Irish Life & Permanent (ILP), the country’s largest mortgage lender, said operating profit this year would decline by 30 per cent as it writes off an investment of €92 million in debt issued by three Icelandic banks taken over by the Nordic state.
The company invested in debt issued by Landsbanki, Kaupthing and Glitnir which were forced into state ownership due to the collapse of Iceland’s banking system and economy. ILP said it was writing down the full investment in the Icelandic banks given the “uncertainty” on its recovery.
ILP said in an interim management statement released at noon that, excluding the Icelandic debt, group operating profit for 2008 would be 15 per cent lower than last year. This is below than the company’s previous forecast in August when it said it expected a decline of about 10 per cent this year.
At 1.45pm the company’s share price was trading 3.8 per cent higher at €2.15.
The company has said it will not pay a final cash dividend shareholders due to the “extraordinary changes we have seen in financial markets generally in recent months including the introduction of the Government guarantee scheme”.
ILP said it was “conscious of the approach being taken on this issue by financial institutions both in Ireland and internationally”.
The company’s net interest margin this year will fall from 117 basis points, or 1.17 per cent, in 2007 to 101-103 basis points, slightly ahead of the company’s previous estimate of 98-100 basis points, because funding costs had remained “stubbornly high”.
ILP said this reduction included the cost of refinancing long-term debt in the second half of this year and the cost of the government guarantee scheme for the final quarter, which analysts estimate to be in the region of €11 million for the three-month period.
The company expects a bad debts charge of 11 basis points this year and in a stressed situation over the next three years a cumulative impairment charge of between 60 to 80 basis points.
The company said it had taken “an important first step” in accessing surplus capital in its life assurance business through “a number of mechanisms including financial reinsurance and the securitisation of a portion of the life in-force portfolio”.
It will raise capital of €250 million over the next three years which will cover the bad debts in this stressed situation. The company has a capital ratio 10.1 per cent and is expected to be close to 10 per cent by the end of the year. This figure includes full year earnings and after the interim dividend payment.
ILP has finalised the terms of “a financial reinsurance treaty” with insurance giant Swiss Re which will released capital required in Irish Life Assurance of about €100 million this year and between €100 million and €150 million over the next two to three years.
The company said the number of its Irish mortgages more than a month in arrears had increased to 6,600 at the end of September from 5,700 at December 2007 out of a total of more than 195,000 mortgages.
Non-performing mortgages, which are in arrears of 90 days or more, rose to 1.67 per cent of the mortgage book at the end of September from 1.48 per cent at the end of last year.
The company expects a “low single digit basis points” bad debt charge on its home loans this year – meaning between 0.01 and 0.04 per cent of the mortgage book.
Arrears of three months or more in the ILP’s buy-to-let mortgages in CHL, the company’s UK business, increased to 115 basis points at the end of September from 77 basis points at the end of June. This compares with a UK industry average of 140 basis points at the end of June.
The company expects gross new lending to fall about 45 per cent this year reflecting its decision to stop lending in the UK and buy-to-let lending being “severely curtailed”. The company says its loan book will grow by about 5 per cent this year.
The company says Irish Life Investment Managers should see “institutional inflows” of €2 billion this year, but overall life sales will be down between 20 and 25 per cent this year. The margin on new life business is expected to be 14-15 per cent, compared with the company’s previous forecast of 16-17 per cent.
The company said it was down about €540 million on “short-term investment fluctuations” in its life business at the end of last week, down from a negative €230 million for the first half of the year. Falling interest rates will improve this figure by about €40 million.
ILP says that assuming no further material changes, it expected the embedded value of its insurance and investment business at the end of the year to be €1.7 billion – or the equivalent of more than €6 per share.