THE SCALE of the task facing the Government on valuing toxic loans destined for “bad bank” Nama became evident yesterday as two of the country’s biggest property lenders wrote off €3.6 billion on bad loans, mostly to developers, over a six-month period.
Allied Irish Banks (AIB) also revealed a sharp deterioration in its €134 billion loan book since the start of the year, with one in four loans under stress at June 30th, compared with about one in every 10 loans six months earlier.
The bank posted a pretax loss of €872 million for the first half of the year – the bank’s first half-year loss in its 43-year history – after setting aside €2.37 billion to cover loans that will not be repaid, of which 72 per cent relates to property and development in Ireland.
Lloyds Banking Group, the UK owner of Bank of Scotland (Ireland), another heavy lender to developers, said it was writing off €1.2 billion on bad debts on its Irish loan book of €33.4 billion.
This compares with €553 million set aside by the bank to cover bad debts, mostly due from property developers, for the whole of 2008.
Lloyds said that €4.69 billion in loans or 14 per cent of its Irish book was impaired at June 30th and not being repaid, up from 5.7 per cent six months earlier.
Impaired loans on AIB’s books jumped to €10.8 billion, or 8.1 per cent of the bank’s loans, at the end of June from €3 billion, or 2.2 per cent of loans, in just six months.
Troubled land and development loans in Ireland accounted for most of the increase. The banks are the two biggest lenders to Liam Carroll, one of the largest developers who has temporary court protection.
The different levels of impairment reported by the two banks highlight the difficulties the Government faces when it comes to setting the discount Nama pays on toxic property loans with a book value of €90 billion.
AIB’s chief executive Eugene Sheehy, who will leave the bank once his successor is selected, expects €16 billion of €20.9 billion in development loans and 660 customers to be moved to Nama. Another €10 billion of the bank’s loans secured on investment properties provided as collateral by developers are also expected to be acquired by Nama.
AIB rose 8.4 per cent after the bank said bad loans will peak this year and due to a strong result on operating profits before bad debts which will help absorb losses.
Mr Sheehy dismissed as “speculation” the widely-held expectation that the State would end up taking a majority stake in AIB following Nama’s purchase of loans. He said he did not know the size of the discount to be applied or if the bank would require further State capital. “So much depends on the valuation process and the pace of it,” he said.
AIB finance director John O’Donnell, who is also leaving the bank, conceded that the bank’s full-year bad debt forecast of €4.3 billion would be torn up once the Government set the discount on the loans being purchased by Nama.
“If Nama happens, it’s no longer a relevant number,” he said.