ANALYSIS:IRISH LIFE & Permanent's (IL&P) decision to raise its expectation for the amount it will have to set aside to cover future loan losses caught the market by surprise yesterday. IL&P raised the loan-loss forecast for the three years to 2011 to as high as €900 million from the €700 million guided three months ago, blaming falling commercial property values.

This market segment, which accounts for just 6 per cent of IL&P's €40 billion loan book, has hardly suffered any sharp falls in such a short period but has been depressed for quite some time.

The increase in the forecast amounts to between 2 per cent and 2.1 per cent of the loan book - an increase from the earlier forecast of 1.8 per cent in August.

Most of IL&P's loans are in the residential mortgage where the company has seen a slowdown in the rate of arrears of three months or more from 8 per cent a month until August, to 3 per cent in September and October.

Problem mortgages are still growing but the decline in the rate of increase in arrears is encouraging, which has prompted IL&P to think that 2009 will be the worst year of the recession.

The firm noted that the Government's focus is on getting Nama up and running. IL&P is taking measures to restructure and ensure it can be in a position to jettison Permanent TSB into a so-called third banking force.

The company said that more detailed talks on the restructuring of the sector would commence in the first three months of 2010.

IL&P will be eager to use the Government's new "eligible liabilities guarantee scheme" to sell State-backed bonds outside the blanket scheme, which ends next September, given the hefty cost of corporate and retail deposits. This will help it to reduce further its reliance on cheap funding from the European Central Bank, which is a positive development, though the loans-to-deposits ratio will remain the highest across the six domestic financial institutions.