Coming clean

In the face of the slump, Irish banks are being very open about their financial details, writes Simon Carswell, Finance Correspondent

'Sunlight is great medicine" was how one broker responded to the huge levels of disclosure by Irish banks of their exposures to radioactive assets linked to the US subprime market.

Ireland's leading banks have been happy to shed plenty of light on their affairs in annual results and trading statements, but rays of sunshine have not yet breached the overcast skies hanging over the Irish financial sector.

Financial stocks are in a slump and most bankers believe it will be well into 2009 before confidence in the market returns.

"Investors are looking for more certainty on the economic outlook, particularly in the US," said Sebastian Orsi, banking analyst at Merrion. "The question investors want to know is whether a downturn will be long and shallow or short and deep."

AIB reported pretax profits of €2.5 billion for 2007 this week and went into painstaking detail on how it had taken a €131 million hit on assets affected by the subprime chaos, namely collateralised debt obligations (CDOs) and asset-backed securities.

It has no exposure to structured investment vehicles (SIVs). These products have forced many of the world's leading investment banks to write down asset values by more than $145 billion (€98 billion) since the credit crunch began in August.

Credit Suisse and Barclays are the latest banks to report significant losses. The Swiss bank marked down asset-backed investments by $2.85 billion (€1.9 billion), wiping $1 billion off its first-quarter profit and sending its shares into a tailspin on Tuesday. Barclays fared much better that day. It wrote down €2.1 billion but reported profits broadly in line with expectations. Its shares rose 3.7 per cent.

The market will be watching British bank Lloyds TSB closely when it announces its 2007 results today, followed by Royal Bank of Scotland on February 28th and the UK's biggest bank, HSBC, on March 3rd.

Subprime-linked writedowns by Ireland's biggest banks have been tiny in comparison. Bank of Ireland said in a trading statement last Friday that it was setting aside another €15 million to cover falling values in its SIV investments, bringing to about €42 million the amount the bank has ringfenced for its exposure to contaminated products.

Last November, Anglo Irish Bank led the way when it revealed a massive level of detail in reporting results for the year to September 30th, 2007, showing €112 million in writedowns associated with SIV and subprime-linked CDOs.

The bank had appeared to have the most to lose, given the negative sentiment directed at it in September and October. Its presentation certainly put investors' minds at ease - shares rose 10 per cent on the day of the results.

Analysts point out that Ireland's leading banks appear to have avoided the bullets flying around international banks. Their low exposure to high-risk credit instruments shows how conservative they have been in the securitisation markets.

They have relied mostly on customer deposits and long-term wholesale funding to grow their loan books. This has rubbished the concerns of international commentators who believed Irish banks must have heavily tapped securitisation markets to grow their mortgage books during the 10-year property boom.

Bank of Ireland chief financial officer John O'Donovan said at the reporting of the bank's interim results in November that its exposure to SIV and CDO assets represented "less than 0.07 per cent" of the bank's balance sheet, or less than €10 million. That day, its shares fell 5.5 per cent, bringing its year-to-date decline to 43 per cent. The bank provided even more detail in its trading statement last Friday. It said that on its balance sheet of about €200 billion, its exposure to SIVs, CDOs and monoline insurers was "modest" totalling around €266 million and breaking out the figures. Investors responded a little more favourably this time - the bank's share price fell 1.4 per cent, despite an initial strongly negative response.

All eyes will be on Irish Life & Permanent (IL&P) on Wednesday when it reports its 2007 results. The group was hammered harder than its rivals, despite showing a considerable level of openness in its trading statement last December. It gave investors two possible scenarios - it said its 2008 profits would fall by up to 9 per cent if the higher funding costs continued through the first half of the year and that earnings would be flat or slightly ahead of 2007 if funding costs settled down after the first quarter.

The three-month Euribor interbank rate, at which banks lend money to one another, has fallen from 4.95 per cent in December to its current level of 4.37 per cent but, despite the significant fall, the actual rate of borrowing still remains high as most debt markets are closed or trading lightly.

The thoughts of IL&P chief executive Denis Casey on this subject will be scrutinised closely as he is likely to give investors considerable detail on its funding costs so far this year.

Davy analyst Emer Lang says investors will also be monitoring the general poor sentiment in investment markets on IL&P's outlook for its life business and whether the group's plans to halve the commissions paid to brokers has interrupted the flow of new business.

The rate of dividend increase will also be an issue. AIB said on Wednesday it would be increasing the dividend payout by 36 per cent to 79 cent a share. The bank's chief executive Eugene Sheehy was quick to emphasise that, even with slower earnings growth forecast in 2008, it still had room to manoeuvre to maintain strong double-digit increases in dividend payouts. The bank said investors had enjoyed 15 years of double-digit dividend growth and a slowing economy would not end that policy.

Irish banks have also tripped over themselves to show the economic and property slowdown has not led to a major increase in bad loans or worries over big clients in the housebuilding sector.

AIB had a bad loan charge amounting to 0.12 per cent of all loans in 2007 and expects this to rise to 0.2 per cent. Bank of Ireland is guiding roughly the same increase. It said last week it expected its bad loan provision to rise to 0.15-0.19 per cent in March 2008 from 0.12 per cent in September 2007.

AIB said on Wednesday it had investigated almost one-tenth of its loans, or €700 million, to Irish homebuilders and they are being "actively managed" by a team within the bank, unconnected to the lenders who made the loans, to "reduce probability of default and potential losses given default".

Irish banks might be outperforming their European counterparts this year and the unprecedented level of disclosure has helped. But it is a damage limitation exercise. Emer Lang says Irish banks will be penalised if they don't disclose. "In time, those that gave all the details will be rewarded. The worst thing any financial could do is bury something. To come out with details at a very early stage is going to stand to the Irish banks."