State faces €9bn shift of IL&P loans if 'third-force' stalls
Irish Life & Permanent could hive off €9bn of mortgages to the State to sort out its funding issues if it is unable to push its weak banking arm into a third force merger, according to analysts at Royal Bank of Scotland.
The broker estimates that if the banking guarantee were lifted in September, its margin on loans would plunge into loss-making territory. The new guarantee scheme, brought in last December to enable banks issue bonds of up to five years in maturity, comes up for review before June.
The Government has left IL&P at the bottom of its priority list as it is not participating in NAMA and has not asked for a bailout. But RBS said the group is a key beneficiary from Finance Minister Brian Lenihan's decision last week to seek an extension of the guarantee scheme.
Still, the broker believes that its Permanent TSB banking arm "is in need of a funding overhaul", given that it is the most reliant state-guaranteed lender on the wholesale market. The bank has €2.65 out on loan for every €1 on deposit. Only 77pc of its €38bn loan book is funded by deposits or long-term wholesale funding.
IL&P, led by chief executive Kevin Murphy, continues to believe the group will be able to shove Permanent TSB into a deal with EBS and Irish Nationwide to form a "third force" to compete with the two main domestic lenders.
However, RBS noted that Mr Lenihan's landmark speech on the banking sector last week made no reference to a "third force". "This heightens our concern that a potential three-way merger might be delayed until the fourth quarter of this year, or it might be off the table altogether," it said.
Standing on its own merits and without an extension of the guarantee scheme -- and assuming no European Central Bank funding -- Permanent TSB's net interest margin would move from 0.8pc to a negative 0.43pc.
IL&P stands out as the only Irish lender the new regulator Matthew Elderfield did not direct in recent weeks to raise further equity to bombproof its equity reserves. This is because the group's reserves are bolstered by the strength of the life and pensions arm.
The group will be required at a later stage to bolster its banking arm on a standalone basis. This will be particularly pressing if it were to participate in industry consolidation.