Irish Life & Permanent profit warning

Shares in Irish Life & Permanent fell 38 cents yesterday to close at €11.52 (£9.07) after the company warned profits would not meet some analysts' forecasts this year. It also disclosed that falling interest rates would mean lower margins in its banking business next year. The shares fell to a low of €11.20 before staging a partial recovery as the market digested the statement.

In a pre-close trading statement yesterday, Irish Life & Permanent said earnings would be "negatively impacted" by weak investment markets and its share of the losses at 30 per cent associate Allianz-Irish Life. While the group said its 2001 results would show "good underlying growth", it said weaker investment markets would knock some €25-€30 million off profits, while losses at Allianz-Irish Life would reduce profits by between €1 million and €4 million.

For 2002, the company expects slower loan growth and tighter margins in its banking business. But the life assurance and banking group said it was "optimistic for the prospects for the business going forward".

Due to report results for 2001 in March, Irish Life & Permanent said sales growth was strong in the life business while asset growth in the banking business had been moderating - though asset quality remained strong.

Broker to the company, Davy, pulled back its 2001 operating profit forecast to €235 million from €266 million, following the statement.

Analyst Ms Emer Lang said she remained positive on the company, pointing out the strong sales performance on the life side and the potential of the banking side when the full synergies from the merger of Irish Permanent and TSB were realised. She increased her 2002 forecast to €290 million from €281 million, largely based on expected strong business growth and improved investment markets.

Group finance director Mr Peter Fitzpatrick said some analysts had already reduced their forecasts to reflect weak equity markets this year, but the group wanted to ensure it quantified the impact for the markets.

Irish Life & Permanent said group retail life sales would increase by about 23 per cent this year, helped by a strong performance through the bancassurance channel, where sales almost doubled, boosting group margins. Corporate life sales will rise by about 32 per cent, but investment sales through Irish Life Investment managers will be down on 2000 levels. Costs will be up about 13 per cent.

Persistency, mortality and morbidity experience on policies (experience variances) are expected to be positive this year. But the adverse movement in investment markets will result in a unit-linked management fee variance of €25 million to €30 million.

In the banking market, the slowdown in loan growth in the second half is expected to continue into 2002. The combined Irish Permanent and TSB Irish mortgage book is expected to increase by about 15 per cent this year, mortgages business in the UK should rise by 18 per cent, and other loans, mainly car finance, are expected to increase by just 5 per cent. While the TSB acquisition was positive for margins, falling interest rates and a change to a more conservative treasury policy have pushed margins down and this is expected to continue into 2002.

The 2001 results will include a number of exceptional charges. The group will write off about two-thirds of the €63 million cost of achieving the Irish Permanent/TSB merger synergies and of harmonising terms and conditions of Irish Permanent staff with those of TSB staff. The balance of this cost will be an exceptional charge in 2002.

The disposal of Interstate and First Variable in the US will lead to an exceptional loss of €80 million this year, made up of the discount to book value of €28 million, a taxation charge of €28 million, transaction/severance costs of €8 million and a writeback of €16 million of goodwill previously deducted from reserves.