IL&P must be counting its blessings that it did not lend to developers or businesses

IRISH LIFE & Permanent (IL&P) emerged bruised and battered for its 2008 annual results.

It had lost not just a chief executive, finance director and head of treasury last month over the €7.45 billion controversial deposits into Anglo Irish Bank, but it lost €433 million (after tax) last year. Life sales and bank lending fell in 2008; bad debts climbed.

IL&P has said it doesn’t need any capital from the Government. David McCarthy, the newly-appointed finance director, says ILP is throwing off enough surplus capital to “serve us well” through the downturn.

IL&P must be counting its blessings that it did not lend to developers or businesses. Its most pressing problem is not a need for fresh capital but the company’s precarious funding position.

Mr McCarthy said the company had, at the end of last year, borrowed €11.8 billion from the European Central Bank’s repo facility – the discount money hatch where banks go if they cannot raise funding elsewhere.

This equalled a whopping 26.8 per cent of Permanent TSB’s €44 billion balance sheet at the end of last year and was up from €3.9 billion last June. ILP said ECB funding averaged €8 billion over 2008 and that it has since cut its ECB funding to €10 billion.

Mr McCarthy said the system had been “drained of liquidity” last year. “More and more, the only place where we will get liquidity is at the ECB window.”

Permanent TSB’s loans-to-deposits ratio remains the highest of the six Irish-owned guaranteed lenders.

It stands at 274 per cent, meaning that for every €100 the bank has on deposit, it has €274 on loan.

The difference is made up from external funding – be it from investors, other banks or the ECB.

IL&P aims to reduce this closely-watched ratio to 220 per cent by the end of this year by attracting €2 billion in new retail deposits. It will be tough given that every bank is chasing new deposits but it managed to add €1 billion last year.

More worrying has been the loss of €600-700 million in large, corporate deposits, mostly from the UK, in the first two months of this year. IL&P said this was “more than compensated” for by new retail deposits.

IL&P will be pressing the Government to extend the bank guarantee beyond September 2010 to insure individual, longer-term bonds so the bank can raise more secure funding.

“The two-year guarantee will ultimately have to be extended on some basis and work is progressing on that issue,” said Kevin Murphy, Irish Life’s chief executive who has taken charge of operations since Denis Casey resigned as chief executive.

The company expects to write off at least €160 million on bad loans and, at worst, €217 million for each of the next three years.

The best case assumes unemployment reaching 11 per cent and worst case 14 per cent, with house prices falling 40 per cent. The bad debt charge of €82 million for 2008 includes €66 million of mostly mortgages and motor loans that are not yet impaired but which ILP assumes will go bad.

There was a “marked increase” in mortgage arrears in the last three months of 2008 and 8 per cent of mortgages are in negative equity.

Permanent TSB sees itself making at least “a small loss” this year and will add a further €30-40 million in losses if the worst-case scenario becomes a reality. The company will, therefore, rely on Irish Life’s profits to weather the prevailing storm in banking.

One bright spot was IL&P’s fund manager, Irish Life Investment Managers, recording “inflows” of more than €2 billion. and leap-frogging Bank of Ireland Asset Management to become the largest Irish fund manager with a 30 per cent market share.

IRISH LIFE & PERMANENT: 2008 results

Group operating profit:€341 million (-42%);

Bank profit (Permanent TSB):€30 million (-86%);

Life business profit (Irish Life):€284 million (-18%);

Group pretax loss:€364 million (2007: €460 million profit).

SUMMARY

Operating profits at ILP fell sharply and the company posted an annual loss for 2008 after:

- Taking a €640 million hit on the plummeting value of stock market investments;

- Writing off €170 million on the goodwill from the purchase of TSB Bank in 2001;

- Losing €92 million on investments in three Icelandic banks;

- Losing €30 million in the collapse of Lehman Brothers;

- Increasing the bank’s bad loan charge five-fold to €82 million.