Irish Life & Permanent plc Annual Report and Financial Statements

Transcription

1 Contents Pages Irish Life & Permanent plc Annual Report and Financial Statements Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements 2009 Contents Overview Financial Performance Highlights 2 The Group at a Glance 3 Chairman s Statement 4 Group Chief Executive s Review 6 Business Review Group Performance Review 8 Divisional Performance Review 20 Risk Management 30 Corporate Responsibility 40 Corporate Governance Board of Directors 42 Directors Report 44 Corporate Governance 50 Directors Report on Remuneration 56 Financial Statements Statement of Directors Responsibilities 64 Independent Auditor s Report 66 Group Financial Statements 68 Notes to the Group Financial Statements 81 Embedded Value Basis Supplementary Information 211

2 Financial Performance Highlights Statutory Basis (EU IFRS) (Loss) / Profit after tax (attributable to equityholders) ( 313m) 49m EPS (Earnings per share) on continuing activities (117 cent) 18 cent Embedded Value ( EV ) Basis Loss after tax (attributable to equityholders) ( 279m) ( 433m) Total EPS 1 (101 cent) (157 cent) Operating profit before impairment of goodwill and tax ( 196m) 341m Operating EPS before impairment of goodwill and tax 1 (66 cent) 111 cent Banking Business New loans issued 1.2bln 7.1bln Lending book 38.6bln 40.1bln Residential mortgage loan book (Ireland) 27.3bln 27.9bln Customer accounts 14.6bln 14.1bln Life and Investment New Business Life new business - APE (Annual premium equivalent) 348m 511m - PVNBP (Present value of future new business premiums) 2,398m 3,152m Life and investment new business - APE 539m 714m - PVNBP 4,306m 5,180m Dividends Final dividend per share Nil Nil Total dividend per share Nil 22.5 cent Capital Ratios Total Tier 1 Capital Ratio Basel II (includes interim capital requirement of 23%) 9.2% 9.2% Life Solvency Cover (times) Including own shares held for the benefit of life assurance policyholders.

3 The Group at a Glance Irish Life & Permanent plc ( ILP or the group ) is a leading provider of personal financial services in the Irish market with strong market positions in life and pensions, fund management and retail banking. The group s activities comprise retail banking under the permanent tsb brand, life assurance and pensions (including bancassurance) under the Irish Life Assurance brand, fund management under the Irish Life Investment Managers brand and General Insurance through its associate company, Allianz. The group was created in 1999 from the merger of Irish Life Assurance, the largest life assurer in Ireland and Irish Permanent, the leading residential mortgage lender. In 2001, the group acquired TSB Bank and merged its business with Irish Permanent. In January 2010, a corporate restructuring programme was completed whereby Irish Life & Permanent Group Holdings plc ( ILPGH ) became the new holding company for ILP. ILP de-listed and ILPGH became the new listed company on both the Irish and London stock exchanges. All shareholdings in ILP were transferred by way of a scheme of arrangement to an equal shareholding in ILPGH. Group Strategy Both the banking and life assurance businesses have developed significantly since the creation of the group in 1999 reflecting the singular focus on the Irish market, strong product offerings and the focus on customer satisfaction. The strong market positions reflect distribution strength with broadly diversified distribution in both banking and life businesses giving the group access to all segments of the market. The group reviews market place developments ensuring it is positioned positively to meet evolving trends, challenges and opportunities. The retail focus of the group s banking activities and the predominantly unit-linked nature of its life and pensions business reduces the risk profile of the group. 99% of the bank s lending is secured, of which 89% consists of residential mortgages. 92% of the life business is unit-linked where the market risk is borne by the policyholder / investor. Banking Business permanent tsb, the group s banking division, provides a full range of retail banking products and services through its nationwide network of branches as well as through intermediaries and directly over the phone and internet. It is a leading provider of residential mortgages and new car finance in addition to current account and retail deposit facilities. Strategically the focus of its banking business is to service the residential owner occupier mortgage and consumer finance credit markets and to offer a wide range of deposit and life assurance products and services into its customer base through its customer acquisition strategy. Life Assurance Irish Life Assurance is the leader in the life and pensions market in Ireland. The business operates a multi-channel distribution strategy for its products and services through its two main divisions, Retail Life and Corporate Life. Of particular importance has been the development of its bancassurance operation which it successfully developed in the permanent tsb network and subsequently extended to a number of other credit institutions with branch networks in Ireland thereby expanding its customer base. Fund Management Irish Life Investment Managers ( ILIM ) is the fund management division of the group. ILIM manages money on behalf of a wide range of institutional and retail, occupational defined benefit and defined contribution pensions, large multinational corporations, charities and domestic companies and is the largest manager of Irish pension assets. ILIM has seen significant growth in funds under management since 1992 reflecting its recognised market product and leadership position. Overview Business Review Corporate Governance Financial Statements 3

4 Chairman s Statement was an exceptionally difficult year for the Irish economy and for our customers whose financial positions are so entwined with that economy. As a result it was a difficult, challenging year for each of our core businesses and for the group as a whole. Regretfully that meant another tough year for our shareholders, customers and staff. The financial performance of the group was dominated by the impact of substantial impairment charges in the bank and the impact of the weaker economy on the life company which meant reduced profits in that division. In total the group reported a loss on both an IFRS and Embedded Value ( EV ) basis of 313 million and 279 million respectively. However, throughout the year important progress was made on adapting the group s key businesses to the new economic circumstances. permanent tsb performed extremely well in the critical retail deposits market and secured an extra 1.8 billion in deposits during the year. Irish Life made progress in tackling what was an emerging problem with persistency (a measure of policy retention) and ILIM continued to dominate the fund management business. All the businesses made progress in reducing their cost bases and resizing for a smaller market. That gives us considerable confidence that the financial performance of the group will be stronger in 2010 than in In the context of the extraordinary challenges in financial markets, the introduction of the Government Guarantee Scheme and the approach being adopted by financial institutions both in Ireland and internationally, the board has proposed that no dividend will be paid for While this is regrettable, it is consistent with the priority to conserve capital in the group in the current economic environment. Board Priorities in a Challenging Market The board s priorities throughout the year were: to set out clear directions for each of the key businesses to ensure that they performed as strongly as possible in the difficult environment which pertained and that they pursued change programmes to ensure that they can perform better in these conditions; to ensure that each of the businesses worked sympathetically with customers in financial difficulty to reach realistic, workable solutions to any problems those customers had; to position the group strongly from a strategic perspective in anticipation of likely consolidation in the financial services industry in Ireland over the coming months; and to implement the findings of the Oliver Wyman report on corporate governance which was undertaken in light of the controversy of February In respect of each of these priorities, important progress was made. Advancing Strategic Agenda The strategic agenda is particularly important for the future of the group. It is clear that we are at a critical juncture for the financial services industry in Ireland. Over the course of the coming months we expect very significant decisions to be taken about the future shape of the industry here. As the largest player in the life and pensions business, the fund management business and the residential mortgage business, we are determined to play an important role in shaping the solutions which emerge. With that in mind, the group undertook a strategic restructuring during 2009 which was completed in early This means that the group has increased flexibility to participate in corporate transactions in the Irish market where we believe they would be in the best interests of our shareholders and other stakeholders. Improving Corporate Governance At last year s AGM I spoke at some length of the controversy which emerged at the start of 2009 surrounding transactions between Irish Life & Permanent plc and Anglo Irish Bank in As we stated clearly at that time, the transactions which took place were wrong and should not have taken place. The board was not advised of the transactions as it should have been and it would not have given permission for them to take place if it had been so advised. Those events led to the swift resignations of three senior executives from the group which was a critical first step in responding to this crisis.

5 Chairman s Statement The board also moved quickly to commission international risk and compliance experts Oliver Wyman to review corporate governance at the group to identify what action was needed to further strengthen our processes and procedures in this area. The board has now fully implemented the proposals made, the key actions included the appointment of a new Group Head of Risk and Compliance, the restructuring of board committees and reporting lines along with the strengthening of risk and control processes throughout the group. Kevin Murphy was appointed as Group Chief Executive in June Kevin is a very experienced executive and has worked with Irish Life, the group s life assurance business, since He was appointed to the board of the group in 1999 and since 2005 has been responsible for the operation of the group s life and pensions businesses. He served as Chief Executive of the group s fund management business between 1993 and Kevin is working closely with the Government, the Regulator and all the other stakeholders alike to manage the challenges in the business and the wider economy. In December 2009 Pat Ryan was appointed to the board. Pat has considerable experience of risk management in financial services combined with professional actuarial qualifications. This means he can bring an unusually relevant insight into the operations of the group which span the life assurance and banking businesses. In March 2010 Bernard Collins was appointed to the board. Bernard has extensive business experience both in Ireland and overseas and will further strengthen our board. Eamonn Heffernan and Liam O Reilly have indicated that they will not be putting themselves forward for re-appointment and thus will retire from the board at the conclusion of the AGM. Both Eamonn and Liam have been valued colleagues and have made important contributions to the board during their tenure. I want to express my appreciation to both of them for their work on the board. National Developments The Government Guarantee Scheme which was extended in December 2009 has been instrumental in retaining the confidence of both retail and corporate customers regarding the security of their deposits with the seven participating financial institutions. This scheme has facilitated the group s funding programme and I wish again to express my appreciation for this continued Government support. Uniquely amongst the institutions covered by the Government Guarantee Scheme, the group is not transferring any assets to the National Asset Management Agency ( NAMA ). We believe this is an important differentiator for the group. We also believe that once the assets begin transferring from the five participating institutions to NAMA, liquidity will increase in the market which will have a positive effect on our group. Outlook Following the completion of our corporate restructuring in January 2010, the group is strategically placed to participate efficiently with any developments in the Irish financial services market during the course of the year. Progress on any corporate developments await the commencement of the NAMA transfer process and the recapitalisation of the participating banks. I believe that 2010 will be a year of challenge and change in the Irish financial services market which the group will actively participate in to secure additional value for all our stakeholders. On the business front, one of our key priorities will be to ensure that all our customers facing difficulties are dealt with sympathetically and that realistic and workable solutions will be found. I believe the investment in change programmes which we pursued in 2009 leave us better placed to compete in this challenging market. We hope in the coming year to make further progress on rebuilding our financial strength and laying the foundation for future success. Finally, on behalf of the board I want to acknowledge the contribution made by the group s management team and that of our hard working staff together with the support of our shareholders in these difficult times. Gillian Bowler Chairman Overview Business Review Corporate Governance Financial Statements 23 March

6 Group Chief Executive s Review 6 Background 2009 was a very difficult year for our customers and our businesses. The defining development during the year was a steep and quick economic correction with GDP falling by close to 8% and unemployment increasing to 12.5% and while the pace of the decline slowed noticeably during the year, it still had a profound effect on our key businesses. In that context, our priority during the year was to support our key businesses as they adapted to this new environment and to drive the changes necessary to allow the group recover in the months and years ahead. In this regard, I believe we have been successful. Group Profitability - IFRS Basis The financial performance of the group is dominated by the cost of provisions made for impaired loans in the lending book of permanent tsb. The group made an operating profit of 68m before provisions for impairment (2008: 245m profit). After provisions for impairment, the group recorded an operating loss of 308m in 2009 (2008: 41m profit). While provisions dominate this result, other factors include lower net interest income due to higher funding costs, lower investment contract fee income due to market movements and negative shareholder property returns. Total group earnings for 2009 fell sharply on a statutory (IFRS) basis with a statutory loss after tax attributable to equityholders of 313m (2008: 49m profit). At the end of the year shareholder funds were 2.0bln (2008: 2.3bln). Group Profitability Embedded Value Basis The pre-tax operating loss for the year on an Embedded Value ( EV ) basis was 196m (2008: 341m profit before the impairment of goodwill). The principal factors in the reduction in EV operating profit were the lower new business contribution and the negative persistency experience in the life business along with the increase in impairment provisions in the banking business and the reduction in net interest income. On an EV basis the loss after tax attributable to equityholders of 279m improved significantly on the 2008 loss of 433m principally resulting from negative short-term investment fluctuations, which, albeit negative, were significantly better than those experienced in Progress in 2009 The overriding focus of the group in 2009 was to drive the changes necessary in the core businesses to allow them compete in this new environment. We made progress in reducing costs in the key businesses and we will continue to drive this agenda in In the life company we took action to address a growing persistency issue in the Retail Life division. This had first emerged as the broader economy weakened in late 2008 and continued through the first half of As a result of our actions we saw the persistency experience improve in the latter half of the year. In the bank, we redirected the sales focus to the retail deposit market which resulted in retail deposit balances growing by 23% on We also moved decisively to increase interest rates on our standard variable rate residential mortgages and some other products in light of the continuing high cost of funds. For 2010, I am looking forward to a significant improvement in the profitability of the life business but I expect 2010 to be another difficult year for the bank. The strategies commenced and completed in 2009 position the group positively to take advantage of the opportunities resulting from the more positive economic outlook for Banking Businesses The principal challenges for the banking business in 2009 were funding, credit quality, cost management and margins. In 2009 the bank successfully re-focused its sales efforts to growing the retail deposit book. We regard this book, coupled with long-term debt, as a stable source of funding for the group. These funds accounted for 48% of the total funding mix in 2009 and are expected to increase to 60% in The increase will be supported by the significant momentum achieved in retail deposit growth in 2009, US $1.75bln long-term debt issued in January 2010 and 2bln long-term debt issued in March The extension of the Government Guarantee Scheme in December 2009 was welcomed by the group and will facilitate the bank s long-term debt agenda over the coming months. We have clearly stated our intention to address our high loan-to-deposit ratio and have made progress on this during the year. At year end that ratio stood at 246% (2008: 271%). Our target for 2010 is to reduce it further to 230% through a combination of deposit book growth and reduced loan balances resulting from the expected lower level of new business volumes in 2010.

7 Group Chief Executive s Review Credit quality and impairments are critical issues for the bank businesses. Arrears in Ireland accelerated in the first half of the year with the significant increase in unemployment, but the rate of increase moderated in the second half of 2009 in line with unemployment levels. The large increase in impairment provisions in 2009 reflects those trends. We expect arrears in our Irish loan book to peak in In our UK business, arrears have fallen since peaking in March. We continue to tightly control costs in the bank which are now 13% lower than the peak. The underlying costs in 2009 were down 10% year on year with headcount down 8%. We have already initiated a number of measures which will see further progress on this agenda including the closure of eleven branches and a reduction in the coming weeks of staff numbers by one hundred and forty full time equivalents. With net interest margins falling in 2009 to 0.83% (2008: 1.05%) permanent tsb re-priced the Irish residential variable rate mortgages in September 2009 and again in February Deposit spreads, which increased in 2009 due to competitive market pressures, are expected to reduce gradually in the market generally in Life Assurance and Fund Management Businesses Irish Life Assurance continues to be the market leader in the life, pensions and investment market in Ireland. Nevertheless, sales declined here in line with the broader market and in light of the weaker economy. Over the year as a whole, APE sales were down 32% year on year at 348m. Retail Life sales performed strongly in the second half of 2009 with the Independent Financial Adviser channel being the most resilient, while Corporate Life sales were impacted by rising unemployment and salary reductions. Sales activity in 2010 will be supported by the repositioning of our product range to reflect the more risk averse needs of our customers. In Corporate Life, the launch of a new lifestyle investment strategy for defined contribution pension schemes will allow the group to actively participate as the market moves from defined benefit to defined contribution pension schemes sales volumes are expected to be flat year on year resulting from the recovery in Retail Life sales being offset by the continuing decline in Corporate Life sales as unemployment and low salary growth continues. The retention agenda progressed successfully in 2009 with a marked improvement in our retention rates in the second half of the year, particularly in Retail Life. Resulting from redundancies in the economy and scheme closures, the growth in Corporate Life s in-force book has slowed. As policies in Corporate Life are not being encashed, the persistency effect on our earnings is less in Corporate Life than in Retail Life. The life businesses had positive mortality and morbidity experience in 2009 resulting in a 23m gain in risk experience variances in our EV earnings. Our fund management business, Irish Life Investment Managers, had a very strong year with inflows of 1.9bln in 2009 and increased its market share to 31.2%. We are now the dominant fund management company in Ireland. Following a significant cost reduction agenda, 2009 saw life assurance underlying costs fall by 10% year on year. This includes a 7% reduction in headcount. This business has now been right-sized for the business flows expected in Capital The bank s capital ratio on a Basel II basis was 9.2% at 31 December 2009 (2008: 9.2%). This compares to a minimum requirement of 8%. The minimum statutory solvency capital requirement of Irish Life Assurance was covered 1.6 times at the year end (2008: 1.6 times). Corporate Activity On 18 January 2010, the group completed a major corporate restructuring whereby Irish Life & Permanent Group Holdings plc ( ILPGH ) became the new holding company for Irish Life & Permanent plc ( ILP ). ILP de-listed and ILPGH became the new listed company on both the Irish and London stock exchanges on this date. All shareholdings in ILP were transferred by way of a scheme of arrangement to an equal shareholding in ILPGH. This was an important exercise in preparing the group to participate in the expected consolidation of the financial services marketplace in Ireland, on which we are likely to see progress this year. Outlook In summary, 2009 was a difficult year. However, we made important progress in addressing key challenges and together with an expected improvement in broader economic conditions in Ireland, we are better positioned for 2010 than for In 2010, I expect the banking businesses results to be broadly similar to 2009 but I anticipate a significant improvement in the life businesses profitability. The foundations built in 2009 should allow the group to face the challenges ahead with confidence. Kevin Murphy Group Chief Executive 23 March Overview Business Review Corporate Governance Financial Statements

8 Group Performance Review The environment in which the group operates remained challenging in 2009 for our customers and our business, with continuing low levels of economic activity and weak consumer confidence. While the worldwide economic upheaval and associated financial crises continued into 2009, the latter half of 2009 saw some signs of improvement both nationally and internationally. Unemployment growth and asset value deflation have impacted the Irish economy significantly and weakened purchasing power along with investor and consumer confidence. These factors lowered new business volumes and margins across all our businesses and resulted in higher impairment provisions on the group s loan portfolios. The group s priority for 2009 was to support the businesses in responding to the changed environment and driving the change needed to allow them to compete successfully. Several initiatives were commenced and completed during 2009 which leaves the group in a better position heading into The group initiated a cost restructuring programme that aligns staffing levels in the life assurance company to current activity projections and the Irish banking business has initiated plans to deliver on the same agenda in The group made progress in addressing the life assurance persistency variance seen in the Retail Life portfolio in the first half of the year. A funding strategy which focuses on maximising stable sources of funding (retail deposits and long-term funding) continues to be pursued in the bank. In response to the increase in the cost of funds, the group increased the cost of variable rate mortgages in September 2009 and again in February 2010 to address the falling net interest margin. Summarised Group Income Statement The group s income statement on an IFRS basis for the years ended 31 December 2009 and 2008 is summarised on a segmental level below: m m Operating (loss) / profit before impairment provisions - Banking Ireland Banking UK Life assurance (15) Fund management Brokerage and third party administration Other 1 (40) (27) Operating profit before impairment provisions Impairment provisions: - Banking Ireland (343) (189) - Banking UK (33) (15) Operating (loss) / profit (308) 41 Share of associate - General Insurance (2) 23 Share of joint venture - Banking Ireland - (1) Taxation (3) (10) (Loss) / profit for the year (313) 53 Group Key Performance Indicators Total tier 1 capital ratio on Basel II basis (%) Life solvency cover (times) Operating profit before impairment provisions on an IFRS basis ( m) Operating (loss) / profit on continuing operations on an IFRS basis ( m) (308) 41 Adjusted operating return on capital employed on an EV basis (%) 2 (7.1) 9.5 Operating (loss) / profit on an EV basis before impairment of goodwill and tax ( m) (196) 341 Shareholder funds per share EV basis ( ) Other includes reconciliations, eliminations and consolidation adjustments as detailed in Note 3 to the Financial Statements. 8 2 The adjusted operating return on capital employed on an EV basis is calculated by dividing the operating profit after tax, excluding share of associate / joint venture (see Note 4 to the EV basis financial statements) by the average shareholder equity for 2008 and 2009 before non-controlling interest and own share adjustment, excluding associate / joint venture and consolidation adjustment (Note 5 to the EV basis financial statements).

9 Group Performance Review The group made an operating profit of 68m before provisions for impairment in 2009 (2008: 245m). The group made an operating loss of 308m in 2009 (2008: 41m profit) after the provisions for impairment. The result for the year is driven by losses in both the banking and life businesses. The banking businesses loss reflects a higher impairment provision charge and lower net interest income arising principally from higher funding costs. The group s life businesses loss results from negative shareholder property returns, lower fund management and investment contract fee income and the reduction of the value of in-force insurance business principally arising from the change in the risk discount rate. IFRS EV m m m m Insurance and investment business Banking (270) 30 (270) 30 Other* (26) 5 (26) 5 (203) 323 (194) 319 Share of associate / joint venture (2) 22 (196) 341 Impairment of goodwill - (170) - (170) EV operating (loss) / profit (196) 171 Short-term investment fluctuations (73) (190) (68) (640) Effect of economic assumption changes (22) 89 (38) 105 Other IFRS consolidation adjustments (10) (11) (17) - Operating (loss) / profit before tax (308) 41 (319) (364) Share of associate / joint venture (2) 22 Following various restructuring programmes in the group, costs fell year on year by 10% excluding restructuring / non-operational costs of 45m. Including restructuring / non-operational costs in 2009, costs fell 4% year on year to 568m. The 2009 result includes a charge of 18m (2008: 86m gain) in respect of the uplift in the value of Irish Life & Permanent shares held for the benefit of policyholders and also includes a gain of 7m (2008: 12m) in respect of the fall in value of owner occupied buildings held for the benefit of policyholders. These movements impact policyholder liabilities but under IFRS the corresponding movement in the asset is not recognised in the income statement. The following table restates the group s IFRS income statement in a format that is comparable to the embedded value income statement shown in the Supplementary Information for the years ended 31 December 2009 and 2008: (Loss) / profit before tax (310) 63 (319) (364) Taxation (3) (10) 40 (65) (Loss) / profit after tax (313) 53 (279) (429) Attributable to: - Owners of the parent (313) 49 (279) (433) - Non-controlling interest (313) 53 (279) (429) Overview Business Review Corporate Governance Financial Statements *Other includes unallocated corporate costs and the income from brokerage and third party administration subsidiaries. 9

10 Group Performance Review Operating Results on Continuing Operations Banking Businesses Operating Results The banking operating loss for 2009 of 270m, compared to a profit of 30m (before impairment of goodwill) in 2008, was principally due to an increase in impairment provisions reflecting the deteriorating macroeconomic conditions in Ireland and to lower net interest income due to higher funding costs. The Republic of Ireland business accounted for 266m of this loss with the UK banking business accounting for 4m of the loss. The net interest margin 3 fell to 83 basis points ( bps ) (2008: 105bps) as a result of the higher funding costs in both the wholesale and retail markets. This resulted in net interest income falling from 473m in 2008 to 375m in An asset re-pricing strategy has seen a 50bps increase applied to Irish standard variable rate mortgages in September 2009 and a further 50bps increase was applied in February Net interest income includes a credit of 7m in relation to deferred acquisition costs; this incorporates a credit arising from the reassessment of expected cash flows from mortgages due to the lower redemption rate experienced in the portfolio in This helped offset the negative impact of mismatches which arose between the fees charged on fixed rate mortgage switches and the cost of closing fixed rate positions in the early part of 2009 (impact on net interest income was circa 30m). A provision was made during 2009 in relation to outstanding settlements on certain closed derivative contracts (impact on net interest income was 15m). The cost of the Government guarantee for the four months ending December 2008 was 8m and this increased to 29m for the twelve months ending December The provision for impairment on loans and receivables was 376m (2008: 82m). This charge consists of a specific provision charge of 213m (2008: 16m) and a collective / incurred but not reported provision ( IBNR ) charge of 163m (2008: 66m). This brings the provision coverage 4, net of write-offs, to 1.2% at the end of 2009 (2008: 0.3%) included a provision for impairment on debt securities of 122m. During 2009, resulting from the continued focus on cost management; the aggregate banking businesses were successful in reducing their costs by 7%. Excluding restructuring / non-operational costs, the cost base fell 10% year on year. The bank has announced a further efficiency programme to be concluded in 2010 with the amalgamation of eleven branches and further reductions in staffing levels. These actions will lead to further cost reductions in Life Assurance and Fund Management Operating Profit The group s life assurance and fund management divisions made an operating profit (before shortterm investment fluctuations ( STIFs ) and economic assumption changes) of 93m for 2009 (2008: 288m). This fall in profits reflects investment contracts and fund management fees falling by 45m year on year due to lower fund balances in 2009 resulting from a fall in markets in The change in shareholder value of in-force (net of short-term investment fluctuations and economic variances) fell by 101m year on year mainly due to lower insurance sales and poor persistency. Also included in the operating profit was the fall in the shareholder expected return of 18m and the increase of 18m in exceptional expenses principally due to the life restructuring costs. Resulting from the economic downturn, 2009 saw an increase in surrenders and withdrawals as investment markets continued to fall and economic conditions worsened. The adverse persistency resulted in a combined negative experience variance and assumption changes of 26m in the 2009 IFRS earnings (2008: 7m positive). With the assistance of a new persistency infrastructure, the Retail Life business has seen persistency improve in the latter half of 2009 while it is expected that Corporate Life will see persistency experience moderate in A restructuring programme in the life assurance and fund management businesses has been successfully completed resulting in a 10% fall in operational costs excluding restructuring / non-operational costs. Life assurance new business written (excluding investment sales for Irish Life Investment Managers, ILIM ), was 348m (2008: 511m) on an APE basis. The decrease was due to the 36% and 30% reduction in Retail Life and Corporate Life sales respectively. In the 2009 statutory profits, new business contribution was 2m negative, compared to a nil contribution in ILIM full year sales of 191m (2008: 203m) were 6% behind the same period last year. 3 Net interest margin is the ratio of net interest income and the average interest earning assets for the year Provision coverage is the ratio of the year end loans and receivables to customers balance (before impairment provision and deferred fees, discounts and fair value adjustments) and the impairment provision balance.

11 Group Performance Review Life Assurance and Fund Management STIFs and Economic Assumption Changes In 2009, STIFs were 73m negative compared to 190m negative in This result includes a loss of 18m (2008: a gain of 86m) in respect of the movement in the year on the value of own shares. These are shares in the company held in policyholder funds entirely for the benefit of policyholders. Under IFRS, the increase in policyholder liabilities as a result of the rise in value of the shares is recognised as a loss but the corresponding rise in value of the asset is not included. The STIFs also include the negative impact resulting from the direct shareholders exposure to property investment (excluding losses on owner occupied properties) of 64m (2008: 55m). Economic assumption changes were 22m negative in 2009 compared to 89m positive in 2008 principally due to the increase in the risk discount rate from 7.0% to 7.5% as a result of the increase in Irish medium-term gilt yields. General Insurance Operating (Loss) / Profit The group s share of the loss in Allianz, (a general insurance business in which the group has a 30% interest) was 2m (2008: 23m profit). A negative underwriting result in 2009 includes negative claims experience in the last quarter resulting from adverse weather conditions at the end of the year. The 2009 performance also includes restructuring costs. Allianz made a dividend payment to the group of 15m in 2009 (2008: 30m). Brokerage and Third Party Administration Operating Profit In 2009, the operating profit on this business segment of 4m (2008: 21m) was impacted by the impairment charge on property and intangibles of 4m (2008: nil) and the lower level of life assurance sales resulting from pay cuts in the public service. Operating Results on an Embedded Value Basis The falls in property markets, increase in unemployment and the continuing dislocation in credit markets significantly impacted the year end valuation of the group s banking and life businesses resulting in the loss after tax, on an Embedded Value ( EV ) basis, of 279m (2008: 429m loss after tax) attributable to equityholders. At operating level, the group s pre-tax loss was 196m for 2009, compared to a profit in 2008 of 341m (before the impairment of goodwill of 170m). Short-term Investment Fluctuations The continued impact of weak property markets on the embedded value of the group s life business has resulted in negative short-term investment fluctuations of 68m in Albeit a negative variance, there was a significant improvement on 2008 s negative fluctuation of 640m. The charge principally resulted from the fall in the value of shareholder property holdings of 97m (2008: 128m negative) and negative movement in the cost of financial options and guarantees of 15m (2008: 62m negative) being offset partially by the positive market effect on unit-linked management fees of 50m (2008: 383m negative). Economic Assumptions The effect of revised economic assumptions was a negative 38m in 2009 (2008: 105m positive). This movement includes the effect of the increase in the risk discount rate from 7.0% to 7.5% as a result of the increase in Irish medium-term gilt yields. Return on capital employed Total embedded value for the group for 2009 fell 10% to 2.5bln (2008: 2.8bln). The adjusted operating return on capital employed on an EV basis for the group (excluding associate / joint venture, non-controlling interest and own share adjustment) was 7.1% negative (2008: 9.5% positive). Overview Business Review Corporate Governance Financial Statements 11

12 Group Performance Review Summarised Group Statement of Financial Position The group s consolidated statement of financial position for the years ended 31 December 2009 and 2008 are summarised below: IFRS Basis EV Basis m m m m Assets Financial assets 32,228 24,761 32,228 24,761 Loans and receivables to customers 38,592 40,075 38,592 40,075 Loans and receivables to banks 4,925 4,775 4,925 4,775 Shareholder value of in-force business ,076 1,080 Other assets 3,546 3,951 3,476 3,831 Total assets 80,021 74,349 80,297 74,522 Liabilities and equity Deposits by banks 18,713 18,546 18,713 18,546 Customer accounts 14,562 14,118 14,562 14,118 Debt securities in issue 13,262 10,899 13,262 10,899 Investment contract liabilities 24,032 21,118 24,060 21,110 Insurance contract liabilities 4,034 4,007 4,034 4,007 Other liabilities 3,412 3,313 3,181 3,066 Equity including non-controlling interest 2,006 2,348 2,485 2,776 Total liabilities and equity 80,021 74,349 80,297 74,522 Loans and Receivables to Customers permanent tsb is focused predominantly on retail lending with 99% of its loan portfolio secured on assets, 89% of which consists of residential mortgages. As a result of adopting a low risk approach to its lending activities, the group is not engaged in business, corporate or property development lending and as a consequence the group is not transferring any loans to the National Asset Management Agency ( NAMA ). The bank continued to focus during 2009 on its core customer lending franchises residential mortgages for owner occupiers and consumer finance in Ireland. Due to the uncertainty with regard to residential property prices, the associated lower transaction volumes and the tightening of credit criteria across all loan products, total loans and receivables to customers of 40.1bln at the end of 2008 fell during the year by 4% to 38.6bln. The loans and receivables to customers balance over principal business lines for the years ended 31 December 2009 and 2008 are summarised as follows: Gross Lending m m ROI residential lending 27,256 27,931 UK residential lending 7,484 7,171 Consumer finance 1,749 2,381 Commercial lending 5 1,939 1,978 Other ,639 39,813 Provision for loan impairment (477) (139) Deferred fees, discounts and fair value adjustments Total lending 38,592 40, Commercial lending excludes loans of 447m (2008: 425m) to the group s life assurance operations including loans held for the benefit of unitlinked policyholders.

13 Group Performance Review Credit Quality A summary of the credit quality of total loans and receivables to customers under the rating system 6 applied by the group is outlined in the following table: Change m m % Neither past due nor impaired Excellent risk profile 23,841 27,458 (13) Satisfactory risk profile 7,885 7,567 4 Fair risk profile 2,877 2, ,603 37,268 (7) Past due but not impaired 3,208 2, Impaired ,036 2, Total loans and receivables to customers 38,639 39,813 (3) Loans classified as past due but not impaired and impaired increased by 59% year on year while loans rated with an excellent risk profile fell by 13%. This reflects the deteriorating trends in economic activity and employment. Further details are available in Note 34 Financial Risk Management. A summary of the loans and receivables impairment provision balances for 2009 and 2008 are outlined below: Specific Collective Total Specific Collective Total m m m m m m As of 1 January Charge to Income Statement Other 7 (9) (29) (38) (5) (13) (18) Following an increase in arrears numbers and falling property values, impairment provisions increased by 338m year on year to 477m, with specific provision increases accounting for 204m of this increase. These provisions represent 58% of the impaired loan balances at the end of 2009 (2008: 69%). This level of provisioning is regarded as appropriate with the majority of the portfolio being secured on assets. The collective / IBNR provision has increased by 134m. The higher charge reflects the fact that collective / IBNR provisions have been provided across all portfolios in acknowledgement of the deterioration of the economy. Future Loan Impairments The group estimates future levels of loan impairments by modelling the bank s loan book against a range of economic assumptions. Increased levels of unemployment, negative GDP growth and falling house prices are the key drivers of impairment and provisioning. Current estimates for the three years ending 2011 indicate an aggregate impairment provision in the range 800m to 900m of which 376m was charged in Overview Business Review Corporate Governance Financial Statements 6 The group uses the 25-point Basel II scale for the internal ratings approach ( IRB ) for credit risk. 7 Other movements comprise amounts written off during the year together with exchange movements. 13

14 Group Performance Review Loans and Receivables to Banks Loans and receivables to banks year on year remained stable at 4.9bln (2008: 4.8bln). At the end of 2009 the balance included 2.5bln (2008: 2.0bln) repayable on demand. Financial Assets The following table provides further analysis on financial assets, on an IFRS basis, for the years ending 31 December 2009 and 2008: Financial Assets m m Debt securities 15,780 10,929 Equity shares in units and unit trusts 13,510 10,390 Derivative assets 1,169 1,162 Investment properties 1,769 2,280 Total 32,228 24,761 Debt Securities The growth in debt securities of 44% to 15.8bln at the end of 2009 includes the 4.5bln increase in securities classified as available for sale. Government bonds account for 66% of the 2009 balance (2008: 59%). The change in value of available for sale ( AFS ) financial assets at 31 December 2009 was 42m positive (2008: 43m negative) which, in accordance with the IAS 39 accounting treatment applied to AFS assets, was taken into other comprehensive income. Included in debt securities is the bank s asset portfolio of 7.4bln. This is principally held in sovereign bonds (48%), highly rated bank Floating Rate Notes (44%) and prime (non-us) euro denominated Residential Mortgage Backed Securities ( RMBS ) (8%). There are no sub-prime assets held within the portfolio. The portfolio is rated 33% AAA, 54% AA, 10% A and 3% BAA/BA/B. rates. This is due to the fact that the non-linked insurance and investment liabilities and the shareholder value of in-force are calculated using assumptions regarding investment returns and interest rates. To the extent that actual returns and interest rates differ from the assumptions used, variances will arise, which may be positive or negative. The group s life business is a relatively low risk operation. Its unit-linked portfolio of 24bln represents 92% (net of reinsurance) of the life assurance and fund management businesses contract liabilities. The unit-linked investment risk is primarily borne by policyholders. In the non-linked insurance and investment portfolio, the group s policy is to match liability flows with high quality assets, principally sovereign bonds. The average duration of the non-linked liabilities is 9.9 years while the average duration of the assets matching these liabilities is 9.8 years. The credit profile of the fixed-rate securities held in the non-linked portfolio is as follows: Credit Profile % % AAA AA 22 9 A The increase in AA rated securities reflects the impact of the downgrading of sovereign bonds held in the portfolio year on year. Given the close duration match of assets and liabilities, any mark to market adjustments in the portfolio due to changes in yield curves are generally matched by equal and opposite movements in the value of the liabilities. 14 The balance of debt securities, 8.4bln, is held at fair value through the profit or loss in the life assurance and fund management businesses. Unit-linked funds account for 6.6bln of this balance while 1.8bln is held in non-linked funds at the end of Equity Shares and Units in Unit Trusts Shares and units in unit trusts are held in listed and unlisted entities and are all designated as fair value through profit or loss. 99% of these balances are held in unit-linked funds on behalf of policyholders. Life Asset Portfolio The value of the group s life operations is exposed to market movements in assets, currencies and interest The life company s shareholder funds of 566m are principally invested in cash and owner occupied property. An analysis of the life shareholder fund investments as at 31 December 2009 is set out in EV supplementary information Note 5. Investment and Insurance Contract Liabilities The increase in investment contract liabilities during the year includes premium receipts of 3.4bln (2008: 4.3bln) and market movements of 2.5bln (2008: 7.7bln negative) being offset partially by 2.9bln (2008: 2.8bln) in claims. Insurance contract liabilities, which are 73% non-linked (net of reinsurance), remained constant year on year at 4bln ( 2.2bln net of reinsurance).

15 Group Performance Review Funding and Liquidity The global economy and financial system continued to experience turbulence and uncertainty during While funding conditions improved over the course of the second half of the year, the terms on which such funding was secured remained onerous and expensive when compared with the terms available historically. This impacted the profitability of the group s banking operations. The regulatory protocol, under which the group operates, requires levels of liquidity based on various cash flow stress tests. The key limits applied are that an institution must have sufficient available liquidity to cover 100% of outflows over the next eight days and 90% of outflows over the coming 9 30 days. As a consequence of the industry-wide wholesale funding difficulties experienced during the first half of 2009, the Financial Regulator agreed to a temporary easing of the liquidity requirements noted above. This easing applied from April to September The standard liquidity requirements applied again since September 2009 and the group operated comfortably within these limits. In early 2009, the group discovered it had inadvertently breached a regulatory reporting requirement and promptly notified and co-operated with the Financial Regulator. The Financial Regulator investigated the matter and entered a settlement agreement with the company. On reaching that agreement, the Financial Regulator acknowledged that Irish Life & Permanent had co-operated fully and had been open and transparent throughout the process and that the company had taken prompt and complete remedial action to fully rectify the breaches. The company was reprimanded for the incident and paid a penalty of 600,000. The matter is now closed. The bank s total funding is well diversified across markets as shown below: Funding Profile % % Customer accounts Long-term debt Short-term debt At 31 December 2009, 60% of the bank s funding comprised customer accounts and long-term debt, down slightly from 62% at the start of the year. At 33%, customer accounts reflected a year on year increase of 23% in retail deposits and a decrease of 12% in corporate deposits. The latter reflected an outflow of overseas deposits in early 2009 which were replaced to a large extent by domestically sourced funds. The success in growing the retail deposit base resulted in a higher cost of funding given the highly competitive nature of the deposit market during the year. The bank is working towards having 70% of funding sourced through retail deposits and long-term funding in the medium term. The loan-to-deposit ratio at the end of 2009 was 246%, an improvement on the 2008 ratio of 271%. The group continues to work to reduce this ratio. Short-term Debt The group has a pool of collateralised assets that are capable of being used as security with a range of counterparties including the European Central Bank ( ECB ). During 2009, an element of assets was used as security for ECB drawings with an average level of drawings for the year of 10.9bln (2008: 7.9bln). The maximum level of drawings during 2009 was 13.5bln (2008: 14.4bln) while drawings at 31 December 2009 were 9.8bln (2008: 11.8bln). ECB drawings, reported in the statement of financial position as deposits by banks, are included in the short-term debt portfolio. Customer Accounts and Deposits In 2009 through a process of leveraging the group s distribution channels in both the bank and life company as well as launching a range of competitively priced products, customer accounts increased to 14.6bln in 2009 from 14.1bln in Retail deposits proved to be a stable and resilient funding source, despite the intense competition in the marketplace. Retail customer account balances increased by 23% ( 1.8bln) year on year to 9.9bln at end Corporate deposit balances at end 2009, including deposits held for the benefit of unit-linked policyholders, were down 12% year on year at 5.8bln, reflecting the outflow of overseas deposits in the early part of 2009 and strong growth in Irish deposits thereafter. Term Funding Notwithstanding the group s focus on deposit growth, the duration of the assets on the balance sheet is such that the appropriate management of duration risk requires that a significant portion of the group s funding should be long term. 15 Overview Business Review Corporate Governance Financial Statements

16 Group Performance Review Funding and Liquidity (continued) The Credit Institutions (Financial Support) Scheme 2008 (the Scheme ) and the Credit Institutions (Eligible Liabilities Guarantee) Scheme (the ELG Scheme ) have been critical in providing Irish financial institutions with access to funding. During the course of 2009, the group successfully secured term funding of 3bln from international investors under the Scheme which expires on 29 September The ELG scheme, which Irish Life and Permanent plc and its subsidiary Irish Permanent (IOM) Limited joined on 4 January 2010, facilitates debt issuance for terms up to five years. These schemes, coupled with improving investor sentiment towards Ireland, enables the group to secure longer term funding, as evidenced by the issuance under the ELG Scheme of a 3-year US $1.75bln bond in January 2010, and a 5-year 2bln in March Further issuance under the ELG Scheme will take place over the course of 2010, which will increase the proportion of long-term funding. The group will also continue to explore alternative term funding opportunities in the senior unsecured and securitisation markets which would contribute to the management of duration risk. Credit Ratings At 31 December 2009 the group was rated BBB+ by Standard & Poor s and A2 by Moody s Investor Service. Capital Management The group has a flexible capital structure with the ability to improve and strengthen its capital base over the next few years. The group s core capital objective is to meet or exceed all relevant regulatory capital requirements and to hold sufficient economic capital to withstand a worst case loss in economic value due to risks arising from business activities. The worst case loss is derived through statistical models influenced by the group s target debt rating. Capital Resources The group s capital resources, on an IFRS basis, as at 31 December 2009 and 2008 are as follows: m m Shareholders equity 2,006 2,347 Non-controlling interest - 1 Undated loan capital Dated loan capital 1,117 1,111 Total capital resources 3,650 4,047 Regulatory Capital The group is regulated by the Irish Financial Services Regulatory Authority ( Financial Regulator ) which sets and monitors regulatory capital requirements in respect of the group s operations. While there are a number of regulated entities within the group which have individual regulatory capital requirements, the two principal regulated entities are Irish Life & Permanent plc, the group s banking operation (trading as permanent tsb), and Irish Life Assurance plc, the group s principal life assurance operation. Regulatory capital is the level below which the group s capital must not fall. The group s policy is to manage the capital base so as to meet all regulatory requirements while maintaining investor, creditor and market confidence and ensuring that there is adequate capital to support future growth in the business. In addition, the relationship between the level and composition of regulatory capital and the shareholders return on capital is monitored to ensure that there is an appropriate balance between equity and debt capital within the overall regulatory capital held. The group manages its capital base through its Internal Capital Adequacy Assessment Process ( ICAAP ). The Irish Life & Permanent ICAAP is designed to allow capital requirements to be risk-weighted and to fully reflect the risk profile and appetite of the group. The ICAAP incorporates a detailed process to identify all material risks for the group and ascertain whether they are to be addressed through management or mitigation (or a combination of the two) and whether capital is required to be held against each risk. The regulatory capital requirement follows existing European capital requirement directives as established under EU legislation. Regulatory capital adequacy is established via comparison of risk-weighted assets and their associated minimum total capital requirements (currently established as 8% of risk-weighted assets), with the regulatory available capital resources of the group. Bank Capital From 1 January 2008, the minimum regulatory capital requirement of the group s banking operations has been calculated in accordance with the provisions of Basel II as implemented by the European Capital Requirements Directive and the Financial Regulator. 16 Resulting principally from the 2009 loss after tax of 313m, total capital resources fell by 397m during the.

17 Group Performance Review The group s capital ratios, after applying the interim capital requirement, remained strong at 31 December 2009 with a Tier 1 and total capital ratio of 9.2% (2008: 9.2%) compared to a regulatory minimum of 8%. The capital base has no Tier 1 hybrid capital in the structure and the Tier 2 capital is only 30% of that permitted under the regulations. The following table sets out the regulatory capital position of Irish Life & Permanent on a Basel II basis at 31 December 2009 and 2008: Available Capital m m Tier 1 capital 3,938 4,174 Tier 2 capital Subordinated liabilities 1,167 1,230 Other ,200 1,311 Tier 1 + Tier 2 5,138 5,485 Life company and other deductions (3,280) (3,426) Total available capital (Tier 1) 1,858 2,059 Required Capital m m Pillar 1 1,313 1,454 Interim capital requirement ( ICR ) at 23% Total required capital 1,615 1,788 Excess own funds Total risk-weighted assets before ICR 16,411 18,173 Total risk-weighted assets after ICR 20,185 22,353 Risk asset ratio (all Core Tier 1) Before the application of the ICR 11.3% 11.3% After the application of the ICR 9.2% 9.2% Basel II The objective of Basel II is to align bank regulatory capital more closely with the economic capital required to support the risks being undertaken. The capital required to cover credit, operational and market risks is required to be explicitly measured under the Basel II methodology. In implementing Basel II, the group has adopted the Internal Ratings Based ( IRB ) approach to credit risk and was awarded IRB accreditation in late Under the IRB approach, the bank uses internally generated risk models to compute the capital required to support credit risk by calculating the probability of default ( PD ) and the loss given default ( LGD ) in all of its various portfolio exposures. The capital requirement for operational risk is calculated according to the standardised approach, in which all of the institution s activities are divided into eight standardised business lines: corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management and retail brokerage; with individual operational risk weightings applicable to each. Value at risk, an industrywide practice, is the methodology which the group has adopted in regard to the measurement of capital required to support market risk. Under Basel II, as outlined in the above table, riskweighted assets ( RWA ) reduced by 10% from 18.2bln in 2008 to 16.4bln in The group s available capital reduced to 1.9bln giving an end 2009 capital ratio of 11.3% (2008: 11.3%). The 11.3% capital ratio compares with a Basel II regulatory minimum of 8%. 17 Overview Business Review Corporate Governance Financial Statements

18 Group Performance Review Bank Capital (continued) The Pillar 2 capital requirement under Basel II has yet to be determined. In the meantime an interim capital requirement ( ICR ) is applied equal to 23% of Pillar 1 RWAs. Adding this ICR reduces the capital ratio to 9.2%, versus the regulatory minimum of 8%. The application of the ICR effectively prevents a release of capital. However, it is the group s expectation that the Pillar 2 capital add-on will be less than the ICR and will give a capital ratio somewhere between the 11.3% and 9.2%, versus the regulatory minimum of 8%. The group continues to review developments and proposals issued by the Basel Committee on Banking Supervision in order to ensure that it remains appropriately capitalised and prepared for any additional requirements adopted by the EU. Life Capital Irish Life Assurance plc ( ILA ) operates to an internal target solvency cover of 1.6 times the minimum required (2008: 1.6 times). The group considers this to be an appropriate level of capital to manage the business having regard for the basis of calculating liabilities and the insurance and operational risks inherent in the underlying products. The solvency cover for Irish Life Assurance plc, the group s main life assurance operation, at 31 December 2009 is 1.6 times (2008: 1.6 times) the minimum requirement of 416m (2008: 410m). This is summarised below: Solvency Cover m m Minimum capital Regulatory capital Net worth Perpetual debt Other assets available Inadmissible assets (108) (104) The table below sets out the movement in life regulatory capital in 2009 and 2008: m m As at 1 January Capital generated from existing business New business strain (74) (88) STIFs and economic variances (106) (228) Bank dividend (13) (15) Other (10) (2) As at 31 December In 2009, the existing book of life assurance business generated cash flows of 194m compared with 377m in Both the new business strain and the net capital generated were helped by the 22m (2008: 125m) new business strain reinsurance arrangement which was put in place at the end of This arrangement reduced the new business strain by 44m (2008: 59m) and impacted by capital generated from existing business 22m negative (2008: 66m positive). In 2009, the negative STIFs and economic variances of 106m (2008: 228m) were largely due to the tangible asset valuation reductions which the group suffered on property assets and debt securities. In line with the group s capital management policy, whereby all surplus capital above targeted minimum levels is remitted to the group, ILA paid a dividend of 13m (2008: 15m) to the bank holding company. Solvency II The calculation of minimum regulatory capital for the life assurance business is currently based on the EU Solvency I Directive. New requirements will be established under the Solvency II Directive which was formally adopted in 2009 and is expected to be implemented in Solvency II will require the calculation of solvency and reserving requirements on a realistic market consistent basis. Given the low risk nature of its life business, on the introduction of Solvency II the group expects to achieve a significant reduction in the reserves required to support its insurance and investment contract liabilities (December 2009: 26bln net of reinsurance) which would result in an increase in the statutory capital surplus. In light of the expected increase in available capital resources, the group believes it is reasonable to seek to access a limited part of this capital increase at this stage. The group is in discussion with the Financial Regulator and an international bank with a view to securing a value of in-force facility of 200m. 18

19 Group Performance Review Reinsurance Treaty In November 2008, the group finalised the terms of a stop-loss reinsurance treaty in relation to new business with Swiss Re, which will reduce the new business strain in ILA over the next three years. As a result of this treaty ILA s capital requirements for 2009 were reduced by 22m (2008: 125m). Dividend In the context of the extraordinary challenges in financial markets, the introduction of the Government Guarantee Scheme and the approach being adopted by financial institutions both in Ireland and internationally, the board have proposed that there will be no dividend for This approach is consistent with the priority to conserve capital in the group in the current economic environment. This compares to a total dividend per share in 2008 of 22.5 cent. Overview Business Review Corporate Governance Financial Statements 19

20 Divisional Performance Review Banking Operating Review Banking Key Performance Indicators Operating (loss) / profit before impairment of goodwill and tax ( m) (270) 30 Banking margin (bps) Impairment provision balance ( m) Lending book ( bln) Total Tier 1 ratio after ICR (%) Retail deposits balance ( m) 9,889 8,047 Customer satisfaction index (%) In 2009 the group s banking businesses faced significant challenges and, for the Irish business in particular, continued to be adversely affected by the deterioration in the Irish economy, lower consumer confidence, transaction volumes and falling property prices. Resulting from the decision to concentrate on protecting the group s key Irish mortgage and consumer franchises together with the general slowdown in the Irish housing market, overall gross new lending in 2009 fell 84% to 1.2bln from 7.1bln in Total loans and receivables fell by 4% in 2009 to 38.6bln compared to 40.1bln at 31 December Notwithstanding the deterioration in the Irish economy, the bank s customer acquisition strategy continued to be successful in 2009 with the bank using its sales strengths to re-focus its efforts in growing retail deposits. Retail deposit balances increased 23% on 2008 to 9.9bln at the end of During the year, the bank continued to focus on its customer service ethos through its Customer Central programme. In 2009, permanent tsb s customer satisfaction index score reduced slightly from 82.7% to 82.5% Net interest margin 8 ( NIM ) for the year declined to 83 basis points (bps) from 105bps for the full year This resulted in net interest income falling 21% to 375m for 2009 from 473m for This fall principally reflects the higher funding costs associated with the sharp rise in the marginal cost of attracting retail and corporate deposits as well as the cost of refinancing maturing wholesale debt. This pressure was partially offset by the higher asset margins on the Irish mortgage business facilitated by the re-pricing of standard variable rate mortgage products during the year. Net interest income includes a credit of 7m in relation to deferred acquisition costs; this incorporates a credit arising from the reassessment of expected cash flows from mortgages due to the lower redemption rate experienced in the portfolio in This helped offset the negative impact of mismatches which arose between the fees charged on fixed-rate mortgage switches and the cost of closing fixed-rate positions in the early part of 2009 (impact on net interest income was circa 30m). The fall in the net interest margin to 83bps is detailed in the following table: bps Funding costs (18) Liability margins (17) Asset margins 21 Other (8) Portfolio Growth As a result of the unprecedented liquidity conditions in the financial markets, coupled with the economic decline in the bank s core markets, the bank continued to adopt a cautious approach to new lending and balance sheet growth in 2009 and focused on the bank s core customer lending franchises - residential mortgages for owner occupiers and consumer finance - in Ireland. All other lending was suspended. The change in the balances over principal business lines was as follows: Gross Lending m m ROI residential lending 9 27,256 27,931 UK residential lending 6.6bln (2008: 6.8bln) 9 7,484 7,171 Consumer finance 1,749 2,381 Commercial lending 10 2,386 2,403 38,875 39,886 Money market funds Deferred fees, discounts and fair value adjustments ,516 40,639 Inter-group loans and receivables (447) (425) Impairment provisions (477) (139) Total lending 38,592 40,075 8 Net interest margin is the ratio of net interest income and the average interest earning assets for the year Including securitised mortgages. 10 Commercial lending includes loans of 447m (2008: 425m) to the group s life assurance operations including loans held for the benefit of unitlinked policyholders.