A question of time for IL&P as task of offloading assets looms

ANALYSIS:IRISH LIFE and Permanent (IL&P) gave a good indication of the work yet to be done to reduce the size of the banking system when it presented its 2010 results.

The company received €3.6 billion in deposits from Irish Nationwide. This shaved €4.5 billion off its deleveraging target.

The Irish Nationwide deposits have brought the bank’s loans-to-deposits ratio – a gauge of the level of external borrowing – from 249 per cent at the end of last year to 200 per cent.

IL&P must reduce this to between 125 and 130 per cent under the EU-IMF plan to bring the banking system back in line with its funding capacity, and to reduce central bank loans of about €130 billion.

Kevin Murphy, chief executive of IL&P, said that this would involve a reduction in Permanent TSB’s loans from €38 billion to below €30 billion.

This would either involve selling or putting the bank’s €6.5 billion buy-to-let mortgages into “a long-term warehouse” as a fire-sale of “excess assets” would lead to further bank losses. A further €2 billion of loans supporting bonds will be sold fully into the markets.

It’s all a question of time. The quicker it is done, the bigger the losses. Luckily for IL&P and the other banks, they have until the end of 2013 to offload these assets to reduce themselves in size.

About €2 billion of the first €10 billion recapitalisation under the EU-IMF deal will be used to slap credit enhancements – market-speak for sweeteners – on the assets to make them more attract to buyers.

Murphy said that the Central Bank would know the scale of assets to be offloaded once the banks submit deleveraging plans at the end of the month.

The deleveraging will inevitably mean far lower levels of lending. Gross new lending by Permanent TSB in 2010 was €615 million, compared with €1.2 billion in 2009 and €8.7 billion in 2006 during the bubble.

Of the Central Bank’s stress tests later this month, Irish Life and Permanent faces a bigger challenge on the prudential liquidity assessment review or PLAR test.

The company has a strong life business that has allowed IL&P to avoid tapping Government for capital injection to prop up Permanent TSB.

Following the PLAR and PCAR (capital) tests, Murphy said the best option for smaller banks, such as Permanent TSB and EBS, was to merge.

Admitting that IL&P had lost out in a bid for EBS to Cardinal, he said that the deal was “not an absolute necessity”.

IL&P would keep “an open mind” on potential opportunities that emerge in the restructuring of the banking sector, he said.

Meanwhile, arrears of 90 days or more on the bank’s loans jumped to 6.8 per cent at the end of last year from 3.9 per cent a year earlier.

Permanent TSB said that from June it would start offering borrowers in distress a five-year moratorium on a third of the interest payments on their loans under new Government-backed measures.

ILP: 2010 results

Irish Life: €160m (+57%)

Permanent TSB: €364m (+35%)

Group operating loss:(€197 million) (+1%)

Full-year operating losses were little changed at €197 million as a profit increase at the life assurance business was offset by rising losses in the Permanent TSB banking unit.

Profit at the companys life unit rose 57 per cent to €160 million. Losses at the banking unit rose 36 per cent to €364 million.