NATIONAL IRISH Bank's pretax profits fell 71 per cent to €2 million in the first half of the year compared to the same period last year, due to a six-fold increase in bad debts and higher bank funding costs.
The bad debt charge jumped to €25 million from €4 million last year due to the sharp downturn in the economy and the housing market, and the outlook for further tough conditions. Loan loss provisions more than quadrupled in the three months to June 30th on the previous three months.
NIB chief executive Andrew Healy said the bulk of the provisions were on loans to residential developers. "We do expect our losses to increase given where we are in the economic cycle."
The bank's profit more than doubled to €27 million, excluding "credit loss expenses". The bank said that while loan loss provisions rose to €25 million, or 0.54 per cent of loans, actual credit write-offs amounted to €1.7 million, or 0.04 per cent of loans.
NIB's business declined sharply in the three months to the end of June, making a loss of €4 million, compared with a profit of €6 million in the first three months.
Some €900 million in loans, or 9 per cent of the bank's €10 billion loan book, is to the struggling housebuilding sector. Mr Healy said the bank had less than €450 million of this book - about 5 per cent of the overall loan book - "under very careful management".
He said NIB had "scaled back" its construction lending since the end of 2006 and taken a conservative approach since then. "Asset quality remains sound," he said.
Mr Healy said NIB was supporting struggling developers by not forcing property sales in a market with few buyers. He said the bank was also "rolling up" loan interest for some of its clients.
He said he was hopeful of a recovery in the housing market in the second half of next year. He expects property values to fall 20-30 per cent from their peak.
Lending rose 19 per cent, while mortgages increased 22 per cent due to NIB's competitive rates on low loan-to-value (LTV) tracker mortgages, mostly to customers switching from other lenders.
Mr Healy said funding costs increased by €12 million due to the credit crunch, but the bank had "absorbed" this, choosing not to pass it on to customers in an effort to attract new business. "We plan to continue to price very keenly because we are winning a large number of new customers."
NIB attracted 7,000 new customers over the six months, bringing its customer base to 236,000 at the end of June.
Mr Healy described NIB's low LTV mortgages as "a very good hook" to attract new customers and encourage them to use NIB for other services, although he said that profits had been affected by maintaining lower rates as funding costs increased.
The bank was the last Irish lender to raise tracker rates due to the credit crisis. It increased its tracker rate by 0.4 of a percentage point from the start of this month.
The bank had €3.7 billion in mortgages at June 30th with an average LTV ratio of 42 per cent, making it one of the lowest risk Irish mortgage books, said Mr Healy. Fewer than 100 mortgages were in arrears, he added.
Deposits increased 8 per cent to €3.2 billion, while business loans rose 16 per cent. Total income was up 9 per cent to €94 million.
NIB increased its workforce by 7 per cent to 649 through the expansion of its branch network, and by developing its wealth management and corporate banking business, although it reduced costs by 12 per cent in the first six months. The bank has 66 branches and plans to open four this year, although five are being merged with larger neighbouring branches.
NIB will launch its life and pensions business Danica Life next month. The bank's parent, Danish bank Danske, reported a 24 per cent drop in net profit to €779 million in the first half of the year.
