AIB bad debts soar, "bad bank" seen to the rescue

Allied Irish Banks (AIB) reported a surge in interim bad debts on Wednesday and said it was impossible to call their peak but investors shrugged off the uncertainty, pushing shares in the lender up 6 percent.

One in four of AIB's loans are now either impaired or at risk compared to around one in ten at the end of last year as Ireland's spectacular property crash lays bare the lender's exposure to struggling developers.

Dublin is setting up a "bad bank" to remove risky property assets from the Irish financial sector and hopes that this would mark a turning point for AIB, along with an operational performance broadly in line with expectations, fuelled AIB's stock.

"People are looking past today's numbers to the "bad bank", that's the next catalyst," said one Dublin-based dealer.

"Operationally, they have done a good job, they have taken their costs down and their margins are better than we had been expecting. If they hadn't written any bad loans they would have done a pretty good job, performance wise."

But that view was not universal.

"Maybe people are looking at it like three out of four borrowers are able to service their debts, like the glass is half full," said Oliver Gilvarry, head of research at Dolmen Stockbrokers in Dublin.

"But I'm not buying it. The results are quite poor and there's no real guidance that it's not going to get any worse."

After swallowing a 2.37 bn euros ($3.41 bn) bad debt charge in the first half, Allied Irish stuck to its full-year guidance for loan loss provisions of 4.3 bn euros but admitted that with the Irish economy set to be the worst performer in the west this year, the risks were on the downside.

Relieving banks

In contrast, British bank Lloyds said its impairments were likely to have peaked.

Allied Irish's Finance Director John O'Donnell admitted that AIB's full-year guidance would be torn up once the government decides what sort of discount it will demand for relieving banks of their risky property assets via the state-run National Asset Management Agency (NAMA).

"If NAMA happens it is no longer a relevant number," he said in an interview with Reuters.

Allied Irish Banks will transfer around 16 billion euros of land and development loans and an undisclosed amount of associated loans over to NAMA this year and next.

Analysts have said a total of between 20-25 billion euros of assets will likely be transferred by AIB and depending on the discount, it may have to seek an injection of state funds, on top of a possible sale of its Polish and U.S. businesses.

At 0910 GMT, shares in Allied Irish were up 6.35 percent at 1.825 euros, outperforming a flat general index

Inerim pretax loss

Despite a large gain from a bond swap, Allied Irish Banks reported an interim pretax loss of 872 mln euros compared with a 1.3 bn euros profit a year ago as the bad debt charge ate into its bottom line.

Excluding a 623 mln euros boost from the bond swap, the lender would have reported a pretax loss of 1.5 bn euros.

Analysts polled by Reuters were expecting a pretax loss, pre-exceptionals of 1.3 bn euros, although the range of forecasts was broad.

Four analysts had, on average, expected the bank to unveil a bad debt charge of 2.2 bn euros.

Allied said it expected the operating environment this year to remain extremely difficult amid weak demand, increased competition for deposits and higher funding costs.

Allied Irish Banks boosted its capital base by 1.1 bn euros through a bond swap earlier this year and chief executive Eugene Sheehy, who is set to resign once a successor is appointed, has said he is confident they will raise a further 400 mln euros without having to sell any overseas businesses.