THE STATE'S largest mortgage lender says there will be further increases in mortgages rates, of between 0.25 per cent and 0.5 per cent, if bank funding costs remain at their current high levels.
However, Denis Casey, chief executive of Irish Life Permanent (ILP), which owns mortgage lender Permanent TSB, said the company was optimistic that bank funding costs would ease.
"The general tone in credit markets has improved in recent weeks. They are beginning to see sentiment improving, albeit slowly. We are optimistic that we will see cash markets adjusting. If they don't, however, retail rates will increase again," said Mr Casey after the company's annual meeting in Dublin yesterday.
He said wholesale money costs have been "stuck" at 4.85 per cent - or 0.85 per cent over the European Central Bank (ECB) rate of 4 per cent - for five or six weeks.
"If wholesale rates were to stay out at that very wide margin over ECB it is clear that retail customer pricing doesn't reflect that reality.
"Our hope is that over the coming months, as the credit crunch begins to resolve itself, those very expensive wholesale rates will begin to soften and come back towards where they were."
ILP last month raised its tracker rate on new mortgages by 0.2-0.25 per cent - and by 0.45 per cent in some cases - and its standard variable rate by 0.25 per cent.
Mr Casey said the wholesale funding market was "pretty fluid" and that funding rates could fall quickly. Three-month money, the benchmark for mortgage costs, fell from 4.9 per cent in December to 4.35 per cent in February. "When markets get confident, they can and will correct themselves quite quickly."
Sentiment in the Irish mortgage market would remain weak for the next four or five months, he said. He would expect gross mortgage lending to be down 20 per cent for the first half of 2008.
Chairman Gillian Bowler said ILP was "absolutely confident" about its funding position and had no plans to ask shareholders for extra cash to bolster its capital. Mr Casey repeated this after the meeting. "There will be no rights issue in Irish Life Permanent."
Ms Bowler said: "We are self-sufficient in capital for the foreseeable future. We will not be resorting to a rights issue for new capital." ILP expected lower growth and the life company generated €200 million in surplus capital in 2007. Within this business there was "an incredibly resilient engine pumping out statutory earnings". She said Basel II rules (which aim to ensure that banks have sufficient capital to cover the risks they take on) would reduce ILP's regulatory capital requirements this year by €130 million.
The company was "equally confident" about ILP's funding and had made "excellent progress" on plans to replace long-term funding maturing this year. She said the company needed to increase its deposits and that it had just launched new savings products, and was planning to grow its private wealth business to attract high net-worth customers.
"Given the level of lending growth secured over recent years, it is simply not possible to fund that through deposits alone."
ILP still expects earnings to fall this year. It said on May 1st that it expected its 2008 full-year operating profit to be in line with analysts' estimates of €563 million, down from €590 million in 2007. Asked yesterday if this was still the case, Mr Casey said "Yes".
ILP said Permanent TSB continued to attract customers and loan quality remained excellent. "Along with all other banks we have, however, seen new lending slow down this year as borrowing costs have increased and credit criteria tightened. Obviously, in this environment, we have taken action to protect margins in the bank," Ms Bowler said.
