BANK OF Ireland has said that its lending margins are being squeezed by higher funding costs and interest rates and more intense competition for deposits.

In a sign of growing pressure on operating profits before increased bad debts, the bank has said that these factors were contributing to have “a significant negative impact on net interest margin”.

Eleven of the bank’s directors who were seeking re-election at yesterday’s annual meeting were voted back on to the board.

The bank maintained its bad debt forecast at €6 billion over the three years to March 2011, though indicated that this could rise if the economy continued to deteriorate and there was further prolonged low activity in the property sector.

Pressure on interest margins and increased competition for deposits will reduce the bank’s operating profits, weakening its ability to absorb higher bad debts.

Oliver Gilvarry, head of research at Dolmen Securities, said the banks needed to maintain operating profits as high as possible to absorb loan losses and the discounts they will be forced to take on loans being transferred to Nama, the State’s “bad bank”.

The bank said that it would continue to reduce its costs.

Lending was “muted”, the bank said, as loans remained “broadly unchanged” between March and June, while deposits were marginally lower over the same period.

Richard Burrows, who stepped down as governor (chairman) of the bank at yesterday’s annual meeting, told shareholders that he knew the “difficulty and distress” experienced by the decision to cut the bank’s dividend. “Accountability for that decision must be taken at the top,” he said.

The bank was “facing into a difficult period” in light of the economic conditions and expected lower levels of business activity.

Incoming governor Pat Molloy, a former chief executive of the bank, said the bank faces “very significant” challenges and “a difficult and demanding journey over the next few years”. “We have lessons to learn, very expensive lessons unfortunately,” he said.

Bank of Ireland chief executive Richie Boucher said the bank was approving four of every five loan applications from small businesses. Mortgage applications rose about 60 per cent in May.

Asked if the bank was considering raising further capital from investors through a rights issue, Mr Burrows said he believed the bank was “adequately capitalised right now” but that this was “something that is always under review”.

The bank said there were no plans to issue any ordinary stock.

Asked if the bank would be nationalised, Mr Burrows said that he had “no crystal ball” but the bank would do what it could to prevent the bank being nationalised.

The bank said it had created a new committee of non-executive directors to approve risks after property development lending has led to multi-billion-euro losses.

Eleven directors, including Mr Boucher, were re-appointed with between 98.6 per cent and 99.2 per cent of the votes.

Several shareholders queried pay to bank executives and asked why former chief executive Brian Goggin received one year’s salary of €1.46 million in lieu of notice when he retired early last January.

Mr Burrows said the bank was contractually obliged to pay this.

David Dilger, chairman of the bank’s remuneration committee, said that there had been “a huge change in the remuneration philosophy” and that in future pay would be based on “sustainable results measured over a long period”.

Referring to the Government’s bank guarantee, Mr Burrows said that one bank had been in a very dangerous situation in September and that this could have had a knock-on effect on the system.

Bank of Ireland’s shares rose rose by almost 1 per cent to €1.54.