ALLIED IRISH Banks (AIB) has almost doubled its bad debt forecast for 2008 and nearly halved its earnings estimate in an unexpected trading statement ahead of its full-year results on March 2nd.
The bank raised its projections for loan losses to €1.8 billion, or 1.37 per cent of the overall loan book, from its previous estimate of €950 million, or 0.75 per cent of the loan book, last November.
AIB is forecasting earnings per share of 66 cent for 2008, compared with the 120 cent previously forecast in November and down from 205.9 cent posted in 2007.
The bank blamed further deterioration in loan quality as “economic conditions have worsened”.
AIB’s share price climbed 2.8 per cent, or 1.5 cent, to €0.64, valuing the bank at €569 million.
The rise in projected loan losses follows a similar move by Bank of Ireland last week which raised its three-year bad debt estimate to €4.5 billion - and a possible worst-case scenario of €6 billion - from €3.8 billion.
AIB’s bad debt estimate includes a charge of €500 million or 0.37 per cent of loans that it anticipates will become impaired due to further deterioration in the property market.
About 75 per cent of the €500 million charge relates to Irish property development loans. “Although not currently impaired, this portfolio is showing significant and growing signs of stress as a result of the adverse conditions at the end of 2008,” the bank said in its update.
The bank said it had decided to take some of these anticipated bad debts as “an incurred but not reported (INBR)” charge into annual results for 2008 rather than setting aside specific provisions in its accounts for this year.
Based on the earnings forecast for 2008, the bank is expected to make an operating profit of €2.6 billion before the total €1.8 billion in expected loan write-offs, leaving a pretax operating profit of €800 million.
“There have been both income and cost benefits due to management focus and cheaper funding conditions,” the bank said.
“Sustained income growth and a reduction in costs will create a materially positive gap between their respective rates of change.”
Analyst Sebastian Orsi at stockbroking firm Merrion Capital said: “They are taking larger loan losses given that the economic backdrop has worsened very quickly but it was definitely not unexpected.”
He said the underlying performance was still good.
The bank said the €500 million charge would shave 30 basis points, or 0.3 of a percentage point, off its core tier-one capital ratio – the key measure of a bank’s ability to absorb unexpected loan losses. This will reduce the ratio to about 5.7 per cent from 6 per cent.
Taking the Government’s planned €3.5 billion capital investment in the bank into account, the ratio would amount to about 8.2 per cent at the end of last year, bringing it in line with the desired capital ratio for banks internationally of 8-9.5 per cent.
AIB decided to issue the trading statement ahead of its 2008 annual results presentation in 10 days as management had taken a decision on the €500 million general charge and it had been discussed by the board yesterday.
