IL&P makes pretax loss of €220m in half year to end of June

IRISH LIFE Permanent (IL&P) made a pretax loss of €220 million for the first half of the year due to a surge in bad debts at the group’s bank, Permanent TSB, and the falling value of property-related investments held by Irish Life.

The loss compared with a pretax profit of €62 million for the same period last year. Investment fluctuations and higher interest rates shaved €189 million off the embedded value of the life business, leaving IL&P with the loss.

At an operating level, the company posted a loss of €51 million, compared with profit of €300 million a year earlier.

Kevin Murphy, chief executive of IL&P, said the company, which avoided development lending, would not sell loans to Nama, the Government’s toxic loans agency.

He said that while Permanent TSB would not benefit directly from the liquidity created by Nama, it would gain indirectly from higher interbank lending.

Nama would be “a catalyst” for consolidation in banking, he said. IL&P’s strategic options were “fluid” and “many different permutations were still possible”.

IL&P said it is willing to participate in a restructuring of the sector and it was open to all options. Plans to split IL&P’s life and banking units were “progressing well”, Mr Murphy said.

The company intends to hold an extraordinary general meeting in the last quarter to approve the creation of a new holding company which will split the two businesses.

This would enable a merger of Permanent TSB into a larger group or a so-called “third force” to rival AIB and Bank of Ireland.

IL&P finance director David McCarthy said the full-year operating loss would be between €50 million and €100 million, depending on the timing of bad loan charges and funding costs.

“Given the extreme stress that we have just come through, that is not a bad outcome,” he said.

Operating profits at Irish Life, the life and pensions business, fell 52 per cent to €84 million, ahead of forecasts due to reduced costs and better operating expenses.

Sales of life and pension products fell 43 per cent. Mr McCarthy said they would be down 25-30 per cent in 2009, but will improve by 10-15 per cent in 2010.

Permanent TSB posted an operating loss of €132 million, compared with a profit of €124 million the previous year as bad loans rose from €15 million to €189 million.

Before the bad debt charge, the bank’s net interest income fell 19 per cent to €195 million, reflecting the high cost of funding for retail and corporate deposits, and for €3 billion raised by IL&P selling three Government-guaranteed bonds.

IL&P expects future losses on Permanent TSB’s €40 billion residential mortgage and consumer loan book to be higher than expected.

Mr McCarthy said loan losses would peak at 1.7-1.8 per cent of loans, about €700 million, over the three years to 2011.

This is higher than the 1.6 per cent forecast as IL&P raised its projection for unemployment to 16 per cent from 14 per cent previously. Mr Murphy said that loan losses would peak this year.

He expects IL&P’s performance in the second half of this year to be in line with the first six months.

Cost-cutting had reduced staff numbers by 550 to 4,800.

The loss of €1.6 billion in deposits led to Permanent TSB’s loans-to-deposits ratio, a measure of a bank’s reliance on wholesale and central bank funding, to surge above 300 per cent, the highest level of any Irish lender.

The bank lost €2.7 billion in corporate deposits in the first quarter due to concerns about the Irish banks after the nationalisation of Anglo Irish Bank. Retail deposits rose by €1.1 billion, while European Central Bank funding remained at €12 billion. Mr McCarthy said IL&P planned to sell two- or three-year State-backed bonds, rather than five-year securities, when the Government guarantee was extended in October to cover individual bonds.

Half-year results

Group operating loss:€51 million (€300 million profit in first half of 2008)

Divisions

Irish Life:

Operating profit:€84 million (-52%)

Permanent TSB:

Operating loss: €132 million (profit of €124 million first half of 2008)

Group pretax loss:€220 million (profit of €62 million in first half of 2008).

Permanent TSB continued to drag on the group as Irish Life remained profitable. Investors took comfort in the company’s view loan losses and mortgage arrears will peak this year.