Irish Life & Permanent (IL&P) increased operating profit by 12 per cent to €590 million in 2007 and delivered a more optimistic outlook than in December, saying profits may rise "marginally" in 2008 as funding costs have eased from their highs two months ago.

Pretax profits at the insurance and banking group fell 22 per cent to €480 million in 2007 as losses on its investment portfolio due to stock market falls knocked €114 million off operating profit.

This compared with a profit of €101 million the previous year.

IL&P had said in a trading statement in December that it may experience flat profit growth or a "single-digit" decline in profit, depending on when funding costs fell during the course of 2008.

The group expects profit this year to be at the upper end of its forecast and "marginally ahead of 2007" given the fall in the cost of short-term money in the last two months.

The group's funding arrangements and the effect of the credit crisis on outlook drew the most attention in the market yesterday.

IL&P chief executive Denis Casey said the biggest risk facing the group was a spike in short-term funding costs and long-term debt markets remaining closed.

"We assume that the easing and improving in short-term markets that we have seen over the last eight weeks persists for the year so we don't have another spike in short-term rates," said Mr Casey.

The group said its 2008 earnings would be helped by a one-off gain of €29 million from the sale of a €2.5 billion bond portfolio.

Shares fell 6.2 per cent in the hours following a conference call in which the group outlined its funding.

They rallied later, closing down 3 per cent at €10.90.

IL&P finance director Peter Fitzpatrick said it was "a little bit uncertain" what shape the long-term debt markets would take.

He said it would be the middle of the year before the "negative sentiment starts to clear its way through the system, and for the supply of money to come back to normal levels".

He said the group's long-term funding was secure until the third quarter of 2008 when IL&P would have to raise €3 billion. This would cost 0.6-0.7 per cent more now, based on current costs.

Mr Fitzpatrick said the group had drawn €5.3 billion from the European Central Bank (ECB) at December 2007, but had reduced this figure to €4.6 billion.

The group raised its full-year dividend by 10 per cent to 75 cent.

Mr Casey said it was "not unreasonable" to expect dividend growth to moderate in line with lower earnings growth this year.

The group said it expected its bank loan book to grow by 8 per cent to 9 per cent in 2008, with its Irish mortgages growing at a slightly lower pace, and life and investment sales to grow by a "mid-single digit".

Gross new lending fell to €7 billion in 2007, from €8.7 billion the previous year.

Mr Casey said property prices dropped by 7.2 per cent last year and would fall a further 4-5 per cent in the early part of this year.

He said ECB rates would drop in the second half of the year and the property market would rally. "Demand has not gone away - it has been postponed."

IL&P said arrears on mortgage amounted to 0.11 per cent of all loans and defaults had improved since December.

Mr Casey said there was nothing to suggest customers were under any payment stress on personal or car loans, where signs of debt distress would appear first.