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Underlying profitability has grown at a significantly higher rate but we continue to take a prudent stance in relation to the valuation of treasury assets impacted by the current dislocation in global credit markets. This conservative approach serves to protect the Group’s future earnings stream.
Expected key highlights for the six month period include:
• Growth in earnings per share of 15% over the same period in 2007
• Loan growth of €6.0 to €6.5 billion1, an increase of approximately 10% in the six months
• Strong asset quality with impaired loans at less than 0.55% of closing book and an annualised lending impairment charge of approximately 0.13% to 0.14%
• Stable net interest margins notwithstanding the increased cost of funding
• Strong performance in customer deposits with lending substantially funded through growth in customer funding
• Excellent liquidity position with treasury assets maintained at approximately €25 billion and just over €3 billion of term debt (3% of the Bank’s balance sheet) maturing through to calendar year end 2008
• Significant equity capital generation in the period
• Active management of cost base with continued improvement in our cost to income ratio
Full year outlook
We maintain full year guidance of 15% earnings per share growth. There are however risks associated with further financial market disruption and the potential impact of a protracted deterioration in the wider economic environment.
Business performance
Business lending
We anticipate net loan growth of between €6.0 and €6.5 billion1 for the six month period, down from €8.7 billion in the preceding half year. We continue to adopt a highly selective and cautious approach to new lending opportunities in the current environment.
In Ireland, economic fundamentals remain sound with growth moderating in 2008 and 2009. The fifteen month slowdown in the housing sector appears to be close to bottoming out following price reductions and a significant decline in the supply of new homes. The improvement in residential affordability is to be welcomed.
Irish residential development represents approximately 7% of the Group's loan book and is performing well under difficult market conditions. Typically, our developments are substantially pre-sold and loan facilities are cross-collateralised with other income producing assets. Most of our clients operating in this area are long-established, experienced developers with significant net worth who have diversified their business interests over the past number of years, both in Ireland and internationally. Naturally, there are a limited number of smaller relationships which require additional active management reflecting current market conditions.
The commercial property sector in Ireland is performing well. Whilst activity has moderated from the record levels of 2007, vacancy rates remain low and occupier demand continues to be robust across all sectors.
Our UK loan book is performing well. Client repayment capacity remains strong with income and rental levels improving as occupational demand holds up. Transactional activity levels in the market have significantly reduced as potential sellers have been slow to trade assets against a backdrop of reduced funding availability for buyers. We expect that the effects of any re-pricing will be more evident in poorly located assets with less robust income streams. Our clients, however, continue to seek value propositions in well located assets with high quality cash flows. As in other markets we are not experiencing any worrying trends but we remain highly vigilant.
Sentiment towards the US economy has deteriorated and accordingly, we continue to exercise a high degree of caution in selecting new business. Our US loan book is fully performing with only a few cases requiring above normal levels of attention.
Lending asset quality
Lending asset quality continues to be robust. We expect impaired loans of less than 0.55% of the closing loan book and an annualised provision for lending impairment in the first half of the year of approximately 0.13% to 0.14%.
Overall client capitalisation and liquidity continues to be strong and there are no emerging systemic trends causing material concern. We are confident that the Bank’s underwriting model assures the ongoing quality of our asset base. At the time of underwriting we apply ‘haircuts’ to cash flow cover and valuation of collateral. At least twice yearly we review and stress test each and every client in the book on a loan by loan basis. Stress testing of cash flows continues to highlight the robust and diversified nature of underlying income streams. Furthermore, the most recent stress testing of loan to value metrics does not highlight significant issues of concern. We are comfortable that the lending impairment charge for the full year will be below the current consensus of 0.25%. Nevertheless, we remain highly vigilant.
Assets impacted by the current credit market dislocation
In order to protect future earnings we have taken a prudent approach to the valuation of assets impacted by the credit market dislocation. Accordingly, we have taken a further write down in excess of 25% on structured investment vehicle assets to bring the total provision to above 75% of their original value. Remaining exposure to such assets is negligible. The nominal exposure to other affected assets equates to less than 0.5% of our total balance sheet and we have likewise taken a prudent approach to their valuation. We believe that this substantially reduces the risk of requiring further material write downs in the second half and subsequent periods.
Liquidity
The Bank’s liquidity continues to be excellent with a significant surplus to operating and regulatory requirements. Our liquid asset position is as strong as at 30 September 2007, at approximately €25 billion. In addition, the Bank continues to be a significant net lender to the interbank market.
Net lending for the period has been substantially funded from ongoing strong growth in customer deposits. The Bank continues to maintain a robust loan to customer deposit ratio in line with year end levels.
Customer funding
The Bank’s customer franchise, which now spans 16 different geographic markets across Europe and North America, continues to perform very strongly. The strength of the franchise is evident from the addition of approximately 50,000 new deposit customers since 1 October 2007. More than half of these customers have invested in term products with durations of one year or longer. Customer deposits continue to account for over 60% of total Group funding and customer retention, at in excess of 95%, is excellent. As expected, retail and non retail customer funding costs have increased due to sustained competition.
Market funding
The Bank continues to attract significant levels of market funding with new issuance comfortably exceeding redemptions. We have been active in the commercial paper markets out to one year duration. Importantly, we have maintained a strong pricing discipline at sub libor levels. Gross issuance totalled €8.5 billion in the five months resulting in current outstandings increasing by more than 20% on year end. The Bank has also secured in excess of €2 billion through private placings of longer term funding in what is otherwise a much curtailed market.
Balance sheet strength
We are well positioned from a capital and term funding perspective. The Bank has significant term funding in place with just over €3 billion of funds, 3% of the Bank’s balance sheet, maturing during the remainder of calendar year 2008. This, plus the strength of our customer deposit franchise, means that we can be patient in accessing term wholesale mark.
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