Going Concern

The financial information has been prepared on the going concern basis. In making its assessment of the group’s ability to continue as a going concern, the Board of Directors has taken into consideration the significant economic, political and market risks and uncertainties that currently impact Irish financial institutions and the group. These include the continuing ability to access funding from the Eurosystem including the Irish Central Bank to meet liquidity requirements and the ability to raise additional capital to meet required regulatory capital ratios.

The directors, having regard to these uncertainties and the terms of the EU/IMF memorandum of understanding (which indicates that the Irish Authorities will ensure that Irish Life & Permanent Group Holdings plc is capitalised to a level of 12% core Tier 1 capital by end May 2011) are satisfied that it continues to be appropriate to prepare the financial statements of the group on a going concern basis as:

• the Government has acknowledged the group’s systemic importance and the actions of the Government to date indicate that it will continue to support the Irish financial system given its importance to the continued functioning of the Irish economy generally;
• the group’s access to liquidity and funding in particular the availability of Eurosystem funding and Central Bank liquidity facilities will enable it to meet its immediate and estimated funding requirements for the coming year;
• the Government has indicated that it will ensure the group is capitalised to a level of 12% Tier 1 capital if required; and
• it is expected that the group will continue to meet its current regulatory capital requirements (including the additional capital requirements identified by the Central Bank in 2010) over the relevant period.

The continued deterioration of the Irish economy throughout 2010 has significantly and adversely affected the group’s financial condition and performance and presents significant risks and challenges for the group in the years ahead. Given the current environment in Ireland the group is also increasingly exposed to potential changes in government policy in relation to the economy and the financial sector. Property prices remain weak and have impacted the group bad debt provisions. The group has also experienced adverse persistency in its life and pensions products impacting the financial performance of the life company.

The downgrading of the group and sovereign credit ratings, the withdrawal of the Irish Government from the funding markets, the EU/IMF Programme of Financial Support for Ireland and the consequent withdrawal of funds from Irish banks have affected the group’s funding plans in 2010. There is a significant ongoing liquidity challenge for the group and for the Irish banking system generally. These challenges have given rise to breaches of regulatory liquidity requirements in the later part of 2010 and ongoing breaches in 2011. The downgrade in credit ratings and the risk of a further sovereign or group downgrade has limited the group’s access to capital markets, as a result the group has increased its recourse to Eurosystem financing facilities. At 31 December 2010, the group had €13.8bln of collateralised funding from the European Central Bank. In 2011 the group used collateral to access special liquidity facilities from the Central Bank of Ireland. The group expects to have sufficient collateral to enable it to access these facilities to meet its immediate and estimated funding requirements for the coming year.

The group is required by the Central Bank to maintain adequate capital and the group is subject to the risk of having insufficient capital resources to meet minimum regulatory capital requirements. The group has confirmed that additional capital requirements of €243m identified by the Irish Central Bank’s Prudential Capital Assessment Review (PCAR) in 2010 will be met from internal resources (subject to Central Bank approval) by May 2011 and is on target to do so. There is a risk that minimum regulatory capital requirements may increase in the future and that the Central Bank may change the manner in which it applies existing regulatory requirements. If the group is required to increase its capital position there is a risk that it may be unable to raise additional capital from the financial markets or from internal resources. The Government has acknowledged the group’s systemic importance to the economy as a whole and the EU/IMF memorandum of understanding confirms the Government’s intention to ensure that the group remains adequately capitalised.

The group is participating in the Central Bank’s latest Prudential Capital Assessment Review (PCAR) and Prudential Liquidity Assessment Review (PLAR), the results of which are expected at the end of March. As a result there is a significant uncertainty as to the outcome and any additional capital or liquidity requirements that may arise.

The Credit Institutions (Stabilisation) Act 2010 was passed into Irish law on 21 December 2010. The Act provides the legislative basis for the reorganisation and restructuring of the Irish Banking system agreed in the joint EU/IMF programme for Ireland. The Act applies to banks who have received financial support from the State, Building Societies and Credit Unions. The group by way of the Government Guarantee has received such support. The Act provides broad powers to the Minister for Finance (in consultation with the Governor of the Central Bank of Ireland) to act on financial stability grounds to effect the restructuring action and recapitalisation measures envisaged in the programme. This allows the Minister to take the actions required to bring about a domestic retail bank system that is proportionate to and focused on the Irish economy.

The Board’s assessment of the appropriateness of preparing the financial statements on the going concern basis has considered the group’s business and funding plans taking into account:

• the period over which the Irish economy is expected to recover from the current crisis;
• the implementation of joint EU/IMF programme for Ireland;
• the group’s schedule of long-term debt repayments;
• the group’s ability to continue to access liquidity and funding, in particular from the Eurosystem funding and the Irish Central Bank liquidity facilities;
• the ability of the group to raise additional required capital in the financial markets or failing that from the Irish Authorities to meet its required regulatory capital ratios; and
• the ability of the group to dispose of assets and/or increase its deposit base to meet the PLAR targets set by the Central Bank of Ireland.

The risk and uncertainties set out above and the options available to the group have been considered by the directors in concluding that it is appropriate to prepare the financial statements on a going concern basis.