Bank of Ireland chief says banks will feel the brunt

The chief executive of Bank of Ireland said she is "cautiously optimistic" about the economic recovery in Ireland, but that banks are still facing a severe hit. Francesca McDonagh told CNBC that while Ireland's economy contracted a record 6.1% in the second quarter of 2020, it was "less than expected".

She said that there were positive signs emerging as people begun spending again and customers exited payment breaks that were implemented earlier in the pandemic. "Consumer spending is at the same level as it was in early March. We're seeing house prices be resilient and we're seeing some parts of society and sectors reopen as restrictions change," she said.

Any progress is at risk of being curtailed, though, as Ireland has seen a spike in Covid-19 cases of late with Dublin expected to be placed under new restrictions on Friday evening.

"My cautious optimism is about the green shoots of re-opening the economy. The actual severe impact of the impairment cost to banks can't be overstated," McDonagh told CNBC.

In its half-year report, Bank of Ireland announced a 669 million euro ($790 million) loss before tax, after it took an impairment charge of 937 million euros ($1.1 billion) to cover loan losses during the pandemic.

At the start of lockdown, Bank of Ireland and other major banks agreed to payment breaks for some customers. McDonagh said around 10% of Bank of Ireland's customers had taken a payment break since lockdown in March.

"Many of those customers have come off and resumed normal credit and interest repayment, but our focus in the latter part of this year as people come off their final payment break is to work with our customers," she said.

"We had the lowest non-performing exposure ratio of any Irish bank before Covid, of working with customers to find sustainable solutions, and that's where our focus will be."

There is still uncertainty on any future outlook, she added, with Brexit presenting "additional uncertainty" that may create further challenges ahead. Bank of Ireland recently revamped its charges and now charges a flat fee of six euros per month for current account customers, regardless of how much they have with the bank.

At the same time, it is doing away with a bunch of other charges like contactless fees and ATM fees. It also remains in the midst of an investment strategy in technology to improve its digital services. "The focus on technology was already there before Covid, but the trends and changes amongst our customers are only going to accelerate that," McDonagh said.

This investment aside, Bank of Ireland is continuing to look at cutting costs elsewhere. When announcing its half-year results, the bank said it plans to cut 1,400 jobs from its workforce.