Royal Bank of Scotland Group Plc, the U.K.’s largest state-controlled lender, may need to set aside additional provisions to cover rising mortgage losses in Ireland over the next two years, according to Espirito Santo Investment Bank.
The investment bank increased its Irish residential mortgage provisions forecast for RBS by 147 million pounds ($228 million), or 27 percent, for this year and by 370 million pounds, or 107 percent, for 2013, London-based analyst Shailesh Raikundlia said in a note today. While Lloyds Banking Group Plc’s (LLOY) Irish mortgage arrears have been “consistently 1.6 times” that of the local banking industry in recent years, its loss provisions are already “conservative,” he said.
“High impairments in Ireland continue to spring unpleasant surprises for Lloyds and RBS as the economy deteriorates under the strict austerity measures instigated following the bursting of the property bubble,” Raikundlia and other Espirito Santo analysts wrote in the note.
Ireland, which is three-quarters through 33.4 billion euros ($41.1 billion) of budget cuts planned to stretch eight years through 2015, sought an international rescue two years ago as bank bailout costs threatened to overwhelm the state. RBS, the largest overseas consumer lender in Ireland, has injected as much as 10.8 billion pounds into its Ulster Bank unit since 2008 to absorb loan losses.
Lloyds, the U.K.’s biggest mortgage lender, pumped about 8 billion euros into its Irish business from 2008 to the end of 2010, when it subsumed loans made in the country into the London-based parent company. Ireland has pledged 64 billion euros to its six largest domestic lenders, including Irish Bank Resolution Corp., formerly Anglo Irish Bank Corp., and Allied Irish Banks Plc. (ALBK)
“Although Ireland accounts for only 10 percent and 4 percent of gross loans at RBS and Lloyds, provisions account for 48 percent and 37 percent of their total provisions,” respectively, Espirito Santo said. The investment bank cut its earnings per share estimate for RBS for this year by 8 percent to a loss of 23.3 pence per share and by 9 percent for next year to a profit of 24.4 pence a share. It has a neutral rating on both banks.
Irish house prices have been cut in half from their 2007 peak, according to the Central Statistics Office, while real estate values have plunged by two-thirds, according to Investment Property Databank. The country’s unemployment rate rose to 14.9 percent in June, the highest level since 1994, the statistics office said on July 4.
Espirito Santo estimates that the level of Irish mortgages in negative equity -- where the size of loans are larger than the value of the underlying properties -- rose to 57 percent at the end of last year from 47 percent a year earlier.
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