IRISH LIFE & PERMANENT

IRISH LIFE & Permanent (IL&P) plans to float its pensions and investment business on the stock market to boost its capital and meet new standards imposed by the Central Bank.

Tests on Irish banks to determine how much more capital they need have calculated that IL&P requires €4 billion to cover the cost of potential losses from home loans, which amount to twice its deposits, and to insure against future risks to its solvency.

As a result, the group is likely to be broken up. Its retail banking arm is set be taken largely into State ownership, while Irish Life, its profitable life and pensions business, will be sold.

The group said yesterday that in the near term it expects to float Irish Life on the Dublin and London stock exchanges through an initial public offering (IPO), which it believes would be the best way to maximise its value.

It did not say how much it expects to raise from this, but sources said that an industry rule of thumb would value Irish Life at somewhere between €1.5 billion and €1.75 billion.

Overall, the group said yesterday that liability management exercises and the sale of its non-banking business would cut the €4 billion requirement by €1.1 billion, meaning that the

State would have to provide €2.9 billion.

If this were to go ahead, it would leave the retail arm, Permanent TSB, as a personal banking and home loan specialist, which would be mainly State-owned, and which would compete for business on the high street with the Government’s other “two banking pillars”,

Bank of Ireland and a merged AIB and EBS.

Group chief executive Kevin Murphy said that he and the board were extremely disappointed with the outcome of the stress tests.

“We had set out a roadmap which would have allowed us to fix our banking business over time without compromising the integrity of the group or the position of shareholders,” he said.

“Unfortunately it became clear in recent days that, given the wider systemic crisis facing Irish banks and the Irish sovereign, the group would have to accept a solution designed to reassure international investors that a line has been drawn under the Irish banking crisis.”

Financial regulator Matthew Elderfield explained yesterday that the €4 billion that IL&P needs includes €3.3 billion to meet capital requirements, that is to ensure that it has enough money to absorb losses and remain solvent, up to the end of 2013. The extra €700 million is a buffer against risks that could arise after that date.

Following a stress test carried out last year, the Central Bank told IL&P that it needed €243 million, a figure the finance institution believed it could raise itself.

BlackRock Solutions, the consultants that carried out this round of stress tests on the Irish banks, applied different standards. IL&P has €100 on deposit for every €200 it has loaned out to customers, mainly in mortgages.

The consultants want this 200 per cent ratio cut to 122 per cent. The bank had been working towards a ratio of 160 per cent.

BlackRock’s calculations estimated that loan losses over three years to the end of 2013 would be €2.5 billion. The bank’s own figures came up with €1.6 billion.

According to IL&P, this implies that the rate at which customers are defaulting would double.

BlackRock also assumed that the bank would foreclose “aggressively” when people fall behind with their mortgage repayments.

The bank and its rivals agreed with the government last year to delay foreclosures and repossessions for two years in cases where people have defaulted.

The biggest single component of the solution is the sale of its assets to meet the 122 per cent ratio.

The group said yesterday that, at the end of the process in 2013, the bank would have €1.5 billion in excess capital, while its equity would amount to 33 per cent of its loan book.