IL&P RESULTS:THERE WAS a funny moment at the Irish Life & Permanent results presentation when its spokesman offered reporters the chance to ask any questions of Gerry Hassett, who "runs the largest life and pensions business in the country".
Such is the trouble caused by the loss-making bank, Permanent TSB, which sent IL&P to a pretax loss of €319 million for 2009, that there was little focus on Irish Life. Permanent TSB is the problem child, struggling with higher bad loans, spiralling funding costs and tightening interest margins. The bank is a drag which is why IL&P restructured itself late last year to allow it to offload the bank at the earliest possible opportunity.
The difficulty is where it might find a home. The most widely anticipated destination for Permanent TSB is in the so-called “third force” with EBS building society and Irish Nationwide, which have begun their own merger talks.
IL&P’s finance director David McCarthy said Ulster Bank and Anglo Irish Bank were also possible partners.
Clearly, the company wants to find any home for its bank as long as it is outside the IL&P house, away from profitable Irish Life.
Kevin Murphy, chief executive of IL&P, said the talks on the consolidation in banking were focused on “structures, viability and survivability beyond the guarantee”.
“Banking is going to have survive again without a Government guarantee and that means all the banks have to be strong and viable enough to survive the removal of the guarantee,” he said.
“No serious discussions can take place,” he said, until the second quarter after loans start moving into the National Asset Management Agency (Nama).
He said that institutions must have identical capital levels and have taken the same provisions against bad loans before merging.
To this end, the company plans to raise up to €600 million by tapping shareholders in a rights issue this year, but can’t do so until the details of a potential merger involving Permanent TSB are available to scrutinise.
Any merger will lead to job losses and branch closures given that the three potential third force partners have more than 200 branches between them when the new bank only needs about 120.
In the meantime, IL&P is grappling with a broken model at Permanent TSB where operating profit before bad debts sank 55 per cent to €106 million.
The State’s blanket guarantee cost IL&P €8 million in 2008 and €29 million in 2009. The company said that this would rise to between €120 million and €130 million this year due to the more expensive extended guarantee.
IL&P’s profitable life business and decision to avoid toxic development lending has meant that it is the only domestic lender which will not receive Government capital or participate in Nama.
However, its main problem is that its net interest margin has been squeezed due to high funding costs. It has the highest loans-to-deposit ratio in the sector, forcing it to rely more on outside funding.
Murphy agreed with the view expressed by Colm Doherty at AIB this week that Irish retail banking is “dysfunctional”, with banks paying more for their money than they charge their customers.
“Not only do we agree with that view but we have already taken action,” he said, referring to the two half-point increases to its standard variable mortgage rate.
The life company’s profitability will improve this year but not enough to bring IL&P back to profitability before 2011. IL&P will hope to have unhooked itself from the drag of Permanent TSB by then.
The challenge, though, is in the unhooking.
