SHARES IN Irish Life & Permanent (IL&P) fell sharply yesterday after the company raised its three-year forecast for loan losses and said the net interest margin would be squeezed as it weans itself off cheap European Central Bank (ECB) funding.
The company said in a trading update that loan losses would total between €800 million and €900 million for the three years to 2011 - up from the previous forecast of €700 million last August.
Shares in IL&P fell 13.6 per cent, or 60 cent, to €3.81.
The deterioration was attributed to declines in the value of the commercial properties backing loans of €2.4 billion in an overall loan book of €40 billion in the banking division Permanent TSB.
Steep falls in property values has also led to a €105 million decline on short-term investment fluctuations in the life business.
Sebastian Orsi, analyst at Merrion Capital, said the timing of the higher forecast in the loan losses was "surprising" given that property values have remained at current levels for several months.
Overall life sales at Irish Life are expected to be down 35 per cent for the year, while the margin on new life business will be between 9 and 10 per cent for the year, down from 15 per cent for 2008.
The company has reduced its reliance on ECB borrowings to €7 billion from €12 billion at the end of June 2009, replacing this with more costly funding raised in the wholesale and deposit markets.
The €5 billion decrease has been replaced equally by commercial paper, a type of short-term funding, and customer deposits.
"The increased deposit funding has, however, come at a higher cost given the highly-competitive nature of the deposit market at present," the company said.
IL&P said that "realistically there is no way" it can exit all of its ECB funding in 2010.
The company said the loans-to-deposits ratio would be "close to" 250 per cent by the end of this year.
The net interest margin is expected to be between 80 and 85 basis points (0.8-0.85 of a percentage point) for this year, which is tighter than the previous forecast of 90 basis points and down from 105 basis points for 2008 due to the higher cost of customer deposits.
IL&P said it expected to grow retail deposits by 20 per cent.
Kevin Murphy, chief executive of IL&P, said the company believed this would be the worst year of the downturn, but there were "encouraging signs" there may be a recovery in 2010.
He told analysts in a conference call that IL&P would consider in January whether to raise interest rates on mortgages again once it can assess the effect of the additional liquidity on the deposit market from the National Asset Management Agency (Nama).
The company said it had made good progress on its plans to restructure its business, with an extraordinary general meeting planned for December 17th to seek shareholder approval to create a new holding company, which it planned to list in mid-January.
This will pave the way for the splitting of IL&P and offloading Permanent TSB into an enlarged "third banking force" with the State's two building societies, EBS and Irish Nationwide, to compete against the two main banks.
"The long-term restructuring discussions will probably seriously commence in the first quarter of 2010, and clearly we'll be well positioned for that," said Mr Murphy.
Finance director David McCarthy said IL&P's core equity ratio - a measure of financial strength - was "north of 9 per cent", while Permanent TSB's ratio was "north of 4 per cent" if it stood alone outside the wider group.
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