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Sorting out the Permo: Kevin Murphy (chief executive of IL&P)

PROBLEMS at its Permanent TSB mortgage-banking subsidiary are now threatening the future independence of the entire Irish Life & Permanent group.

Chief executive Kevin Murphy desperately needs to offload Permanent TSB before it sinks the whole of IL&P.

This week's announcement from Permanent TSB that it was shedding 280 jobs -- almost a sixth of its total workforce of 1,850 -- increasing its variable mortgage rate by 1pc and scrapping fixed-rate mortgages, merely confirmed what many analysts had long since concluded. The 1999 acquisition by Irish Life of mortgage lender Irish Permanent has been a disaster for shareholders of the life-assurance and pensions giant.

When the deal was first announced in late 1998, we were told that it would create a 'bancassurance' group and that the Permo's branch network would boost sales of Irish Life's assurance and pension products.

That was the hype. The truth was that the merged group never lived up to its advance billing. Despite acquiring TSB Bank in 2002 to create Permanent TSB, the Permo always suffered from a fatal flaw.

This was that unlike the clearing banks with whom it was increasingly competing in the residential mortgage market, it lacked a sufficient retail-deposit base to fund its rapidly growing loan book.


AT the end of 2002, Permanent TSB had a total book of €13.2bn and retail deposits of €10.2bn. This meant that customer deposits covered 77pc of its loan book.

Five years later, however, the Permo's loan book had grown to €39bn -- but its retail deposits were still only €13.5bn.

This meant that the proportion of its loan book that was funded by retail deposits had fallen to just 34pc. This was by far the lowest proportion of any of the Irish-owned banks.

When credit was cheap and abundant, the Permo's paucity of retail deposits didn't seem to be a problem. But when the credit crunch first struck in August 2007 and global capital markets seized up, it was an entirely different story.

With no one sure which would be the next bank to reveal massive losses on sub-prime US mortgages, banks around the world suddenly became extremely reluctant to lend to one another.

This was a disaster for a bank like Permanent TSB, which relied on loans from other banks -- so-called inter-bank lending -- to fund most of its loan book.

But there was even worse to come. The US sub-prime mortgage fiasco meant that investors started to take a long, hard looks at banks everywhere.

The Irish banks, with their massive exposure to the over-heated domestic property market, came under particularly intense scrutiny -- and investors didn't like what they saw.

Shareholders dumped their shares and depositors began to withdraw their money from the Irish banks.

After peaking in early 2007, Irish bank shares nosedived. Irish Life and Permanent was no exception. Its share price has dropped from €22.80 on February 22, 2007, to just 90 cent yesterday -- a fall of 96pc.

Ironically, with the shares of both AIB and Bank of Ireland having fallen even further and Anglo having been completely nationalised, this confers on IL&P the dubious distinction of having been the "best-performing" Irish bank share over the past four years.


In fairness to IL&P, it should be pointed out that unlike the other five Irish-owned banks, Permanent TSB has not required a cent of fresh capital from the State. The Permo is also unique among the Irish-owned banks in not having transferred any bad loans to NAMA.

That's the good news. However, the bad news is that the business model upon which IL&P was based has collapsed. In 2008, Permanent TSB advanced €7.1bn of new loans.

This fell to just €1.2bn last year and to a mere €300m in the first half of 2010. On an annualised basis, that represents a fall of more than 90pc in less than two years.

Far from providing Irish Life with a fresh sales outlet, Permanent TSB has instead come to represent a colossal financial millstone around the life and pensions group's neck.

While Permanent TSB lost €270m in 2009 and a further €131m in the first half of 2010, Irish Life has remained solidly profitable throughout the worst financial crisis in more than 80 years, with profits of €102m in 2009 and €92m in the first half of 2010.

Not surprisingly, IL&P has been desperately seeking to shed Permanent TSB for the past 18 months. In August 2009, in one of his first major moves after being confirmed as chief executive the previous June, Kevin Murphy announced the creation of a new IL&P holding company to replace the existing corporate structure.

The new holding company was widely interpreted at the time as paving the way for a Permanent TSB spin-off.

Easier said than done. With public anger at the mounting cost of the Irish banking collapse rapidly reaching boiling point, there was no way any Government could allow the IL&P shareholders ride off into the sunset with Irish Life while leaving the taxpayer to pick up the tab for any Permanent TSB restructuring.

For Murphy, who is due to retire next year when he reaches his 60th birthday, the current impasse over Permanent TSB means that his 39-year career with the group is threatening -- due to no fault of his own -- to end on an unsatisfactory note.

A native of Cork city, Murphy graduated from UCC with a degree in pure maths and statistics.

Following his graduation, he joined Irish Life as a trainee actuary in 1972 and spent the next 21 years in various roles at the company. His big break came in 1993 when he was appointed chief executive of Irish Life Investment Managers.

ILIM had been the pre-eminent Irish fund manager until the early 1980s. However, by 1993 it had fallen behind its rivals and Irish Life was haemorrhaging investment mandates to better-performing competitors.

Over the following 12 years Murphy gradually restored ILIM to its former glory and was rewarded in 2005 by promotion to chief executive of the whole of Irish Life.

However, Murphy's career seemed to have peaked when he was passed over for chief executive of IL&P in favour of the more forceful Denis Casey, following the retirement of David Went in May 2007.

That was before Casey spectacularly self-destructed in February 2009 when it was revealed that the group had secretly deposited €7.5bn with Anglo Irish Bank at the end of September 2008.

THESE deposits, made just before Anglo's year-end, allowed the rogue bank to pretty up its balance sheet, giving shareholders, creditors and regulators a misleading picture of its true financial position.

When IL&P's role in the affair was exposed, Casey was forced to quit. Having been passed over for the position two years previously, Murphy was the obvious choice to succeed him.

After serving as acting chief executive for four months, he was appointed to the post in a permanent capacity in June 2009.

Since then, most of his time has been consumed dealing with the fallout from the legacy that was left to him by Went and Casey.

If he can somehow successfully extricate Irish Life from its Permanent TSB entanglement, he will have performed one final, outstanding service for the company where he has spent his entire career.

Irish Independent