Banks compete in race to come clean

B of I and AIB are projecting massive write-offs on loans to builders in an effort to get the bad news out now, writes Simon Carswell, Finance Correspondent

"IT'S LIKE trying to catch a falling knife," said a senior banker this week, describing how banks are trying to project future losses on loans to developers in a property market that is all but dead.

Bank of Ireland - the first Irish bank to report figures since the State's guarantee was introduced on September 30th - decided to clasp the knife at its half-year results yesterday. It gave a grimly pessimistic view on how much it will lose on its development loans.

Finance director John O'Donovan said the bank would be writing off a total of €3.8 billion over the next three years and that the bank's bad debts would peak over the two years to March 2011.

The bank posted an underlying profit of €650 million in the half-year to September 30th - a 32 per cent drop on last year. Given the scale of rising bad debts, no wonder the bank says earnings per share will be "marginally better than breakeven" in the second half of the year to March 2009.

The bank's developer loans are the problem. In the year to March 2009, the bank will write off 3.2 per cent of its €13 billion development and land-bank book. These are loans secured on unsold homes and undeveloped land.

It will write off another 5 per cent the following year. Over three years combined, Mr O'Donovan said, the bank would write off 12.5 per cent of development and landbank loans. The bank was taking a "realistic" assessment, he said. This beats the losses projected last week by AIB, which plans to book a loan loss charge of up to 7.8 per cent on its development loans over two years. AIB's development loans also represent a much larger share of its overall loan book.

The banks appear to be in a race to the bottom in a bid to declare the highest bad debt charges.

It makes sense to come clean now. The gloomier the banks are on projected bad debts - and the more they can convince the market that they have sufficient capital to cover them - the quicker their shares will start to recover.

Otherwise investors will continue to expect the worst.

But the debate on whether the Irish banks need to raise more capital - which essentially involves setting aside more cash - still rages.

Bank of Ireland chief executive Brian Goggin didn't rule out raising capital but said it was "not an option" it was considering.

It could be argued, he said, that the UK banks were "overcapitalised" to absorb losses "coming down the tracks", but that Irish banks did not have the same risks as institutions which had taken on "investment bank-type activities".

"We don't want to box ourselves into a corner until such time as there is greater clarity as to what capital levels should be," he said.

The Financial Regulator and the Government seems to agree, though they are keeping possible recapitalisation under review.

In the meantime, Bank of Ireland is busy adding to its capital.

Dividends have been scrapped, saving an estimated €390 million this year. Riskier lending, which requires more capital to cover, have been cut. Asset sales are being considered.

Mr Goggin said the bank has a number of businesses, investments and portfolios which could be sold but wouldn't identify them.

"One in isolation might not do much for capital but a number combined could be meaningful."

The bank also said it can grow capital without restricting lending to businesses, pointing out that the loan book grew by €9 billion to €145 billion over the half-year.

However, the bank is growing deposits faster than it is lending to reduce its dependance on the dislocated wholesale markets.

Bank of Ireland's loan-to-deposits ratio fell to 140 per cent this week from 174 per cent in September 2007 as wholesale borrowing fell to €72 billion in September from a peak of €85 billion.

Reducing reliance on the wholesale funding markets is another falling blade banks have had to catch.