The society's annual report should reveal the size of its loan book to developers if not the mix, writes Simon Carswell

ONCE A year Irish Nationwide reveals its figures to its members with the publication of its annual report.

It is the only one of the six guaranteed institutions that has not yet had to show its hand on how its business will be affected by the expected sharp increase in losses on loans, particularly on property.

The building society, together with Anglo Irish Bank, is the most exposed of any of the covered Irish financial institutions to the deteriorating property markets in Ireland and Britain. The sharp spike in future loan losses projected by Anglo Irish Bank last week raises questions for the building society.

Irish Nationwide told bond analysts that it expected to reduce its loan book by more than 10 per cent, or about €1 billion, to €11 billion this year by redeeming loans.

Credit rating agency Fitch said in September that 80 per cent of the building society's loans are to commercial and residential property development and investment, while 45 per cent of the loan is on British property, mostly in London.

Prior to the introduction of the State guarantee on September 30th, Fitch and another agency, Moody's, earlier that month downgraded Irish Nationwide's debt ratings, citing the building society's increased exposure to commercial property and development and the rapid deterioration in property values in Ireland and the UK.

Irish Nationwide doesn't break down its exposure to property developers. In its 2007 annual report, the building society said €9.8 billion of its €12.3 billion loan book was commercial, with the remainder residential.

Fitch said in a report published in February 2008 that about 41 per cent of the building society's commercial portfolio related to speculative property investments and development. The report was based on 2006 figures, though the society has grown its development book since then.

The agency said in the report that "the level of exposure to vulnerable, speculative developments with high LTVs (loan-to-value ratios) could make the society more likely to suffer as a result of a property crash".

If the building society has reduced loans to about €11 billion and the 2007 breakdown to commercial and residential segments can still be assumed, Irish Nationwide would have a commercial book of almost €9 billion.

Anglo Irish Bank said at its annual results last week that, in a worst-case scenario, the bank would write off up to €2.2 billion over the next three years or as much as 3.76 per cent of the €58.5 billion loans classified as investment and commercial and residential development.

Assuming the same scenario at Irish Nationwide would mean that the building could be facing loan losses of up to €338 million over the next three years.

This compares with profits of €391 million the building society made in 2007 - an increase of 64 per cent on the previous year.

Analyst Philip Ingram at Merrill Lynch said in a report on Irish banks' exposure to the declining homebuilding sector in November 2007 that Irish Nationwide was "the lender that gives us most cause for concern". He said the society's exposure to this segment totalled 15 per cent of loans.

Taking this same figure now, Irish Nationwide would have loans of €1.65 billion to this sector.

Anglo expects to write off up to €1 billion, or 11 per cent of its €8.9 billion in residential development loans over the next three years in a worst-case scenario. Applying the same figures to Irish Nationwide - and assuming builders represented 15 per cent of the book - would mean that the building society would write off €181 million over the next three years on its residential development loans.

By reducing lending and retaining profits, the building society has managed to grow its capital reserves quickly. Irish Nationwide's core tier one ratio - a key measure of a lender's capacity to absorb unexpected losses - from 8.6 per cent at the end of last year to 11.5 per cent at the end of June.

"Irish Nationwide is like a mini-Anglo," said Oliver Gilvarry, head of research at Dolmen Securities. "It would have the same risk profile and a lot of the same borrowers. It is more like a property fund than a building society."

Mr Gilvarry said the building society has strong capital but has a heavily concentrated loan book among a small number of developers with a "significant exposure" to property development.

Fitch analyst Matthew Taylor said that in terms of the quality rather than the quantity of the building society's development loans Irish Nationwide may be more exposed than the other Irish banks.

"The nature of its exposure means that it could be more vulnerable," he said.