Tuesday 20 February 2018

IL&P open to deal with Cardinal for banking arm

Deal with 'preferred bidder' for EBS is mooted as lender unveils €197m losses for last year despite a surge in insurance profits

Laura Noonan

IRISH Life & Permanent yesterday hinted that it would be "open" to selling its embattled banking arm to the Cardinal consortium, which is on course to buy building society EBS.

The comments from IL&P chief Kevin Murphy came as the lender revealed losses of €197m last year, despite a 57pc surge in profits at its core life insurance arm.

IL&P had been hoping to buy EBS and merge the building society with loss-making Permanent TSB, but Cardinal has now emerged as the "preferred bidder" and is in exclusive talks.

"If Cardinal gets EBS and if they are interested in talking to us, we'd certainly be interested in talking to them," Mr Murphy said yesterday.

"It remains our strategic view that smaller banks need to merge to create stronger entities."

Asked whether a deal could see IL&P sell off Permanent TSB to Cardinal, Mr Murphy said there was a "huge range of possibilities".

"The ownership structure would be just a matter of negotiation," he added. "We're maintaining a very open mind."

Cardinal declined to comment, but sources have suggested the consortium, which is backed by US private equity, has earmarked about €2bn for acquisitions beyond EBS.

Mr Murphy stressed that while IL&P had lost the battle for EBS, Permanent TSB's fortunes have been bolstered by last week's acquisition of Irish Nationwide's €3.6bn deposit book.

The boost will bring IL&P's crucial loan-to-deposit ratio down from 246pc at the end of December to 200pc, meaning the bank will have deposits of €100 for every €200 it has loaned out.

The disparity, coupled with the freezing of capital markets, has seen IL&P's reliance on last-resort cash from the European Central Bank surge to €13.8bn or more than 30pc of total funding.

The European authorities and the IMF want Irish banks to get their loan to deposit ratios down to 120pc.

Institutions have been asked to submit "deleveraging" plans to the Central Bank detailing how they will shrink their loan books and get their loan-to-deposit ratios in line.

Mr Murphy yesterday said IL&P's €6.5bn UK mortgage book, a significant whack of the institution's €38bn total loan book, could be sold as part of that process.

That €6.5bn reduction in loans, coupled with the €800m to €900m in loan repayments IL&P generates every year, would put the lender close to the target 120pc.

"The big debate is how quickly you have to deleverage," Mr Murphy said.

"There are two extremes being discussed: the fire sale where you would have to take a capital hit; and taking the loans off balance sheet into some kind of warehouse.

"It's not clear what sort of solution is going to be proposed."

Fire sales would see IL&P forced to stump up more capital for Permanent TSB, while another round of stress tests at the end of March could also see Permanent TSB's capital needs rise.

IL&P chiefs yesterday stressed that the group had surplus capital of €417m.

"We wouldn't expect to have to take any state capital," group finance director David McCarthy told a conference call.

The losses for 2010 came as Permanent TSB's impairment charges surged to €420m and the cost of the government guarantee scheme rose by €80m, triggering a €364m loss.

The loan impairments, which were triggered by a deterioration in property prices, were €100m ahead of guidance given earlier in the year but were flagged in a statement issued last week.

Irish Life's core life insurance business enjoyed a 57pc rise in operating profits to €160m, as the number of policy lapses came in below expectation.

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