Permanent TSB and EBS may still form third force

IRISH LIFE and Permanent (IL&P) says it is still open to merging Permanent TSB, the State’s largest mortgage lender, with EBS after losing out to the Cardinal-led private equity consortium as the preferred bidder for EBS.

The suggestion leaves open the possibility of a merger of the two lenders and the creation of the so-called “third force” in banking to rival AIB and Bank of Ireland.

Permanent TSB and EBS have more than one-third of Irish home loans. A deal with Cardinal would give private equity investors an interest in two of the four banks remaining after the closure of Anglo Irish Bank and Irish Nationwide.

Kevin Murphy, the chief executive of IL&P, said the company would be interested in talks with Cardinal on the merger if the consortium completes the purchase of EBS.

“If they are interested in talking to us, we will certainly talk to them because it remains our strategic view that the smaller banks in Ireland need to merge to create stronger entities,” said Mr Murphy.

Cardinal has indicated it wants EBS to be the first in a number of takeovers by the group as the banking sector is restructured under the EU-IMF bailout. The Irish-led consortium, which is backed by New York-based billionaire investor Wilbur Ross and US private equity group Carlyle, beat ILP to be chosen as preferred bidder for EBS last week.

Reporting its 2010 results yesterday, ILP said that it had retained the €3.6 billion in deposits transferred from Irish Nationwide as part of its wind-down since taking them over last Friday. The company offered voluntary redundancy to the 237 Irish Nationwide staff who were moved to ILP as part of the transfer. This represents more than half the building society’s original workforce.

Mr Murphy said the deposits from Irish Nationwide would help shrink Permanent TSB as part of the downsizing of the overall banking system.

The company would need to off-load more than €8 billion out of a total loan book of €38 billion to meet reduction targets set under the EU-IMF plan, he said.

The banks must dispose of tens of billions of euro worth of loans to reduce their size under the plan so they can stand alone without State support or funding from the Irish and European Central Banks.

Mr Murphy said that fire sales of “excess assets” would lead to further bank losses.

The alternative was to put them into “a long-term warehouse” to be sold or run down over time, he said.

The method to be used will be decided after the banks submit deleveraging plans by the end of the month, he said, and the scale of the excess assets in the banks would then be determined.

IL&P reported a loss of €197 million for 2010 as further declines in house prices increased bad debts at Permanent TSB, despite a strong performance by its pensions and investments business Irish Life.

Some 11,500 mortgages out of 178,000 at Permanent TSB were in arrears of 90 days or more at the end of last year, compared with 6,895 a year earlier.

Some 28 per cent of mortgages were in negative equity at the end of 2010.

IL&P has estimated that house prices will have fallen by 43 per cent at the end of this year, compared to the 38 per cent decline at the end of last year.

The company expects the Central Bank’s stress tests at the end of this month to consider the effect of house price falls of up to 60 per cent as part of its worst-case scenario.