ANALYSIS:IRISH LIFE & Permanent (IL&P) signalled that there was some light at the end of the tunnel when it said mortgage arrears and loan losses would peak this year, writes SIMON CARSWELL

Kevin Murphy, in his first results presentation since taking over as chief executive in June, said that arrears on mortgages doubled in the six months to June 2009, but that the pace of increase had fallen as job losses had slowed.

Mr Murphy’s second-in-command, finance director David McCarthy, said he expected arrears to peak at the end of this year, following the same trend for IL&P’s UK buy-to-let mortgages on which arrears have peaked.

While the group raised its long-term forecast for bad debts, the market responded positively, with IL&P’s stock climbing 2 per cent as the results showed there was an end in sight to loan losses.

“It’s positive in that it’s no worse than expected and the capital position looks pretty resilient,” said Sebastian Orsi at Merrion Capital. “The funding environment is improving, but it’s still tough.”

Permanent TSB’s decision to raise its standard variable rate by a half-point last month helped bring the bank’s interest margin above 0.9 per cent, up from 0.87 per cent in June, but still below 1.05 per cent last December.

The battle for deposits and wholesale funding remains costly.

The haemorrhaging of corporate deposits in the first quarter has not been covered by rising retail deposits, driving the key loans-to-deposits ratio above an alarming 300 per cent.

Mr Murphy said that IL&P had been making enquiries with the Government about whether inter-group deposits were covered by the State bank guarantee. If they are, the company may seek to put on deposit at Permanent TSB some of the cash pile of up to €2 billion that is held by Irish Life.

Mr McCarthy said that, as a standalone entity, Permanent TSB would have a core tier one capital ratio of 5 to 6 per cent, assuming that it bought back some bonds from investors at a discount.

This year will be tough for banking, Mr Murphy said, while the life business will be “subdued” and the investment market will not return to normal until 2010.

Some 6,122 of IL&P’s 188,000 mortgages are in arrears of 90 days or more. About 25,000 mortgages, worth in the region of €500 million, or 12 per cent of loans, are in negative equity where the loan is higher than the property’s value.

On its involvement in any restructuring of the sector, IL&P must play a waiting game. It will not be partaking in Nama because it has no development loans to sell to the State body.

Any restructuring that will take place, said Mr Murphy, will occur post-Nama in the latter half of 2010 after the loans with a book value of €90 billion are moved.

Only then will the size of the balance sheets of Irish Nationwide and EBS building society, potential partners of Permanent TSB, be known and how a larger banking group might be created.

In the meantime, IL&P will “look after itself”, according to Mr Murphy. It will continue to seek to grow its deposits and will, during the final quarter of the year, ask shareholders to approve the creation of a new holding company separating Permanent TSB and Irish Life.

Given the drag that the loss-making bank has been on the profitable life business, this will pave the way for a possible off-loading of Permanent TSB and the chance to park the bank in a larger group following the Nama purge of toxic assets across the banking sector.

This in turn will realise some long-awaited value for Irish Life.