Irish Life & Permanent plc Interim Management Statement

Tues 17th November 2009 - 7.00am                            

Irish Life & Permanent plc (IL&P) issued the following update on the group's business. A conference call for analysts will be hosted by management at 9.30am today, the details of which are set out at the end of this statement.

Group Overview

The Group expects that 2009 will see the worst of the current economic downturn in Ireland with GDP forecast to fall by 7-8% and unemployment increasing to 12-13%. The pace of the decline slowed considerably in the second half of the year and expectations for 2010 are for a 1-2% decline in GDP with unemployment expected to increase further to around 14%.

Debt market conditions have improved significantly during the second half of the year with funding markets reopening, although the cost of funding - particularly deposits - remain well above what the Group considers to be normal levels.

The economic environment has affected the Group with lower new business volumes and tighter margins across all businesses and, as expected in the banking business, rising impairments in its loan book.

In response to these difficult conditions the Group has been cutting its cost base to reflect lower activity levels, improving the banking business funding mix and working with its customers to help manage their financial commitments as their disposable incomes have reduced. 

At the same time the Group has been making good progress on its strategy, including its reorganisation plan, with an EGM scheduled for 17 December next to approve the creation of a new holding company for the Group.

Life & Pensions

New business

The Retail and Corporate divisions of Irish Life Assurance are both experiencing weaker demand but Irish Life Investment Managers (ILIM) continues to perform strongly.

Overall life sales (APE basis) for the year are expected to be down by approximately 35% on 2008. Retail investors remain cautious with a low appetite for investment products while reduced SME profitability and cashflows have contributed to lower pension volumes. Employment growth and salary increases are the principal drivers of sales in the Corporate division and adverse trends in both of those drivers account for the expected reduction in sales in 2009.

ILIM expects to receive gross inflows of about €1.7bn for the year reflecting its strong investment performance and its leading position in the market.

The life new business margin (APE basis) for the year is expected to be in the range of 9-10% (2008:15.1%) with ILIM's margin at 6-7% (2008:11.4%).

In-force

As previously guided by the Group adverse persistency experience is expected to account for the majority of the expected negative variances on the in-force book for the year. Persistency trends in Retail are improving but are partly offset by some deterioration in Corporate business. The other significant negative variance relates to expenses, consisting of the cost of a voluntary severance scheme for staff and the cost borne in respect of the life policy levy imposed by the Government earlier this year. Risk experience continues to be strongly positive.

Year end assumption changes will be made in respect of persistency (negative), expenses (positive) and risk (positive).

The aggregate impact of experience variances and assumption changes for the year is expected to be between €60-70m negative.

Embedded value

The estimated impact in the year to date of Short Term Investment Fluctuations ("STIFs") on the life business embedded value is €105m negative. As of 30 June 2009 the impact was €80m negative. 

While policyholder funds have benefited from positive equity market movements, year to date, this has been offset by the steep declines in property funds. The overall average fund growth to date has been just ahead of embedded value assumptions.

However the decline in property values has also directly impacted the value of shareholder owned and occupied property as well as the value of shareholder capital and commitments in property funds. The total of these property related STIFs is currently estimated at about €105m negative. 

The reduction in Irish Government bond yields since 30 June 2009 has been positive for the embedded value effect of economic assumption changes which are now estimated at €35m negative for the full year compared with a first half 2009 impact of €89m negative.

Banking

Lending

Lending demand in permanent tsb's core lending franchises - home mortgages and consumer finance - continues to be weak and new advances for the full year will be approximately 80% lower than in 2008. Redemption rates across the loan portfolio continue to be exceptionally low compared to previous years. Overall the bank's loan book is expected to decline modestly through 2009.

Funding

After a very difficult start to the year liquidity conditions have generally improved over recent months. Dependence on ECB drawings has been significantly reduced and currently amounts to €7bn, down from €12bn at the end of June 2009.

The banking business has successfully pursued its policy of growing its deposit funding with retail deposits expected to grow approximately 20% for the year. Strong growth is also being recorded in Irish corporate deposits after the general outflow, out of Ireland, of overseas deposits, particularly UK, early in 2009. The increased deposit funding has however come at a higher cost given the highly competitive nature of the deposit market at present.

The bank has raised approximately €3bn in term funding this year and expects to return to funding in term debt markets once the new government Eligible Liabilities Guarantee (ELG) Scheme is in place.

Margins

Wholesale and deposit funding costs continue to be high while low base rates have reduced liability margins. The net interest margin for the full year is expected to be between 80 and 85 basis points. This is lower than previous guidance given by the Group and reflects the increased cost of deposits, both retail and commercial, and the reduction in the amount of lower cost ECB funding drawn in the second half of the year.

Credit quality

The trends in arrears in the bank's loan book are broadly in line with the position reported in the Group's 2009 Interim Report.

In the Irish residential mortgage book arrears continue to rise but the rate of growth has moderated. Arrears cases, over 90 days due, increased by 3% in both September and October versus an average monthly increase of 8% to August. The amount of over 30 to 90 days due cases are broadly unchanged from June 2009.

In the bank's UK residential mortgage business, Capital Home Loans ("CHL"), the over 3 months due arrears cases at the end of October were over 20% below the peak in March 2009 while the over 1 to 3 months due cases remain broadly flat. CHL's arrears experience to end September 2009 is consistent with, but better than, the buy-to-let sector as a whole.

Impairment provisions for the second half of the year are expected to be broadly in line with the first half. This is higher than previously guided by the Group with the largest element of the increase being in respect of commercial property where values continue to decline.

The higher level of provisioning in 2009 will add to the total impairment provisions for the three years to 2011, giving an estimated total of between €800m and €900m.

Associate - Allianz Ireland

Trading conditions remain challenging in the general insurance market in Ireland with difficulty in securing required rate increases and with customers reducing the amount of their insurance cover. The second half contribution from Allianz to the Group is expected to be in line with the first half of the year.

Group

Costs

A range of cost reduction initiatives have been, and are being, taken across the group in response to the reduced levels of business and associated margin pressures. Underlying operating costs in the bank and life businesses are expected to decrease by over €50m in 2009, a reduction of around 10% compared to 2008. Exceptional costs, including the costs of severance schemes and of the Group restructuring will however arise at both divisional and Group level in the year.

Capital

The group remains well capitalised with its Tier 1 capital ratio comfortably ahead of regulatory requirements.

Restructure

Good progress has been made on plans to restructure the group to provide it with greater financial flexibility.

An EGM to approve the creation of a new holding company is scheduled for 17 December 2009 with a target date for the listing of the new holding company's shares in mid-January 2010.

Conference Call & Contact Details

Kevin Murphy, Group CEO and David McCarthy, Group Finance Director, will host a conference call for analysts at 9.30am on Tuesday November 17th 2009.

To join the conference call, please dial in to the relevant number below 5 minutes before and ask for the Irish Life & Permanent call

Ireland        (01) 247 5352

UK              (0) 20 8609 0205

Other         +353 1 247 5352

Pass code:     343073#

The conference call will also be available via the LIVE<GO> service on Bloomberg and Thomson Reuters www.streetevents.com.

Conference Call Replay

Replay facility available until midnight 24 November 2009. The telephone numbers and access code are:

Ireland        (01) 447 5559

UK              (0) 20 8609 0289 

US              703 621 9126

Other        +353 1 447 5559

Pass code:     276472#

Contact details

David McCarthy, Finance Director

Tel: +353 1 856 3050

Barry Walsh, Head of Investor Relations

Tel: +353 1 704 2678

Orla Brannigan, Investor Relations

Tel: +353 1 704 1345

Ray Gordon, Gordon MRM

Tel: +353 1 665 0450

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.