Irish Life Warns on Credit Crisis, Shares Slide
DUBLIN (Reuters) - Irish Life & Permanent (IPM.I: Quote, Profile, Research) stepped out of line with rivals on Thursday with an analysis of what a prolonged credit crisis would do to 2008 profit, knocking up to 12 percent off shares in the insurance and banking group.
“As we look into 2008 the continued credit squeeze poses a challenge for all banks,” IL&P said in a trading update.
IL&P (IPM.L: Quote, Profile, Research) predicted group operating earnings would be “flat or slightly ahead” next year if funding costs for banks remained at current “extraordinarily high levels” until the end of March and then settled back to 40 basis points above European Central Bank (ECB) interest rates.
“However were current elevated rates to prevail right through the first half of 2008, and then rebase at 40 bps (basis points) over ECB, the impact on group earnings could be high single digit percent negative,” it warned.
Like other Irish financial stocks, shares in IL&P have been hard hit this year after the global credit crunch compounded existing worries over the impact on earnings growth of an end to Ireland’s decade-long property boom.
The stock, which had already lost over a third of its value since the start of the year, fell almost 12 percent to 11.80 euros following the update before regaining some lost ground to close nearly 7 percent lower at 12.46 euros in Dublin.
Ireland’s banking stock sector tumbled 4 percent in its wake, helping drag the overall Irish market .ISEQ 3.8 percent lower.
“I find it incredible that they took it upon themselves to lead the international banking community in saying what the impact of the credit crisis is going to be on 2008 financing costs and profits,” said one analyst who asked not to be named.
IL&P had shown “shocking honesty” but perhaps also a degree of naivety by going into so much detail, the analyst said.
“They’ve thrown in everything, including the kitchen sink, when they probably didn’t need to. It’s a bit like being caught for shoplifting and saying ‘by the way, I’m planning to top my wife as well’.”
For the year just ending, IL&P said it expected its life insurance business, which accounts for about 60 percent of group earnings, to post a 25 percent rise in operating profit. For 2008 it is projecting a double-digit rise in life sales.
“The group’s life and investment business has once again enjoyed tremendous growth in revenues – buoyed by strong demand for pensions in particular,” the company said.
At its permanent tsb banking business, IL&P said loan-book growth of about 15 percent in 2007 would result in “mid-teens percent” operating profit growth although that is before an exceptional provision of 11 million euros.
The bank said it had taken the charge in order to cover total possible costs associated with a “rogue solicitor” who is wanted by police after failing to turn up in court on Wednesday to face questions on an 80 million-euro mortgage scam.
IL&P said it expected a slowdown in mortgage lending to carry over into 2008 and that, combined with tighter credit conditions, that would mean a moderation in loan growth.
Despite the relatively bleak picture painted for next year, IL&P pointed out that its lending activities were high quality and low risk while it said funding already in place would provide a secure underpinning of the group’s funding options and requirements through 2008.
“I think it’s worth restating what a strong result the group has produced in 2007,” Chief Executive Denis Casey told analysts during a conference call.
“It’s clear that the very low risk posture that we’ve adopted in our life business and in our banking business is standing us in very, very good stead.”
Casey said that although the current environment was challenging, the group was well placed to ride out “the short-term turbulence.”
“We feel our businesses are very well positioned in the Irish market and in a market and in an economy which we think will prove to be more resilient perhaps than people are currently giving them credit for,” he told analysts.