreign offices
    1,382       102       7.4  
                   
Total interest bearing liabilities
                       
Domestic offices
    45,537       838       1.8  
Foreign offices
    26,115       1,049       4.0  
                   
      71,652       1,887       2.6  
Non interest bearing liabilities
                       
Current accounts
    7,426                  
Other non interest bearing liabilities(2)
    14,153                  
Stockholders equity including non equity interests
    4,392                  
                   
Total liabilities and stockholders’ equity
    97,623       1,887       1.9  
                   
Percentage of liabilities applicable to foreign activities
    35.4%                  

54


Table of Contents

Change in Net Interest Income — Volume and Rate Analysis
      The following table allocates changes in net interest income between volume and rate for 2006 compared to 2005. Volume and rate variances have been calculated based on movements in average balances over the period and changes in average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated rateably to volume and rate.
                         
    2006 over 2005 IFRS
     
    Increase/(Decrease) due to
    change in
     
    Average   Average   Net
    Volume   Rate   Change
             
    (in millions)
INTEREST EARNING ASSETS
                       
Loans to Banks
                       
Domestic offices
    60       (13 )     47  
Foreign offices
    (34 )     10       (24 )
Loans to customers
                       
Domestic offices
    522       3       525  
Foreign offices
    389       94       483  
Central government and other eligible bills
                       
Domestic offices
          1       1  
Foreign offices
                 
Debt securities
                       
Domestic offices
    390       53       443  
Foreign offices
    18       (11 )     7  
Other financial assets at fair value through P/ L
                       
Domestic offices
    1             1  
Foreign offices
    10             10  
                   
Total interest income
    1,356       137       1,493  
                   
 
INTEREST BEARING LIABILITIES
                       
Deposits by Banks
                       
Domestic offices
    (42 )     121       79  
Foreign offices
    28       8       36  
Customer accounts
                       
Domestic offices
    128       99       227  
Foreign offices
    (59 )     241       182  
Debt securities in issue
                       
Domestic offices
    309       164       473  
Foreign offices
    124       (2 )     122  
Subordinated liabilities
                       
Domestic offices
    32       (31 )     1  
Foreign offices
    53       (22 )     31  
                   
Total interest bearing expense
    573       578       1,151  
                   
Net interest income
    783       (441 )     342  
                   
Net swap interest
                    34  
                   
Total change in net interest income
                    376  
                   

55


Table of Contents

DESCRIPTION OF ASSETS AND LIABILITIES
      The following sections provide information relating to the assets and liabilities of the Bank of Ireland Group.
Assets
Loan Portfolio
      The Bank of Ireland Group’s loan portfolio comprises of loans to customers (including overdrafts) and instalment credit and finance lease receivables.
      The Group provides mortgage loans for house purchases as well as home improvement loans and secured personal loans to existing mortgage customers. The Group has a wide range of home mortgage loan products including amortizing, interest only and endowment loans. Interest on mortgage loans is typically at a floating rate but the Group also makes some fixed rate loans.
      At March 31, 2006 residential mortgages accounted for 50% of the Group’s total loan portfolio and construction and property accounted for 18% of the Group’s total loan portfolio. No other industry classification accounts for more than 10% of the Group’s total loan portfolio.
      A significant portion of the Group’s lending is in the form of overdrafts. An overdraft is a demand credit facility operated through the customer’s checking account. A credit limit is agreed with the customer based on the Group’s lending criteria. The customer can draw on the facility up to that limit, with the result that the balance can change with the requirements of the customer. It is expected that such accounts would fluctuate regularly between debit and credit and that the account would, in each year, be in credit for at least 30 days (which need not be consecutive). Overdraft facilities are normally granted for a specific period of time, generally twelve months, at which point they are reviewed and, if appropriate, renewed. Interest rates on overdrafts are variable and are usually quoted in relation to interbank rates. Interest on overdrafts is normally debited directly to the customer’s account.
      Under certain provisions of the Consumer Credit Act, 1995, a lender in Ireland is required to give at least 10 days’ (and in certain cases 21 days’) notice before any demand for early repayment is made on a borrower who is a “consumer” for the purposes of the Act.
      Overdrafts are designed to meet a borrower’s short-term financing needs and, in the case of commercial customers, are provided only for working capital requirements. Medium or long-term financing requirements are provided through loans with fixed repayment schedules.

56


Table of Contents

Total loans to customers by origin
      The following table sets forth the Bank of Ireland Group’s total loans to customers by origin at March 31 for each of the five years ended March 31, 2006. Table 1 details the loans using data prepared in accordance with IFRS for the years ended March 31, 2006 and 2005, while table 2 details the loans using data prepared in accordance with IR GAAP information for the years ended March 31, 2004, 2003 and 2002.
Table 1
                 
    At March 31,
     
    2006   2005
    IFRS   IFRS
         
    (in millions)
Ireland
               
Agriculture
    1,160       1,145  
Energy
    485       476  
Manufacturing
    4,850       4,245  
Construction and property
    10,726       8,065  
Distribution
    2,986       2,239  
Transport
    1,168       982  
Financial
    1,676       1,399  
Business and other services
    6,112       4,165  
Personal
               
— residential mortgages
    19,827       15,686  
— other lending
    5,212       4,538  
             
      54,202       42,940  
             
United Kingdom
               
Agriculture
    69       67  
Energy
    48       61  
Manufacturing
    842       657  
Construction and property
    7,057       4,242  
Distribution
    289       186  
Transport
    292       293  
Financial
    430       237  
Business and other services
    2,199       1,746  
Commercial mortgages
    2,595       2,228  
Personal
               
— residential mortgages
    31,171       25,653  
— other lending
    2,411       1,845  
             
      47,403       37,215  
             
Group total loan portfolio
    101,605       80,155  
Allowance for loan losses
    (359 )     (319 )
             
Total
    101,246       79,836  
             

57


Table of Contents

Total loans to customers by origin (Continued)
Table 2
                         
    At March 31,
     
    2004   2003   2002
    IR GAAP   IR GAAP   IR GAAP
             
    (in millions)
Ireland
                       
Agriculture
    1,134       1,142       1,114  
Energy
    485       650       696  
Manufacturing
    3,579       3,866       3,908  
Construction and property
    6,111       4,666       3,638  
Distribution
    1,575       1,391       1,353  
Transport
    954       486       899  
Financial
    1,311       817       1,960  
Business and other services
    3,147       2,865       2,478  
Personal
                       
— residential mortgages
    12,360       10,005       7,944  
— other lending
    3,614       3,025       2,718  
                   
      34,270       28,913       26,708  
                   
United Kingdom
                       
Agriculture
    69       58       55  
Energy
    63       158       142  
Manufacturing
    1,275       721       593  
Construction and property
    2,572       1,984       2,091  
Distribution
    203       224       226  
Transport
    337       249       63  
Financial
    173       96       153  
Business and other services
    1,375       1,250       1,094  
Commercial mortgages
    2,130       1,855       1,989  
Personal
                       
— residential mortgages
    24,073       20,863       22,933  
— other lending
    1,472       995       1,008  
                   
      33,742       28,453       30,347  
                   
United States
                       
Commercial loans
          1       22  
                   
            1       22  
                   
Group total loan portfolio
    68,012       57,367       57,077  
Allowance for loan losses
    (472 )     (480 )     (500 )
                   
Total
    67,540       56,887       56,577  
                   

58


Table of Contents

Total loans to customers by origin (%)
      The following table sets forth the percentage of total loans to customers represented by each category of loan at March 31 for each of the five years ended March 31, 2006. Table 1 details the percentage using data prepared in accordance with IFRS for the years ended March 31, 2006 and 2005, while table 2 details the percentage using data prepared in accordance with IR GAAP information for the years ended March 31, 2004, 2003 and 2002.
Table 1
                 
    At March 31,
     
    2006   2005
    IFRS   IFRS
         
    %   %
Ireland
               
Agriculture
    1.1       1.4  
Energy
    0.5       0.6  
Manufacturing
    4.8       5.3  
Construction and property
    10.6       10.1  
Distribution
    2.9       2.8  
Transport
    1.1       1.2  
Financial
    1.7       1.7  
Business and other services
    6.0       5.2  
Personal
               
— residential mortgages
    19.5       19.6  
— other lending
    5.1       5.7  
             
      53.3       53.6  
             
United Kingdom
               
Agriculture
    0.1       0.1  
Energy
    0.0       0.1  
Manufacturing
    0.8       0.8  
Construction and property
    6.9       5.3  
Distribution
    0.3       0.2  
Transport
    0.3       0.4  
Financial
    0.4       0.3  
Business and other services
    2.2       2.1  
Commercial mortgages
    2.6       2.8  
Personal
               
— residential mortgages
    30.7       32.0  
— other lending
    2.4       2.3  
             
      46.7       46.4  
             
Group total loan portfolio
    100.0       100.0  
             

59


Table of Contents

Total loans to customers by origin (%) (Continued)
Table 2
                         
    At March 31,
     
    2004   2003   2002
    IR GAAP   IR GAAP   IR GAAP
             
    %   %   %
Ireland
                       
Agriculture
    1.7       2.0       2.0  
Energy
    0.7       1.1       1.2  
Manufacturing
    5.3       6.7       6.8  
Construction and property
    9.0       8.1       6.4  
Distribution
    2.3       2.4       2.4  
Transport
    1.4       0.9       1.6  
Financial
    1.9       1.4       3.4  
Business and other services
    4.6       5.0       4.3  
Personal
                       
— residential mortgages
    18.2       17.5       13.9  
— other lending
    5.3       5.3       4.8  
                   
      50.4       50.4       46.8  
                   
United Kingdom
                       
Agriculture
    0.1       0.1       0.1  
Energy
    0.1       0.3       0.2  
Manufacturing
    1.9       1.3       1.0  
Construction and property
    3.7       3.4       3.7  
Distribution
    0.3       0.4       0.4  
Transport
    0.5       0.4       0.1  
Financial
    0.3       0.2       0.3  
Business and other services
    2.0       2.2       1.9  
Commercial mortgages
    3.1       3.2       3.5  
Personal
                       
— residential mortgages
    35.4       36.4       40.2  
— other lending
    2.2       1.7       1.8  
                   
      49.6       49.6       53.2  
                   
United States
                       
Commercial loans
                 
                   
                   
                   
Group total loan portfolio
    100.0       100.0       100.0  
                   

60


Table of Contents

Analysis of Loans to Customers by Maturity and Interest Rate Sensitivity
      The following tables analyse loans by maturity and interest rate sensitivity. Overdrafts, which represent a significant proportion of the portfolio, are classified as repayable within one year. Approximately 11.7% of the Bank of Ireland Group’s loan portfolio at March 31, 2006 was provided on a fixed-rate basis. Fixed-rate loans are defined as those loans for which the interest rate is fixed for the full life of the loan. Variable-rate loans include some loans for which the interest rate is fixed for an initial period (e.g., some residential mortgages) but not for the full life of the loan. The interest rate exposure is managed by Global Markets within agreed policy parameters. See Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.
                                 
    As at March 31, 2006
    IFRS
     
        After    
        1 year but    
    Within   within   After    
    1 year   5 years   5 years   Total
                 
    (in millions)
Ireland
    10,231       16,375       27,596       54,202  
United Kingdom
    4,268       8,507       34,628       47,403  
                         
Total loans by maturity
    14,499       24,882       62,224       101,605  
                         
Fixed rate
    2,007       5,784       4,117       11,908  
Variable rate
    12,492       19,098       58,107       89,697  
                         
Total loans by maturity
    14,499       24,882       62,224       101,605  
                         

61


Table of Contents

      The following table sets forth an analysis of loans by maturity within each classification as at March 31, 2006.
                                 
    As at March 31, 2006
    IFRS
     
        After    
        1 year but    
    Within   within   After    
    1 year   5 years   5 years   Total
                 
    (in millions)
Ireland
                               
Agriculture
    388       391       381       1,160  
Energy
    80       155       250       485  
Manufacturing
    880       2,509       1,461       4,850  
Construction and property
    3,103       4,397       3,226       10,726  
Distribution
    780       923       1,283       2,986  
Transport
    314       690       164       1,168  
Financial
    393       500       783       1,676  
Business and other services
    1,300       2,023       2,789       6,112  
Personal
                               
— residential mortgages
    859       3,017       15,951       19,827  
— other lending
    2,134       1,770       1,308       5,212  
                         
      10,231       16,375       27,596       54,202  
                         
United Kingdom
                               
Agriculture
    27       26       16       69  
Energy
    29       19             48  
Manufacturing
    367       400       75       842  
Construction and property
    1,223       3,704       2,130       7,057  
Distribution
    24       160       105       289  
Transport
    116       139       37       292  
Financial
    286       112       32       430  
Business and other services
    603       704       892       2,199  
Commercial Mortgages
    140       736       1,719       2,595  
Personal
                               
— residential mortgages
    266       1,698       29,207       31,171  
— other lending
    1,187       809       415       2,411  
                         
      4,268       8,507       34,628       47,403  
                         
Group total loan portfolio
    14,499       24,882       62,224       101,605  
                         
Movement in the Allowance for Loan Losses
      The Group’s loan loss experience in recent years has been satisfactory. The charge to the Profit and Loss account has not exceeded 20 basis points in any of the past five years.
      The main factors contributing to this outcome have been the exceptional performance of the Irish economy over the period including almost full employment and a low interest rate environment. Although interest rates have begun to rise in recent months they are still relatively low, on a historical basis.
      In Britain, the robust performance of the economy, low interest rates, which have now reverted to a more normal level, and a concentration on lower risk residential mortgage lending are responsible for the satisfactory loan loss experience there.
      The Group has also invested significantly in credit rating models, which are central to Credit Risk Management within the Group.

62


Table of Contents

      With effect from April 1, 2005 the Group has adopted and applied impairment provisioning methodologies that comply with International Financial Reporting Standards (IFRS). IAS 39 requires that an incurred loss approach be taken to impairment provisioning. Group policy is to assess all credit exposures for objective evidence of impairment on a regular basis and to maintain a stock of provisions that reflects such impairment. The stock of provisions is comprised of two elements: specific provisions and Incurred but not Reported (IBNR) provisions. See under “Impairment Provisions” in the Credit Risk section for greater detail on the application of IAS 39.
      Over the past five years total Group loan loss allowances have declined from 500 million to 359 million, representing 0.88% and 0.35%, respectively, of total loans. A review of the loan loss provision was effected in the year to March 31, 2005, and in light of the favourable economic conditions and the strong quality of assets, an impairment loss write back of 100 million was made. The transition to IAS 39 from April 1, 2005 had no effect on the quantum of impairment provisions required by the Group, and therefore no transition adjustment was required.
      The ratio of loan loss allowances to loans that are impaired was reduced from 151% in 2002 to 45% in 2006. The 151% figure was calculated by dividing total loan loss allowances of 500m by 331m, the total of loans accounted for on a non-accrual basis. The figure of 45% for 2006 is arrived at by dividing impairment provisions of 359m by 796m.

63


Table of Contents

Movement in the Allowance for Loan Losses
      The following table presents information regarding the movement in the allowance for loan losses in each of the five years ended March 31, 2006. Table 1 details the movement using data prepared in accordance with IFRS for the years ended March 31, 2006 and 2005, and table 2 details the movement using data prepared in accordance with IR GAAP information for the years ended March 31, 2004, 2003 and 2002.
Table 1
                   
    Financial year ended
    March 31,
     
    2006   2005
    IFRS   IFRS(1)
         
    Impairment   Impairment
         
    (in millions)
Allowance at beginning of year
    318.7       471.8  
Total allowance
    318.7       471.8  
             
Exchange adjustments
    0.6       (9.2 )
             
Recovery of amounts previously charged off:
               
 
Ireland
    19.6       19.5  
 
United Kingdom
    1.7       1.9  
             
Total recovery of amounts previously charged off
    21.3       21.4  
             
Amounts charged off:
               
 
Ireland
    (71.9 )     (131.9 )
 
United Kingdom
    (13.1 )     (12.6 )
             
Total amounts charged off
    (85.0 )     (144.5 )
             
Provision for impairment losses charged to income:
               
 
Ireland
    73.5       86.6  
 
United Kingdom
    29.9       (7.4 )
             
      103.4       79.2  
             
Impairment loss write back
          (100.0 )
             
Allowance at end of year
    359.0       318.7  
             
Total allowance
    359.0       318.7  
             
 
(1) Figures presented in accordance with IFRS excluding IAS 32, 39 and IFRS 4.

64


Table of Contents

Movement in the Allowance for Loan Losses (Continued)
Table 2
                                                   
    Financial year ended March 31,
     
    2004   2003   2002
    IR GAAP   IR GAAP   IR GAAP
             
    Specific   General   Specific   General   Specific   General
                         
    (in millions)
Allowance at beginning of year
    169.5       310.2       158.8       341.4       123.2       307.2  
Total allowance
  479.7   500.2   430.4
             
Exchange adjustments
    1.3       5.9       (7.7 )     (22.4 )     1.4       2.2  
                                     
Recovery of amounts previously charged off:
                                               
 
Ireland
    12.3             4.1             14.4        
 
United Kingdom
    0.7             1.5             4.7        
                                     
Total recovery of amounts previously charged off
    13.0             5.6             19.1        
                                     
Amounts charged off:
                                               
 
Ireland
    (105.3 )           (77.4 )           (39.0 )      
 
United Kingdom
    (9.3 )           (19.0 )           (16.1 )      
                                     
Total amounts charged off
    (114.6 )           (96.4 )           (55.1 )      
                                     
Provision for loan losses charged to income:
                                               
 
Ireland
 <