Overview of Business Performance - Investis

Overview of Business Performance
against basis risk in its fi xed rate mortgage portfolio.
Under IFRS, the outcome of this pre-funding is refl ected
in trading income rather than net interest income.
Costs
Administrative costs increased 11% in 2007 to a302m
(2006: a273m). This includes short-term increases
in the staffi ng levels designed to maximise the SSIA
maturity opportunity which presented itself in the fi rst
half of 2007, the costs arising from the implementation
of Basel II and the costs associated with increased
distribution within Capital Home Loans. Excluding
these once off costs the underlying level of cost growth
was in the order of 7% refl ecting salary infl ation. Cost
containment continues to be a signifi cant priority of the
bank.
Credit Quality & Provisions
The charge in respect of impairment provisions of
a28m includes a specifi c provision of a11.7m against
exposures created by the fraudulent actions of a rogue
solicitor. Outside of this charge the 14% growth in
impairment provisions is in line with the underlying
growth in the loan portfolios. Provisions held continued
to be adequate with reserves of a75m (2006: a57m)
compared to arrears of a50.7m (2006: a43.9m).
Credit quality across all portfolios remains excellent
particularly in the Irish residential mortgage portfolio
where, despite the slowdown in the Irish housing
market in 2007 and successive increases in euro
interest rates in 2006 and 2007, arrears levels at 31
December 2007 were at an historic low. Within the Irish
residential mortgage book total arrears as a percentage
of the portfolio were 11bps, compared to 12bps at
the year end 2006 and the total number of arrears,
notwithstanding the underlying growth in the portfolio,
decreased by 6%. In CHL arrears also continued to be
low with arrears as a percentage of the portfolio at 4bps
(2006: 4bps).
Funding and Liquidity
During the fi rst half of 2007 the Irish Financial Regulator
changed the regulations concerning the liquidity
requirements of the Irish banking system. Previously
Irish banks were required to meet a minimum 25%
liquidity ratio. Under the new protocol, required
liquidity holdings are based upon various cash fl ow
stress tests. The key limits applied are that an institution
must have suffi cient available liquidity to cover 100% of
outfl ows over the next 8 days and 90% of outfl ows over
the next month.
The introduction of this new protocol was very
opportune given the liquidity and credit crisis which
developed in the second half of 2007.
The group’s funding position is supported by its credit
ratings. The group is rated “A+” by Standard & Poors. In
May 2007 Moodys Investor Service improved the group’s
credit rating from A to Aa.
The group has always followed a policy of diversifi cation
of its funding sources and this diversifi cation and the
duration profi le of the funding leave the group in a
strong position in the current credit environment. At
31 December 2007, 64% of the bank’s total funding
comprised customer accounts and term debt.
The group’s total funding is well diversifi ed across
markets, as shown below:
Customer Accounts
2007
%
34
Long-term Debt 23
Securitisation 7
ECB repurchase agreements
64
12
US$ Commercial Paper 7
Deposits by Banks - Secured 6
Euro Commercial Paper 5
US$ Extendible Notes 3
Deposits by Banks - Unsecured 3
100
In addition, the group can utilise its mortgage assets to
provide collateral against which funding can be drawn
through to ECB Repo facility. This is a facility which is
made available by the ECB to all European Banks on
a tender basis. At 31 December 2007, the group had
committed ECB facilities available to it of a17.2bln,
(a20bln nominal collateralised asset pool), against
which it had drawn a5.3bln.
The undrawn balance of a11.9bln, which is available
together with other eligible assets which are available
but have not yet been collateralised, provide a secure
underpinning of the group’s funding requirements for
2008.
In the latter part of 2007 in order to protect margins
against the increased cost of wholesale funding the
group increased mortgage and other credit interest
rates on new business by 9 - 25bps on selected
products. This re-pricing included a 9bps increase in the
Standard Variable Rate attributable to the back book of
mortgages.
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