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If the bank crisis is finally behind us is it back to business?


'With the Irish State still owning 99.8pc of AIB, 75pc of Permanent TSB and 14pc of Bank of Ireland, profit growth is essential if the Exchequer is to recover as much as possible of the €64bn it spent bailing out the Irish banks'

'With the Irish State still owning 99.8pc of AIB, 75pc of Permanent TSB and 14pc of Bank of Ireland, profit growth is essential if the Exchequer is to recover as much as possible of the €64bn it spent bailing out the Irish banks'

'With the Irish State still owning 99.8pc of AIB, 75pc of Permanent TSB and 14pc of Bank of Ireland, profit growth is essential if the Exchequer is to recover as much as possible of the €64bn it spent bailing out the Irish banks'

Bank of Ireland publishes its results tomorrow - the first of the Irish-owned banks to release its full-year 2015 results. AIB's results follow next week, and Permanent TSB's the week after that. Investors will be analysing the results closely for any signs of a return to loan growth.

When Bank of Ireland boss Richie Boucher gets up to deliver his results presentation tomorrow he is likely to reveal that the company recorded operating profits of more than €1.4bn and pre-tax profits in excess of €1.2bn in 2015. These numbers will leave Bank of Ireland well-positioned to resume paying dividends to its long-suffering shareholders in 12 months' time.

AIB is also gradually returning to health. With the Government anxious to sell a 25pc stake in the bank later this year, Michael Noonan will be pleased to hear that analysts are forecasting that chief executive Bernard Byrne will unveil 2015 operating profits of more than €1.2bn and pre-tax profits of €2bn, on March 3, as it writes back some of its previous loan loss provisions.

The news from Permanent TSB on March 9 probably won't be quite so good, with chief executive Jeremy Masding having already indicated that any return to profit is unlikely before 2017.

So is the Irish bank crisis, that cost the Irish taxpayer a gross €64bn and bankrupted the Irish state, finally behind us? Is it back to business as usual at the country's banks?

Not quite. While the acute phase of the crisis may finally be over, the Irish banks are still a long way from being in the full of their health.

The latest figures from the Central Bank show that, contrary to what the banks' own advertising campaigns would have one believe, overall bank lending is still falling. At the end of December total bank lending to Irish households stood at €91.9bn, while lending to non-financial Irish companies was €47.4bn.

Bank lending to households has fallen by a further 5pc over the past year and is down by a massive 41pc from its May 2008 peak. The fall in bank lending to non-financial Irish companies has been even more dramatic, down by a further 22pc over the past year and by a scarcely credible 72pc since August 2008.

If one figure illustrates the dysfunctional nature of the Irish banking system, it is the fact that for most of the past year Irish households have been net funders of the Irish banking system - that is, the total bank deposits of Irish households, which stood at €94.7bn at the end of December, exceed their bank borrowings. This is the first time that this has happened since the late 1990s.

If the Irish banks are recovering, then it is a very limited recovery.

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A further indication that all is still not well with the Irish banks is their continuing very high levels of problem loans. At mid-year, AIB had €18bn of impaired loans on its balance sheet, Bank of Ireland had €13.3bn of defaulted loans (there are slight differences of definition between the three banks as to what constitutes a problem loan), while Permanent TSB had €5.9bn of non-performing loans.

Add it up and the total comes to a hefty €37.2bn. The good news is that the Irish banks' stock of problem loans is falling, down from €42.8bn at the end of 2014 and is likely to have fallen further by the end of 2015. The bad news is that problem loans still represent a very high proportion of the Irish banks' loan books, almost 20pc at mid-2015.

Measuring problem loans as a proportion of total loans, Bank of Ireland is by some distance the healthiest of the Irish banks, with defaulted loans accounting for 14pc of its total loan book at the end of June 2015 as against 24pc at AIB and almost 27pc at Permanent TSB.

With the Eurostoxx index of European bank shares down by almost a quarter since the start of the year, and their balance sheets still loaded down with problem loans, who would want to buy shares in the Irish banks?

The answer to this question will be of particular interest to whatever government emerges following Friday's General Election.

The outgoing Government had planned to sell up 25pc of AIB's shares to outside investors later this year. If all had gone according to plan the AIB IPO would have yielded the Exchequer €2.5bn-€3bn.

Emer Lang, banking analyst with Davy Stockbrokers, is still optimistic that the AIB IPO will go ahead. When it comes to the bank's continuing high levels of problem loans she is very much in the glass half-full rather than half-empty camp.

When AIB's Bernard Byrne unveiled the bank's half-year results last August, he was able to fatten up the numbers with a €542m write-back of previous provisions against bad loans.

With the Irish banks carrying a total of €19.1bn provisions on their balance sheets, with AIB alone having total provisions of €9.5bn, Ms Lang is of the belief that there may be more where that came from.

"We think that non-performing loans can continue to come down, but we have stopped short of putting a figure on any write-back of provisions," she says.

What is clear is that a sustained improvement in the economy would reduce the volume of problem loans at the Irish banks. This in turn would allow all of the Irish banks, and not just AIB, to write back a substantial proportion of the amounts which they have previously set aside to cover losses on those problem loans - something which Michael Noonan or his successor will be keen to impress on potential AIB investors.

The potential write-back of provisions is certainly a plus for all of the Irish banks. However, even if these write-backs materialise, they are a once-off item. The key to a sustained recovery at the Irish banks is to get profitable lending growing once again.

This may still be some way off. Last November, both AIB and Bank of Ireland revealed that their lending volumes were unchanged in the third quarter when they published their interim management statements. Since then there have been some indications of possible future loan growth with Bank of Ireland revealing a 30pc increase in loan approvals of loans to SMEs in the final quarter of 2015.

While any increase in loan approvals is welcome, the proof of the pudding will be the volume of loans actually drawn down. As the experience of the mortgage market in recent years has demonstrated, it can take much longer for loan draw-downs rather than just approvals to start growing.

Even when they do, there remains the fact that recession-scarred borrowers, both households and companies, are still very much in loan repayment mode. In the short term this may not matter very much, as the new business being written by the banks is at much higher margins than much of their existing loans, such as tracker mortgages. As Ms Lang points out, this means the Irish banks could see their profits increase even as their loan books continue to shrink.

Even so, investors will be listening very closely to what Messrs Boucher, Byrne and Masding have to say about loan draw-downs. An increase in actual draw-downs is the key to future growth in lending and profits. With the Irish State still owning 99.8pc of AIB, 75pc of Permanent TSB and 14pc of Bank of Ireland, profit growth is essential if the Exchequer is to recover as much as possible of the €64bn it spent bailing out the Irish banks.

At the end of last week, Bank of Ireland had a market value of €8bn, while Permanent TSB was worth €1.26bn. This places a combined value of about €2bn on the State's shareholding in these two banks - AIB has a notional market value of €19bn but with only 0.2pc of its shares publicly traded, most analysts reckon that its real value is roughly comparable to that of Bank of Ireland.

The Bank of Ireland share price is down by 26p since the beginning of the year while the Permanent TSB share price has fallen by almost 40pc over the same period, shaving over a billion euro off the value of the State's shareholdings in the two banks.

Taxpayers and Ministers can only hope that the bank bosses have good news to report when publishing their results over the next few weeks.

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