Bank writes off €1.8bn in bad debts

THE reckless lending by the Irish banking sector came home to roost yesterday as AIB, the country’s largest bank, announced it was forced to write off a massive €1.8 billion in bad loans in 2008.

That compares with €106 million written off in 2007.

The bank said losses on property investments in Ireland and Britain accounted for most of the provisions in the accounts, which came to 1.37% of average customer loans, compared to 0.09% in 2007.

Bad debt provisions this year are estimated at €2.9bn, rising to €4bn in a worst case scenario, the group said.

The bank said it expects commercial property values to fall by 50% in 2009- 2010.

The bank described the figures as “pretty horrendous” and a reflection of how badly the wheels have come off the property wagon.

The bank said it has €15.5bn of “criticised” loans, meaning loans that require closer management.

That accounts for 11.7% of its loan book and 80% of these loans are from its operations in the Republic, with a further 14% from Britain.

That compares to AIB’s exposure to criticised loans of €6.8bn or 5.3% of loans in 2007 and highlights the pressure facing the property market, analysts said.

The net result of bad debt impairment charges saw pre-tax profits fall from €2.5bn in 2007 to just over €1bn last year.

It is anticipated that the bank will make losses in each of the next two years.

AIB’s retail banking in the Republic took the brunt of the property collapse. It made a loss of €52m after providing €1.3bn in bad debts on loans to the property sector.

Property and construction accounted for 80% of the total bad debt provisions by the group.

Earnings per share (EPS) show the adjusted EPS figure fell 68% to 66.5c.

Against a backdrop of uncertainty in global financial markets, the results represent a “resilient performance by the group in 2008 in the prevailing environment”, said Eugene Sheehy, chief executive of AIB.

Shares in the group rose more than 16% yesterday on the back of the results and by close of business they were up 8 cent at 48 cent, giving the bank a market value of just over €420m.

At its 2007 peak when the shares hit €23.95, the bank was valued at over €21bn.

Meanwhile, the Irish Hotels Federation warned that lack of bank credit was jeopardising 60,000 jobs in the sector.

The IHF said there was a continuous shortage of funding to the sector, highlighted by Central Bank figures showing lending to the sector was down 2.9% at the end of 2008 from 2007.

Mr Sheehy said AIB was well capitalised and is prepared to lend to the small business sector for which it provides 40% of loans.

The bank will only lend to those who can “repay” their loans, he said.

“We have to make sure that we can keep as many businesses as we can intact at this time”, he said.