Last week the Financial Regulator, Matthew Elderfield, gave an important speech to the Fintel Third Annual Global Financial Services Centres Conference in which he stated that financial institutions operating in the State will need to have 8% core tier 1 capital (very simply capital including retained earnings as a percentage of assets). Nothing new there – he’s been saying that for at least a month. What was new is that he stated that institutions who were required to submit their recapitalization plans by the end of last week needed to assume that the haircut that NAMA is attaching to the first tranche of loans transferred should be applied to the institution’s entire NAMA-bound portfolio when calculating capital requirements. WARNING: There are a lot of numbers coming up but the principle is that Anglo and INBS will need assume further substantial losses now as it produces its recapitalsation plans – in the case of Anglo the losses will bring us close to the €10bn “upper limit” of recaps and with INBS we have exposed a totally new requirement (on top of the €2.7bn just injected).
In the case of Anglo, its last financial statement was for the 15-month period ending 31st December 2009 and showed that the bank had estimated it had €35.602bn of gross loans to be transferred to NAMA. Against this gross was a cumulative provision of €10.120bn (28% of the gross). At 31st December 2009 Anglo had a core tier 1 ratio of 6.3% (€4.6bn tier 1 capital as a proportion of €73.055bn risk-weighted assets). This position was after the government had injected a cumulative total of €12.3bn into Anglo. Yesterday, an unnamed NAMA spokesperson stated that the transfer of Anglo’s first tranche was part-complete and would be effected in total by next weekend. Crucially they stated that the discount on the first tranche was close to 55% (up from 53% from Brian Lenihan last week and an estimated 50% from NAMA at the start of April). So what does this mean for Anglo’s future capital requirements?
If the discount for tranche 1 is indeed 55% and the gross Anglo NAMA-bound portfolio is €35.602bn then the loss will be €19.581m. The loss so far booked by Anglo is €10.120m. Therefore an additional loss of €9.461m will need to be absorbed now. Anglo’s core tier 1 capital will fall by €9.461m from €4.6bn to minus (-) €4.86bn. The risk-weighted assets will fall by €35.602 from €73.055bn to €37.453bn. A tier 1 capital requirement of 8% will be €2.996bn (8% of €37.453bn). Therefore Anglo will need a further injection of capital of €7.617bn (€2.996bn versus minus €4.86bn). Now the government has told us that Anglo may need upto €10bn of additional capital. It looks as if this capital will be required sooner rather than later. Of course Anglo has a non-NAMA loan book of €37bn approx against which it had provisions of €5bn approx at the end of 2009. Any further impairment provision on this loanbook may push Anglo above the €10bn government estimate. For now the government can hope that Anglo’s position doesn’t deteriorate further and that NAMA doesn’t seek more severe haircuts.
However the position for Irish Nationwide Building Society creates a new unforeseen capital requirement of nearly €1bn. Like Anglo, INBS produced its accounts to 31st December, 2009 and the accounts show that a total of €8.729m gross loans are destined for NAMA. A provision was made in the accounts by INBS for €2.989m on these loans. The actual discount on the first tranche of INBS loans going to NAMA was 58.21%. Therefore INBS must forecast its loss on the entire NAMA portfolio at a total of €5.081bn (58.21% of €8.729m), up €2.092m from the provision of €2.989m in its December 2009 accounts. Consequently an additional loss of €2.092m must be booked by INBS. At 31st December, 2009 INBS had tier 1 capital of €1.304m (this was after the government’s injection of €2.7bn of capital via €2.6bn of promissory notes and €0.1bn consideration for a special share) and relevant assets of €10.9bn giving a tier 1 ratio of 12%. However what happens when INBS books the additional loss on NAMA-bound loans? The tier 1 capital will fall from €1.304bn to minus (-) €0.788bn (ie €1.304bn less €2.092bn). The relevant assets will fall from €10.9bn to €2.17bn (ie subtracting the entire €8.729bn NAMA-bound portfolio). With a 8% tier 1 capital ratio, INBS will need have tier 1 capital of €0.174bn which means the government will need inject an additional €0.962bn. That’s almost €1bn for which the government appears to have made absolutely no provision. UPDATE: On 13th May 2010, the Irish Times reports here that INBS concede they may need more capital but only if the NAMA discount on their NAMA-bound portfolio exceeds 58%. This is at odds with what is set out above which demonstrates that INBS will need more capital EVEN IF the discount on the remaining tranches is equal to 58%. Profits (and gains) may mitigate capital requirements but on the face of it INBS will have a requirement of close to €1bn shortly. I wonder of Simon Carswell’s reporting is correct when he reports “If future losses incurred on Nama-bound loans were higher than the 58 per cent discount on the first €670 million transferred, the society may need more capital. “If we continue to make losses, that will be necessary.””.
Of course the Anglo and INBS might be forecasting profits which might mitigate the need for recapitalizations. Also both institutions might be considering reducing their cumulative provisions against non-NAMA loans. However profits, if any, are likely to be modest and the institutions’ recent history with estimating impairment provisions would not suggest impairments will be reduced, quite the opposite in fact.
How helpful, therefore, it would be to the national deficit and national debt if NAMA were to apply less severe haircuts to Anglo and INBS. This would mean that these two institutions would have a lower call on funds from the public purse for recapitalization (NAMA bonds and subordinated debt are not accounted for in Eurostat debt and deficit calculations). The government has given its undertaking that NAMA will be independent in pursuing its objectives according to the NAMA Act. It is to be hoped that NAMA’s independence from political interference in pursuing its objectives is defended – thankfully NAMA can seek to rely on the Regulator/Ernst and Young and the EU oversight if called upon to defend its honesty.
UPDATE: 13th May, 2010 – FG Leader, Enda Kenny, asked the Tanaiste, Mary Coughlan the following question in the Oireachtas (click here for full transcript): “ is there confirmation of reported claims that the Government will have to put another €1 billion into Irish Nationwide Building Society? In the context of the European Commission having to give its imprimatur to this and the Anglo Irish Bank deal, can the Tánaiste confirm that more taxpayers’ money might be required for Irish Nationwide Building Society and, if so, to what extent?” The Tanaiste replied: “With regard to Irish Nationwide Building Society, the chairman of the society indicated yesterday that the society’s capital position is comfortable. He also indicated that the transfer of assets to the National Asset Management Agency, NAMA, is proceeding but it was not possible at the time to forecast the discounts to be applied as this was to be done on a loan by loan basis. However, a capital need is not seen to arise at present. The society is preparing a restructuring plan for the future which will be submitted to the European Commission in June. The society will examine different options and take on board the Commission’s guidance in that regard.”
Read Full Post »