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REG-Irish Life&Permanent Interim Management Statement
Released: 12/11/2008
com:20081112:RnsL9999H
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RNS Number : 9999H
Irish Life & Permanent PLC
12 November 2008
Irish life & Permanent plc Interim Management Statement
12th November 2008
12.00pm
Irish Life & Permanent plc ("IL&P") issued the following update on the group's
business and expected performance in 2008. A conference call will be hosted by
management at 14.30 GMT today, the details of which are set out at the end of
this statement.
Overview
The deterioration in the economic environment and the continuing dislocation in
credit markets have created a challenging environment for banking businesses in
Ireland and elsewhere. Chief among market concerns are funding, asset quality
and capital adequacy. Notwithstanding the clearly challenging environment IL&P
considers that it is well placed to manage each of these issues.
The introduction of the funding guarantee scheme by the Irish government on
September 30th, coupled with concerted actions by monetary authorities have
significantly eased the supply of funding for the group's banking business. The
low risk nature of the group's banking loan book - with almost 98% of lending
secured and of which 88% consists of residential mortgage lending - greatly
reduces the level of impairment risk to which the group is exposed. And the
combined capital strength and flexibility of the group's banking and life
assurance businesses ensures that it can continue to maintain its very strong
capital position through the cycle.
Banking
Funding & Margins
IL&P is participating in the government guarantee scheme covering bank
liabilities - retail, corporate and interbank deposits, senior unsecured debt,
covered bonds and dated subordinated debt - and which extends to September 2010.
This intervention has improved access to liquidity and creates the opportunity
for the bank to pursue the objective of further diversifying its funding. In
particular we have an objective to increase the bank's deposit base and a number
of initiatives are being implemented to create an expanded resource gathering
capability in Ireland and the UK for commercial and retail deposits. As of 31
October the combined deposit and long term funding amounted to close to 70% of
total funding.
Whilst access to liquidity has improved the cost of wholesale funding remains
stubbornly high and well in excess of the historic spreads over ECB base rates.
This is the main contributor to the expected reduction in the full year net
interest margin from 117bps in 2007 to 101 - 103bps for 2008, slightly ahead of
previous guidance of 98 - 100bps. This reduction includes the incremental cost
of the refinanced long term debt in the second half of the year as well as the
cost of the government guarantee scheme for the final quarter, but is mitigated
by the extended amortisation of mortgage acquisition costs due to the slowdown
in redemption activity.
Asset Quality
permanent tsb bank has a low risk loan portfolio with no exposure to Corporate,
SME or property development lending. As a result, the level of through the cycle
impairments likely to be incurred by the bank will be low compared with banks
that have a material exposure to these sectors. Our stress models, which we have
updated to reflect the latest consensus forecasts for Irish and UK economic
performance and house price declines, point to an aggregate through the cycle
(next three years) impairment charge of between 60 to 80 basis points as
previously indicated. The Group's strong capital position can comfortably
accommodate this level of bad debt charge without requiring access to external
capital support.
Credit quality across the bank's loan book continues to be strong. However the
economic slowdown and consequent rise in unemployment is, as expected, beginning
to manifest itself in an increase in arrears across the bank's loan portfolios
albeit from a low base.
The number of Irish mortgage cases, over one month in arrears, has increased to
6,600 at the end September from the low of 5,700 as of December 2007 out of a
total portfolio of over 195,000 cases. Irish mortgage NPL cases (90+ days
overdue and impaired) as of 30 September 2008 were 1.67% against 1.48% at 31
December 2007. The impairment charge for this book for 2008 will be low single
digit basis points.
The UK property market is deteriorating as the economy weakens and house prices
decline. The bank's UK subsidiary, Capital Home Loans (CHL), has seen its three
month plus arrears cases (including repossessions) in its buy-to-let (BTL) book
increase from 77bps at end June to 115bps at end September. This compares with
the UK Council for Mortgage Lenders BTL industry average for the end of June of
140bps. CHL's focus on the professional investor sector and its minimal exposure
to higher risk new build city centre apartments should see it continue to
out-perform. Affordability in the sector will benefit from the recent sharp
reduction in UK rates which should moderate further developments in arrears.
The consumer finance book has been impacted by the slowdown in the car market
which has resulted in a fall in the value of second hand cars generally. Lower
recovery values have, in turn, led to a higher level of collective provisioning
on this portfolio.
The increased provisioning in respect of the car finance loan book together with
the assumption of a continuation of credit trends for the remainder of the year
is expected to result in a loan impairment charge for the full year of circa
11bps.
As previously announced the bank's Treasury portfolio of E2.3bn includes E92m
net exposure on senior debt issued by the three Icelandic banks which have been
taken under government control. Given the uncertainty as to recovery an
impairment charge for this amount will most likely be made in 2008 and would be
charged in full to the profit and loss account.
The Bank is a net debtor of the Lehman Brothers Group. It holds "out of the
money" derivative positions which have defaulted and, in line with market
practice, have been closed. These derivatives more than cover an investment in
Lehman Group bonds totalling E30m. The Bank believes that it has good grounds
for set off between the two amounts and, accordingly, has not created any
impairment charge against its investment. The Life company unit-linked funds
hold an investment with Lehman Brothers valued at E19m and will set up reserves
at the year end to cover any potential loss.
Lending & new business
In the unprecedented liquidity conditions in the market ILP has adopted a
cautious approach to new lending and balance sheet growth. Loan growth for the
full year is expected to be circa 5%. CHL has been closed to new lending since
March and in Ireland commercial property lending has been discontinued and
residential investment property lending severely curtailed. The bank's lending
priorities are mortgages for home buyers and personal lending for bank
customers. Total gross new lending for 2008 is expected to be down about 45% on
2007 reflecting the above actions and the sharp fall off in activity in the
housing market.
The success of the bank in building its retail franchise and in attracting new
current account customers continues apace and it is on target to add a further
50,000 new customers in 2008.
Life & Pensions
New business
The diversity of Irish Life's business and its leading position in the Irish
market put it in a strong position in the current challenging market
environment. The Corporate Pensions division is demonstrating its resilience and
is expected to record steady growth in its business and Irish Life Investment
Managers should see institutional inflows of over E2bn for the year reflecting
its dominant position in the Irish market. The continued falls in investment and
property markets coupled with the accelerated slowdown in the economy have
however dented investor confidence and impacted new business volumes in the
Retail division where, not surprisingly, sales of investment and savings
products will be down sharply on 2007. Overall life sales (excluding investment
sales by ILIM) for the year are expected to be down between 20 - 25% on what was
a record year in 2007, but still ahead of the 2006 sales, and ahead of the
expected market outcome for the year.
Lower than expected volumes will impact the life new business margin which is
expected to be approximately 14 / 15%, as against previous guidance of 16 / 17%.
Given its business mix in 2008 ILIM expects to record an increase in its margin
to just under 10%.
In-force
The in-force book continues to perform well. The combined return from the unwind
of the risk discount rate and expected investment return will see good growth in
the year. However adverse persistency - primarily on investment and savings
contracts in Retail - will more than offset the continuing positive risk
experience from both the Retail and Corporate books. Operating assumptions
changes are expected to be strongly positive reflecting both risk experience and
reduced unit costs but off-set by changes in respect of persistency. The
combined experience variances and assumption changes are expected to be about
E30m positive.
Embedded Value
The falls in investment markets and asset values recorded in the first half of
the year have continued unabated into the second half further impacting the
embedded value of the life assurance business primarily through the reduction in
the present value of future management fee income and asset revaluation.
For the first half of 2008 short term investment fluctuations were a negative
E230m and as of end of the last week were estimated at circa E540m negative of
which c.E360m comprised management fees, c.E80m shareholder property
revaluations and E29m attributable to the write-down of the remaining balance of
the group's holding in the Sigma investment fund. Reducing interest rates will
however have a positive effect on economic assumptions in the region of E40m.
At this point, and assuming no further material changes, the year end embedded
value of the group's insurance and investment business would be in the region of
E1.7bn [30 Jun'08: E1,900m] equivalent to over E6 per share.
Capital & Dividends
The group has a very strong and flexible capital position. The bank's total and
Tier 1 capital at the end of June was 10.1% and the expected position at the end
of 2008 is estimated to be close to 10% including full year earnings and net of
write-offs and interim dividend payment.
As was indicated in our Interim results announcement the group has a substantial
store of surplus capital which will be released as the new Solvency 2 regime is
implemented. It is possible to accelerate access to that store of capital
through a number of mechanisms including financial reinsurance and
securitisation of a portion of the life in-force portfolio.
We have taken an important first step in the process of accessing this store of
capital having finalised the terms of a financial reinsurance treaty with Swiss
Re which will release capital required in Irish Life Assurance of circa E100m in
2008 and will further reduce future capital requirements over the next 2 / 3
years by between E100m and E150m depending on life new business volumes and
experience on the block reinsured.
The interim dividend of 22.5 cent per share, which was announced with our
Interim results on the 27th August, is being paid today as scheduled.
However, in the context of the extraordinary changes we have seen in financial
markets generally in recent months including the introduction of the Government
Guarantee Scheme in Ireland and conscious of the approach being taken on this
issue by financial institutions both in Ireland and internationally, we do not
propose to recommend the payment of a final dividend for 2008. This will, of
course, further reinforce our strong capital position.
Group pre-tax Operating Profit
In response to the slowdown in new business activity there has been an
increasing focus on cost management across the group. Overall group costs for
2008 will increase by about 2% and a range of further actions are being planned
to reduce costs in 2009.
Life earnings are expected to be lower than previously guided due mainly to
lower new business profits and negative operating variances. Bank earnings,
prior to any provision in respect of the Icelandic bank debt, are expected to be
slightly ahead of previous guidance. Our expected share of profits from our
associate business, Allianz Ireland, remains unchanged.
Overall group pre-tax operating profit, including the impairment provision in
respect of the Icelandic bank debt, is expected to be down about 30% on the 2007
result.
Excluding this provision, the expected group operating profit for 2008 would
reduce by 15% on 2007.
Analyst Conference Call Details
Denis Casey, Group Chief Executive and Peter Fitzpatrick, Group Finance
Director, will host a conference call for analysts at 14.30 GMT on Wed 12 Nov.
To join the conference call, please dial in to the relevant number below 5-10
minutes before and ask for the Irish Life & Permanent call
Irish participant number (01) 486 0917
UK participant number (0) 20 7138 0813
US participant number 718 354 1359
Other participants +353 1 486 0917
The conference call will also be available via the LIVE service on Bloomberg
and Thomson Reuters www.streetevents.com. A replay facility will be available
until midnight 18 November 2008 details of which are available on the group web
site www.irishlifepermanent.ie
Contact details
David McCarthy, Group Chief Financial Officer
Tel: +353 1 856 3050
Barry Walsh, Head of Investor Relations
Tel: +353 1 704 2678
Ray Gordon, MKC Consultants
Tel: +353 1 6788099
Disclaimer - Forward Looking Statements
This document may contain forward-looking statements with respect to certain
plans and current goals and expectations relating to the future financial
condition, business performance and results of the Irish Life & Permanent group.
By their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances that are beyond the
control of the Irish Life & Permanent group including, amongst other things,
Irish domestic and global economic and business conditions, market related risks
such as fluctuations in interest rates and exchange rates, inflation, deflation,
the impact of competition, changes in customer preferences, risks concerning
borrower credit quality, delays in implementing proposals, the timing, impact
and other uncertainties of future acquisitions or other combinations within
relevant industries, the policies and actions of regulatory authorities, the
impact of tax or other legislation and other regulations in the jurisdictions in
which the Irish Life & Permanent group and its affiliates operate. As a result,
the Irish Life & Permanent group's actual future financial conditions, business
performance and results may differ materially from the plans, goals, and
expectations expressed or implied in these forward-looking statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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