ANALYSIS:THE ANNOUNCEMENT from the EBS building society this week that it would write off more than 20 per cent of its property development loan book raises the prospect of further write-offs by banks which were heavier lenders to this end of the property market.

Irish banks and building societies have little or no exposure to the so-called “toxic assets” that have contaminated the balance sheets of financial institutions globally.

However, the toxicity within the Irish banks relates to loans to Irish property developers. EBS was a minnow in this market, which represents just 3 per cent, or €512 million, of its €16.9 billion loan book.

The building society has decided to “kitchen-sink” it – as the process of heavy write-offs are colloquially referred to in banking at present. This means that it is throwing everything at fixing the problem and taking as much of the painful losses up front in a bid to resolve the problem and move on. The approach is “designed to recognise losses as early as possible”, the building society said.

By writing off €69 million of this book in 2008 and at least a further €33 million this year (amounting to more than 20 per cent of the book), the building society hopes it can try to put most of the losses on the developer loans – the biggest problem in its overall book – behind them in last year’s figures.

The building society said 35 per cent, or €179 million, of the development was impaired, compared with 1.2 per cent a year earlier.

Alan Merriman, EBS finance director who managed the development book and has resigned over the society’s €38.2 million annual loss in 2008 incurred largely as a result of it, said the surge in bad developer loans shows “the cliff we have effectively gone over.”

Goodbody Stockbrokers expects the six Irish lenders to write off a total of €27.7 billion over the three worst years of the crisis, 2009 to 2011, and €35 billion over four years, to 2012.

Analysts at JPMorgan estimated last week that loan losses at the Government-guaranteed Irish-owned lenders, excluding EBS, would reach €26.9 billion and that they may require a further €12.9 billion injected in capital, in addition to the €7 billion being invested in Allied Irish Banks (AIB) and Bank of Ireland.

Central Bank governor John Hurley told the Oireachtas Committee on Economic Regulatory Affairs last Tuesday that some international assessments on Irish bad bank debts were “incorrect.”

“I would not put a figure of €26.9 billion on it because we are still going through a deep recession. However, it seems that the order of magnitude is much less than is being portrayed internationally,” said Mr Hurley.

Analysts at Citigroup have previously pointed out that US banks wrote off 6.5 per cent of their loan books in total over the two worst years of the Great Depression during the 1930s, while bad debts at Japanese banks amounted to 7 per cent of loans combined over the two worst years of that country’s financial crisis in the 1990s.

Goodbody says the six Irish banks and building societies will write off a cumulative 6.6 per cent of loans over three years, marking the worst years of the crisis.

AIB was the largest lender in the Irish residential development market, with €10.8 billion in loans to the sector, amounting to 8 per cent of the bank’s loan book.

This is more than 20 times the size of the EBS development loan book.

EBS, the smallest Irish development lender, wrote off 13.5 per cent of these loans in 2008. This compares with 8.3 per cent written off by AIB on Irish residential development loans last year.

AIB has said that, at best, it will write off a further 8 per cent of this part of its book in 2009 and 4.8 per cent in 2010, or 21 per cent in total between 2008 and 2010. In a worst-case scenario, AIB will write off a further 11.6 per cent of this book in 2009 and 7.1 per cent in 2010, or 27 per cent in total over three years, which the bank said is “a pretty severe scenario”.

AIB is spreading the pain over three years, while EBS has booked most of the write-offs in the first year, taking the pain up front.

If AIB had made the same provision as EBS in 2008, it would have shaved almost €500 million off its €1 billion annual profit. The bank has also written off 3.8 per cent of its €2.8 billion UK residential development book in 2008 and will write off a further 14.3 per cent of this book over the next two years in a stress scenario.

All told, AIB, the State’s largest bank, expects in a stress-case scenario to write off 5 per cent of all its loans over 2009 and 2010.

There is the prospect of all six covered Irish-owned banks parking all their toxic development loans into a separate bad property company – an idea referred to recently by Minister for Finance Brian Lenihan as one possible option to remove bad assets in a bid to free up lending.

EBS chief executive Fergus Murphy said the Government had guaranteed the deposits side of the balance sheets but that it “needed to do something on both sides” to instil confidence among investors.

Mr Murphy said EBS would be able to “engage” with a bad property company and that “a relatively small transfer” of €500 million in development loans into this company would “make a very big difference for us and put us in a very strong position”.

The bad loans at AIB that would be earmarked for such a bad workout firm would be far higher.