SHARES IN Irish Life Permanent (ILP) rose 5.1 per cent to €9.20 yesterday, despite the group saying that it expected earnings to fall by between 5 and 9 per cent this year as new lending slows and the credit crisis drives up the cost of bank funding.
The company said it was taking "a more cautious view" on its life business due to the "poor customer sentiment" towards stocks and commercial property. It is also taking a "cautious" approach in its banking business as the credit crisis continues to drive up bank funding costs and squeeze profit margins on the group's lending.
ILP, the State's largest mortgage lender, said it was withdrawing from the buy-to-let mortgage market. It no longer provides mortgages to landlords in Ireland or the UK and will concentrate on lending to owner-occupiers only.
The consensus among analysts is for ILP's operating profits to fall 9 per cent this year to €538 million, from €590 million last year.
ILP said last month it expected 2008 profit to be in line with analysts' consensus of €563 million, down 4.5 per cent. It said in a statement yesterday that it was now expecting a "mid to high single digit" percentage drop in 2008 operating profit, coming in at between €537 and €560 million. "It's a bit of a cut in forecast," said Sebastian Orsi, analyst at stockbrokers Merrion Capital.
However, the shares price recovered most of the ground lost on Wednesday when it fell 6.4 per cent to €8.75 after ILP updated the consensus forecast on 2008 operating profit on its website, reducing it to €538 million.
The company's share price has fallen 22 per cent this year and 52 per cent since this time last year. ILP's shares reached a new low on Wednesday, falling to a point where it was 8 per cent below its book value at the end of last year.
Davy Stockbrokers said in a research note that the probability of an Irish bank seeking additional equity was "no longer zero" as interest rates rose and the British banks were "leap-frogging" the Irish "in the league tables". ILP has ruled out any plans to seek extra capital in a rights issue.
The company said yesterday it was raising €3 billion in long-term funding maturing between August and September and was expecting to pay 1-1.1 percententage points over inter-bank rates.
ILP chief executive Denis Casey told analysts yesterday that Permanent TSB would raise mortgage rates by 0.25-0.5 of a percentage point if wholesale funding costs did not ease.
The European Central Bank has signalled that it may raise its rates next month. This pushed wholesale money rates to a seven-year high and they have remained near that level.
Asked about ILP's profit margins on new lending at current rates given the high funding costs, Mr Casey said: "We are just about washing our face on new lending." It was "probably not realistic" to assume dividend growth this year. ILP's dividend grew by 10 per cent last year.
ILP said it expected profits in its life division, which accounts for two-thirds of its business, to fall by "a low single-digit per cent" and bank earnings to fall by "low teens percent" on the assumption that high funding costs "persist".
It is expecting to make €20-25 million from its 30 per cent share of Allianz's non-life insurance business. ILP is forecasting gross new lending to fall 17-19 per cent for the first half of the year and overall balance sheet growth to be "low single-digit per cent" this year. It is expecting life sales to drop 10 per cent this year.
