Bank of Ireland PLC (IRE) on Thursday lowered its earnings forecast for the second half, saying it now expects to post an underlying loss after previously guiding for "marginally better than break-even," as the deepening economic crisis has increased loan losses.

BoI posted an underlying profit of EUR70 million in the second half last year.

Underlying earnings exclude several items, including the impact of non-core items and goodwill impairment. BoI said it expects to post an underlying profit for the full year.

Ireland's second-largest bank issued the surprise trading update in the wake of its EUR3.5 billion recapitalization by the government late Wednesday. BoI's Core Tier capital will grow to EUR10.7 billion, the government said.

"There has been a further sharp and widespread deterioration in global economic and financial conditions," BoI said. "Our core markets are in recession with rising unemployment, reduced levels of economic activity and falling asset prices."

Goodbody Stockbrokers said it will cut 2009 earnings-per-share to break-even of around 5 cents from around 33 cents previously, given the deteriorating backdrop. Goodbody rates the shares a buy.

The bank said that equity markets remain weak and volatile, while global inter-bank and wholesale funding markets are stressed.

BoI expects a loan impairment charge of around EUR1.4 billion for the 12 months to March 31, 2009.

Around 45% of the increase in the loan impairment charge in the second half arises from the bank's property and construction portfolios.

The bank also revised upwards loan impairment charges for the three years to March 2011 to EUR4.5 billion from EUR3.8 billion.

"Uncertainty regarding the future results in risk to this estimate," the bank said. "As key economic indicators deteriorate there is a downside risk to this estimate which may result in an additional loan impairment charge of up to EUR1.5 billion for the three years to March 2011."

Total income is expected to be "mid-single digit percentage points lower" for the year to March 31, 2009 versus the prior year.

It said operating expenses should be "low single-digit" percentage points lower compared with the prior year.

Chief Financial Officer John O'Donovan told reporters there were no current plans to raise capital in the markets, but added, "One can never say never."

Weakness in investment markets will result in a negative investment variance, which at Dec. 31 2008 was EUR86 million.

Profit in the U.K. Financial Services Division are expected to be "significantly lower" primarily due to a marked increase in the loan impairment charge.

The deterioration in global equity markets resulted in increased fund outflows and "significant falls" in the value of assets under management in BoI's asset management businesses.

BoI expects a goodwill impairment of about EUR300 million which will be reflected in the year-end income statement and will have a negative impact on basic earnings per share. This has no cash or regulatory capital impact.

Funding conditions in wholesale markets remain "stressed" and funding costs "elevated." In the nine months to Dec. 31, 2008 BoI raised around EUR8 billion in term funding, through public and private placements. At Dec. 31, 2008 about 30% of BoI's wholesale funding had a maturity of greater than one year.

At 0900 GMT, BoI shares were down 0.2% at EUR0.61 on the Irish Stock Exchange in a weak overall market after rising 3.3% in opening trade on the recapitalization. The stock has plummeted from EUR9.49 in the last year.

Results for 12 months to March 31, 2009 will be announced on May 19, 2009.

Company Web site: www.bankofireland.com

-By Quentin Fottrell, Dow Jones Newswires; 353-1-676-2189; quentin.fottrell@dowjones.com