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Name of the game for Permo now is survival

IRISH Life & Permanent's decision to lay off 280 staff at its Permanent TSB mortgage banking subsidiary-- almost a sixth of the total-- and raise its variable mortgage rate by a further 1 per cent shows just how desperate things have become for the Irish-owned banks.

In many ways, the Permo is the best, or at any rate the least bad, of the Irish-owned banks. Unlike the other five Irish banks, it has not transferred any bad loans to Nama. Neither has it required any fresh capital from the State. It also has in its Irish Life sister company a profit-generator that can be used to help plug any holes that may emerge in the Permo's balance sheet.

Unfortunately, the Permo is also the Irish bank that is most dependent on inter-bank funding, with a massive 60 per cent of its €38bn loan book being financed by inter-bank lending and other forms of wholesale funding rather than good old-fashioned customer deposits.

This means that the Permo is utterly reliant on the state deposit guarantee in order to stay in business.

At the same time as the flaws in the Permo's funding methods have become apparent, its business model has collapsed. It advanced just over €300m of new loans in the first half of 2010. This compares with €1.2bn for the whole of 2009, and more than €7bn in 2008. In other words, the volume of new loans being advanced has fallen by more than 90 per cent in just two years.

Throw in massively increased funding costs and a huge book of tracker mortgages which it can't reprice, and this week's announcement was probably inevitable. Unfortunately, some of the measures announced this week -- the variable mortgage rate increase in particular -- threaten to make the bank's problems even worse in the medium-to long-term.

With €4.7bn of its loan book either impaired or past due but not categorised as impaired -- an eighth of the total loan book -- this week's rate increase threatens to make things worse rather than better for the Permo beyond the very short-term.

From which one can only conclude that, in common with the other Irish-owned banks, the focus at the Permo right now is on ensuring short-term survival and that the medium- to long-term can look after itself.

Sunday Indo Business