Irish Life & Permanent (IL&P) today issued a trading statement in respect of expected financial performance in the full-year 2007.
IL&P said 2007 promises to be another record year for the group reflecting the strength of its brands, franchises and distribution capability together with the low risk nature of the businesses.
"The group's life and investment business has once again enjoyed tremendous growth in revenues - buoyed by strong demand for pensions in particular - and operating profit growth is expected to be mid-twenties percent for the year," the statement said.
The banking business, notwithstanding the slowdown in the housing market and the dislocation in global credit markets, will report strong double digit loan growth and will deliver another year of good operating profit growth. In addition the bank expects to attract record numbers of new current account customers.
Reflecting this strong performance IL&P said it expects the full year dividend to be in line with market consensus.
Il&P expects a rise in 2007 operating profit of about 25% but earnings could fall next year if the credit crisis is prolonged.
"If funding spreads continue at the present extraordinarily high levels ... to the end Q1 2008, and then settle at 40 bps (basis points) over ECB (interest rates), then group operating earnings for 2008 could be flat or slightly ahead of the expected 2007 outcome," the group said. See latest EURIBOR rates.
"However were current elevated rates to prevail right through the first half of 2008, and then rebase at 40 bps over ECB, the impact on group earnings could be high single digit percent negative."
The share price was down 9.4% in early afternoon trading to 12.10.
Irish Share Prices
Life Business
Life sales* in Ireland (excluding investment sales by ILIM) are expected to grow by c.30% for the full year. The principal driver - apart from the first half boost from maturing SSIAs - has been the strong growth in pension business, particularly in Irish Life's retail division.
The asset management business, ILIM, has enjoyed record inflows through the year - up over 75% on 2006 and its funds under management are about 10% ahead so far this year.
Banking Business
The group's banking business, permanent tsb, continued to expand and grow in 2007. Loan book growth for the year is expected to exceed 15% on foot of gross new lending of over 12 billion (2006: 12.9bn). While new lending will be down on the record level in 2006 it should still be some 25% ahead of the bank's 2005 new lending levels.
IL&P says that the slowing housing market in Ireland has seen new residential mortgage lending contract by circa 20% for the year with second half new lending volumes very much in line with the first half, as had previously guided. The slower performance in Irish residential mortgage lending has been partially offset by strong loan growth in Capital Home Loans, the group's UK mortgage business, which expects to see new lending grow by over 40%, albeit with the pace of growth slowing in the second half.
IL&P says that the success of the bank in attracting new customers via its strong current account offering continues apace and the bank would expect to sign up almost 70,000 new customers this year (2006: 68,000).
2007 Operating Profit Expectations
Life Business
Life new business earnings for 2007 are expected to show growth in the high teens percent. This reflects the strong expected sales growth of c.30% for the year offset by lower margins. The life new business margin (ex-ILIM) is expected to be c.19% for the year which is slightly below the first half outcome as a result of a change in both product and distribution channel mix. The second half of 2007 has seen a lower proportion of protection and investment bond business and a proportionately higher amount of sales through broker and institutional channels.
The existing book of in-force business is expected to deliver strong growth in earnings for the year reflecting the growth in the book and positive experience variances and assumption changes.
Overall life operating profit* is expected to grow c.25% for the year.
Banking Business
IL&P says that the strong growth in the bank loan book coupled with an expected full year net interest margin of circa 115 bps (2006: 119 bps), as guided, will see mid-teens percent growth in the bank's net interest income in 2007. This would represent "an excellent outcome" given the difficult conditions in global credit markets in the second half of the year.
Credit quality is also said to be excellent across all loan books as evidenced by the continuing benign arrears experience. However in the last quarter, along with many other Irish banks, permanent tsb was affected by the actions of a rogue solicitor. A full provision of 11m is included in respect of the loans advanced "although we will be vigorously pursuing recovery in this case," the group says.
Aside from this exceptional provision the increase in the impairment charge for the year is expected to be behind the growth in the loan book.
Bank operating profit growth, before the exceptional provision of 11m, is expected to show mid-teens percent growth for the year.
Associated business
The group's share of earnings from its associate business, Allianz (Ireland) in which it has a 30% interest, is expected to be in excess of 30m for the year.
Asset Portfolios
Movements in asset values, currencies and interest rates impact the embedded value of the group's life business and the mark to market valuation of the bank's liquidity / investment portfolio.
IL&P says that the second half upheaval in equity and debt markets plus the relative strengthening of the euro has been the principal contributor to the investment variance ("short term investment fluctuations") on the life embedded value which, as of the end of last week was estimated at circa 60m negative versus 21m positive at the half year.
The vast bulk of the variance represents the present value of the reduction of future fee income from unit-linked funds arising from the falls in unit values. Within the non-linked portfolio, out of debt securities of 1.5bn, only one asset of 38m is subject to a mark to market write-down which is not expected to be material.
The banks liquidity portfolio of 4.2bn is invested predominantly in sovereign bonds (60%), high grade financial FRNs (30%) and prime (non-US) RMBS (10%). The portfolio is rated 73% AAA, 20% AA and 7% A (FRNs) and has no sub-prime exposure. The mark-to-market adjustments on this portfolio are expected to be de minimis.
Funding
IL&P says that the diversification and duration profile of the group's funding sources place it in a strong position in the present credit environment. Currently some 68% of the bank's funding base is sourced from customer accounts and term debt.
The high quality and low risk nature of the group's lending activities - overwhelmingly prime residential mortgages - provides a pool of assets against which funding can be drawn through the ECB Repo facility. At the year end IL&P expects to have available facilities from the ECB totalling 20bn of which 4bn will have been drawn. The balance of 16bn together with other assets, which have yet to be collateralised, "will provide a secure underpinning of the group's funding options and requirements through 2008."
2008 Outlook
IL&P says that the prospects for the group's life business, which accounts for approximately 60% of the group's earnings, continue to be favourable given the wealth accumulation and positive demographics in the Irish economy and public policy support for wider pension coverage. With the increased distribution capability of the life business and the strength of the investment management franchise it is targeting double digit growth in life sales in 2008.
The slowdown in Irish residential mortgage lending in 2007 is expected to carryover into 2008. However the group says that underlying fundamentals of the market remain robust and are strongly supported by government policy. Taken together with tighter credit conditions the pace of loan growth in the bank is therefore expected to moderate in 2008 and higher funding costs arising from the continuing global credit crunch will impact bank earnings - the extent depending on when, and at what level, credit spreads eventually normalize.
If funding spreads continue at the present extraordinarily high levels (c.100 bps over official ECB rate) to the end Q1 2008, and then settle at 40 bps over ECB, then group operating earnings for 2008 could be flat or slightly ahead of the expected 2007 outcome. However were current elevated rates to prevail right through the first half of 2008, and then rebase at 40 bps over ECB, the impact on group earnings could be high single digit percent negative.
* Life sales on an APE basis; life Operating Profit on an Embedded Value basis.
