Ireland Financial News – Mortgages & Banking

Bank of Ireland has reported pre-tax profits of €650m for the six months to the end of September this year, a drop of almost a third from a year earlier.

In its statement published this morning, the bank also said it would not pay a dividend to shareholders.

Chief executive Brian Goggin told RTÉ radio that the bank was a ‘strong, sound and successful’ business and did not see the need to raise additional capital at the moment.

He said only €13bn, or less than 10% of its total loan portfolio, linked to property development, was causing the bank problems.

Underlying earnings per share were down 31% to €0.55.

A breakdown showed that profits in Bank of Ireland’s retail business in the Republic dropped 25% to €286m, while Bank of Ireland Life profits plunged from €72m to €3m, badly hit by stock market turbulence which affected the value of its investments.

Capital markets profits fell 8% to €283m and UK profits dropped 38% to €148m.

News from RTE >>

 Permanent TSB, one of the largest players in retail banking in Ireland, is offering staff a paid career break in an effort to cut costs.

The initiative is being taken as the bank expects less business volumes in the months and years ahead arising from the recession in the Irish economy.

Permanent TSB has confirmed it is offering to pay employees up to €20,000 euro to take a two year career break (€10,000 per year) or €35,000 for a three year break.

Unite, the trade union which represents 75% of Permanent TSB’s 2500 staff, has given the initiative a cautious welcome.

Regional organiser with Unite, Colm Quinlan, described the proposition as a novel one that has not been seen before and which ultimately does preserve jobs.

However, he said a number of points had still to be ironed out.

He said the union had been informed by management of the initiative and had not objected to it being circulated to staff.

Permanent TSB hopes the career break will appeal to younger employees who might take the opportunity to travel.

The bank will also be anxious not to lose staff entirely given the high cost of training and staff development.

News from RTE >>

AIB shares have opened sharply lower after issuing an interim management statement this morning, in which it substantially reduced its earnings forecast for this year.

The bank said it does not expect a ‘meaningful’ recovery in the residential market until 2011.

AIB Group, Ireland’s biggest bank, said bad debts, largely because of loans to residential property developers in Ireland, would increase this year and next, well beyond the bank’s and analysts expectations.

Worries over loans to property developers lead the group to reduce its earnings forecast for the rest of the year to €1.20.

Originally it had forecast earnings of between about €1.80 and €1.90 per share. Analysts had forecast around €1.70 before the statement was released.

AIB will not be paying a dividend to its shareholders.

Minister for Finance Brian Lenihan said he is worried that the bank does not estimate a meaningful recovery in the mortgage market until 2011.

Speaking in Dublin this morning, Minister Lenihan said AIB’s trading statement showed just how important the government’s action to stabilise the Irish banking sector had been.

He also said yesterday’s exchequer figures were in line with those contained in the Budget and at the moment he did not see the need for a ‘mini-budget’.

However, Mr Lenihan said that if there is further deterioration, corrective action will be taken to ensure expenditure remains within the ‘proper limits’.

News from RTE >>

The Financial Regulator has asked the six Irish banks covered by the State’s guarantee to submit new business plans showing how they plan to reduce their risks.

The regulator has also placed ‘officers’ in each of the banks to scrutinise their future operations.

20 officers have been employed to be placed on-site across the banks.

The moves were agreed as part of the €500bn deposit guarantee introduced by the Government to prop up the Irish banking sector amid the global financial crisis.

Elsewhere, European shares have dived in opening trade this morning, tracking steep falls across Asia on global recession fears.

Dublin’s ISEQ index was down almost 3.5% in the first 10 minutes of trade.

Irish financial stocks were all lower.

London’s FTSE 100 tumbled over 3% in opening trade, while the Frankfurt’s DAX index also fell by 3% in early trades as investors fretted over potentially weak corporate earnings. The Paris CAC plunged fell 4.9%.

Japan’s Nikkei index plunged 9.6% earlier this morning to end at a five-year low.

Meanwhile, a growing list of countries have been affected by the global financial crisis in recent days.

Among those now affected by the credit crunch are: Iceland, Hungary, Pakistan, Ukraine, Serbia and Belarus which are all in discussions with the International Monetary Fund.

Capital has also flowed out of countries such as South Africa, South Korea and Argentina which yesterday announced it was nationalising its pension funds.

 The Minister for Housing has denied that the Government’s new home loan and equity schemes for those trying to get on the property ladder will put the State’s finances at further risk.

Michael Finneran also denied that the measures were being taken to help builders to offload excess stock.

He said they were purely designed to extend credit to first-time buyers unable to secure finance due to the credit crunch.

Under the Home Choice Loan scheme, the Government will lend up to 92% of the value of a home to an individual buying a new house, provided they are a first-time buyer and earn in excess of €40,000 a year.

They must also be in permanent employment for at least two years, and be able to prove that they have been unable to secure a sufficient mortgage from a bank or building society.

The loan will be at the commercial variable lending rate and the risk of each loan will be assessed using the same grounds that banks use.

Mr Finneran said the purpose of the scheme, which will be launched properly in a fortnight, is to extend loans of up to 92% to buyers who at present who are only being offered loans of around 80% by the banks.

The aim of the Government Equity scheme is to streamline the existing affordable housing initiatives into one system.

Instead of selling properties to buyers at a reduced rate, subject to a clawback if they are sold on, the local authorities administering the new scheme will take an equity stake equivalent to the amount that is currently being discounted.

The State’s equity will remain as a set percentage of the market value of the house and will stay in place until fully repaid or bought out.

Both schemes will be financed from the market through the Housing Finance Agency, which borrows from the international markets at Government rates, and will lend on at commercial rates.

Outlining details of the scheme, Mr Finneran said there would be no maximum placed on qualifying earnings for those seeking a Home Choice Loan.

He rejected suggestions that the declining value of houses put the State at risk, saying all normal risk management systems will be put in place. Valuations would be done by the State, he said.

Mr Finneran also said that because we are approaching the bottom of the housing correction, the Government believes there is good value there for first-time buyers, which in time will benefit the Exchequer.

He said both schemes will allow Government to recycle money they earn back from the loans and equity into further affordable housing.

 The Government has finally released details its controversial bank guarantee scheme, more than two weeks after the plan was first announced.

Minister for the Finance Brian Lenihan said the new regulations would take the Government deep into the banking system.

Under the scheme, taxpayers will guarantee all loans and deposits in the country’s banks and building societies.

One of the key provisions contained in the Bill will be measures to prevent abuse of the scheme.

The Government will raise €1bn over two years from the banks covered by the State guarantee. If the guarantee is called upon the banks involved will eventually have to refund the money.

Up to two directors, representing tax payers interests, will be appointed to the board of each bank and building society covered by the scheme.

They will be drawn from a panel approved by the Minister for Finance.

A new committee will oversee bonuses and pay of directors and executives.

Bonuses will be linked to a reduction of risk and long term sustainability of the banks.

News from RTE >>

 The Financial Regulator has revealed that the six main Irish banks have loans totalling €15bn secured only against property.

Giving evidence to the Joint Oireachtas Committee on Economic Regulatory Affairs, CEO of the Financial Regulator Patrick Neary said that banks will undoubtedly suffer some losses on these property exposures.

He also outlined some measures contained in the Government’s bailout package.

The committee heard that in total, the six Irish banks have speculative lending on construction and property development totalling over €39bn.

Some €24bn of that is secured by additional collateral or sources of cash, leaving €15bn secured solely on property.

Mr Neary said currently the Irish banks are above their regulatory capital requirements, with ratios three points higher than the EU average.

But he said the extent to which the banks’ future profits will able to sustain their capital levels depends on what provisions they have made for their exposure.

Regulator to hire bank supervisors

Revealing details of the Government’s bailout plan, Mr Neary said the Regulator will immediately recruit 20 senior banking supervisory staff who will work in the banks.

He said the scheme will also require detailed business plans and extra reporting from the banks.

Mr Neary said he did not think he should resign and would continue in his job as long as the Regulatory Authority wished him to do so.

He said nobody could have possible forecast the scale of the current global economic meltdown.

News from RTE >>

 The EU Commission has approved the Government’s €400bn guarantee that covers six Irish-owned banks and five foreign-owned financial institutions.

The announcement came as Taoiseach Brian Cowen returned from Paris where EU leaders had agreed on a big funding programme for banks and businesses.

Under the programme governments can use taxpayers’ funds to put new capital into the banks, either by buying bank shares or debt instruments issued by the banks.

It is the biggest move yet by European countries to mount a co-ordinated, system-wide effort to beat the credit crisis and Eurozone countries have agreed that they can do virtually anything to prevent bank failures.

Countries can now invest in bank equity to improve tier one capital rations and can buy up, insure or guarantee debt instruments issued by banks.

Eurozone countries can now take ‘toxic assets’ as collateral for government bonds.

Governments have also encouraged the European Central bank to start lending directly to big businesses through a commercial paper market, hoping that if big businesses get finance they will use it to pay the small businesses that supply them, boosting the flow of cash.

They also want a suspension of the so called mark-to-market accounting rules to try and halt the slide in the value of bank assets.

It will be up to each country individually to decide on which measures, if any, are needed.

Elsewhere, the British government has announced a plan to buy shares in the country’s banks to help shore up their balance sheets.

Under the scheme the government will take a 60% share in the Royal Bank of Scotland, worth £20bn, and around 40% of the combined bank which will be formed by the amalgamation of HBOS and Lloyds TSB.

The amount of money the British government is putting into RBS and HBOS is more than they are currently worth after last week’s losses on the markets.

Barclays said it will not have to turn to the government for emergency recapitalisation and will be raising £6.5bn from investors but will not be paying a final dividend for 2008, saving the group £2bn.

Meanwhile, Royal Bank of Scotland CEO Fred Goodwin has stepped down as RBS looks to recover from the credit crunch

 New research suggests that as many as 170,000 people will fall into negative equity by the end of next year if house prices continue to drop.

The research, by Goodbody Stockbrokers, expects that by the end of 2009 house prices will have fallen 30% from their peak in 2007.

Combined with the fact that one in three homebuyers took out 100% mortgages at the peak of the boom, the research concludes that thousands will fall into negative equity.

Half of those who bought between 2005 and 2007 will be left owing more than their houses are now worth, it says.

People who have jobs and can afford to pay their mortgages will not be in trouble.

But, the research also suggests that unemployment will rise by 2% over the next 18 months, leaving more people without the means to keep up their repayments.

However, evidence has shown that even in severe housing busts, most owners are able to keep up payments on their mortgages.

The Taoiseach will travel to Paris later today for an emergency meeting of leaders from the 15 countries that use the Euro.

The meeting is being held at the request of Spain.

According to French reports, the leaders may be asked to back a plan to invest taxpayers’ money in banks in order to recapitalise them, and guarantee their debts in the interbank money market.

This is similar to the plan announced by the British government last week and by US Treasury Secretary Henry Paulson on Friday.

Using taxpayers’ money to buy bank shares, effectively a part nationalisation, would be difficult for the Irish government, which is attempting to plug a €15bn hole in the budget on Tuesday.

It is believed that Ireland would argue for any such scheme to be voluntary.

The Government already provides a guarantee for some bank debts.

Germany’s Finance Minster has said it is time to stop rescuing banks on a case-by-case basis and to move to a comprehensive solution to the credit crunch.

Ten days ago the Dutch proposed a €300bn bank capitalisation fund for all of the EU, but this was rejected by Germany and other states.