NATIONAL IRISH Bank (NIB) has warned of further loan losses as the recession takes hold after a spike in loan impairments last year and the writedown of all goodwill remaining from its acquisition in 2005 by Danske Bank led to pretax loss of €552 million.
NIB attributed 75 per cent of a €228 million loan loss impairment charge to a marked deterioration its €3.5 billion commercial property loan portfolio, which comprises about a third of its €10.7 billion loan book and about 3 per cent of all commercial property lending in Ireland.
“We’ve taken a severe and negative view of the likely bad debt in this sector,” said NIB chief executive Andrew Healy.
The impairment charge represents 2.14 per cent of all NIB loans and 4.8 per cent of commercial property loans, leading analysts to warn that losses of that scale did not augur well for Allied Irish Banks (AIB) or Bank of Ireland.
“The marked rise in Danske’s Irish impairments does not bode well for the Irish banks and highlights significant upside risk to impairment forecasts for both AIB and Bank of Ireland,” said John Cantwell and Ciaran Callaghan at NCB Stockbrokers in a note.
In its most recent guidance to the market, AIB said the deterioration of its Irish residential development book was the main driver behind an expected bad loan charge of 0.75 per cent of group loans in 2008.
Bank of Ireland expects its total impairments to be at the low end of a 0.6-0.75 per cent range for the year to March.
Mr Healy said Danske was committed to the Irish bank, in spite of its decision to write down €395 million in goodwill outstanding from the €659 million takeover. This didn’t mean the acquisition was a “bad decision” from Danske’s perspective, he said.
In a statement, Danske chief executive Peter Straarup said no one had anticipated the speed and depth of the recession in Ireland “and the assumptions we made in 2005 on likely economic growth are no longer valid”.
In addition to a spike in bad loans in its Danish business, the NIB impairments were a contributory factor in the collapse of profits at Danske. After a net loss in the fourth quarter, Danske’s pretax profit for 2008 fell to 2.23 billion Danish kroner (€299.28 million) from DK19.31 billion.
On whether NIB’s loan loss profile will worsen, Mr Healy said: “More consumers and more business will come under pressure as we move forward, that’s inevitable . . . It would be disingenuous of me to suggest that this is the end of the road as regards impairments.”
Asked if NIB was exercising forbearance in respect of loans on development property, he said the bank was working closely with its customers and pointed out that it introduced a cap on lending in that sector in 2006. However, NIB would be unrealistic to continue believing it still held the same value on its securities “if property values have fallen”.
In spite of rising unemployment, Mr Healy said NIB’s mortgage book was “holding up”. Less than 100 mortgage customers were currently in arrears with repayments or more than 90 days overdue.
NIB is “cautious” in its business lending at present, he said, adding that such lending rose 13 per cent last year. “We have seen a lower level of applications this year . . . Three out of four applications through the door have been approved this year so far.”
Total lending increased to €10.65 billion in 2008 from €9.31 billion and income rose to €204 million from €181 million. The bank’s “profit before impairment charges” rose to €71 million from €29 million.
NIB is not replacing staff who leave and it has cut the number of temporary staff it employs. This contributed to a 12 per cent reduction in costs to €133 million. While the bank aims to cut costs by a further 10 per cent this year, Mr Healy said it had no plans at this time to seek any voluntary or mandatory redundancies.
Deposits rose €80 million to €3.29 billion last year. Customers of the bank are protected by the Danish government’s bank guarantee scheme.
