Irish Life Permanent sheds 9.9% as Moody's lowers outlook to negative

SHARES IN Irish Life Permanent (ILP) shed almost 10 per cent on yet another difficult day for financial stocks on the Dublin market as Moody’s rating agency lowered its outlook on ILP to negative.

The renewed sell-off came ahead of an interim management statement this morning from Bank of Ireland, whose stock traded as low as €5 before closing 2.32 per cent weaker at €5.06 at the close. AIB was down 2.51 per cent at €8.71, although Anglo Irish Bank rose 0.44 per cent to €5.47.

ILP, which closed down 9.92 per cent at €5.36, said the negative outlook from Moody’s was “to be expected” given current market conditions. “We welcome the confirmation of what are a very strong set of ratings for the group,” said its spokesman.

The change of outlook on ILP from Moody’s came a week after Standard Poors lowered its long-term counter-party credit rating on the group, a move which triggered a 10.31 per cent slide eight days ago. Moody’s said this reflec- ted ILP’s high reliance on mar- ket funding and its expectation of lower profitability. It cited ILP’s “relatively high” exposure to the buy-to-let sector in Ireland and the UK and the deteriorating market environment in Ireland.

“The high rate of growth in lending in Ireland in recent years has led to the bank’s funding profile becoming increasingly reliant on market funding and at year-end 2007 average customer deposits accounted for 32 per cent of average total funding,” it said.

“Although Moody’s notes the good levels of diversification the rating agency expects the higher costs of wholesale funding, together with the lower volumes of new business being generated to lead to lower profitability in 2008.

“The bank’s asset quality continues to be very good, however the relatively high exposure to buy-to-let lending (36 per cent of the total loan portfolio) in both Ireland and the UK, the relatively high loan-to-value ratios of some of the recent lending in Ireland and the worsening economic environment means that Moody’s ex- pects arrears to rise, and the related provisioning costs may lead to further pressure on profitability.”

NCB analysts John Cantwell and Ciaran Callaghan said in a note that any comments on asset quality from Bank of Ireland’s update will the key area of focus for investors. They see “upside risk” to their March 2009 impairment charge forecast of 30 basis points, up from 9bps in the year to March 2008. Davy analyst Scott Rankin said bank valuations now assume a “horrific” outcome from the property downturn.

“With more rumours every week about builders in trouble, we are waiting for the inevitable damage to hit bank PLs [profit and loss accounts],” he wrote.

“In May, we cut our forecasts substantially as we pushed bad debt charges for next year well above normalised levels to a range of 37-50bps [basis points] for the three main financials. Given the trend in macro data since then, with activity so low in the new homes and commercial property markets, the risks to these numbers are increasingly skewed to the downside.”