Simon Carswell at the Irish Times bring us a story today which begs some basic questions about the future of Irish banking. He reports that AIB (that’s the zombie bank which we legally 49.9%-own at present but in reality we own 92%+) has recently lobbied the Department of Finance to change the policy on NAMA acquiring sub-€20m loans from that bank.
You’ll recall that up to last September 2010, NAMA was to take over all €5m-plus AIB land and development loans (and any associated borrowings). In September 2010 the Minister for Finance, Brian Lenihan raised the threshold from €5m to €20m but following the intervention of the IMF/EU in November, 2010 it was decided to not only restore the threshold but to encompass ALL land and development (and associated borrowings) at AIB, including the sub-€5m exposures.
It is reported that AIB has complained that NAMA taking over these loans will severely impact the bank’s operations and threaten its headcount (a sensitive issue in a country with an official 13.5% unemployment rate) and indeed the future of some branches. AIB claim that these loans will have substantial associated borrowings and encompass a sizeable proportion of Irish small and medium-sized business lending. AIB further claimed that NAMA didn’t have the wherewithal to handle these loans and even if they did, AIB would be better placed to work-out the loans. And lastly the bank was concerned that the transfer of these loans would create an even bigger capital hole for the State to fill with additional bailout funding.
I find this story a little sinister because (a) AIB will be paid the current value of the loans plus a long term economic value of some 10% so why should there be an even bigger capital hole – we know the formal accounting rules allow the banks to understate loan losses but surely the Financial Regulator has been getting accurate estimates of loan losses? (b) although NAMA is taking over the sub-€20m loans it is handing them back to the banks for day-to-day management so why would that mean a reduction in headcount let alone the closure of entire branches (c) it seems a little late in the day to claim that banks can manage the loans better than NAMA – after all NAMA has absorbed €71bn of loans at par value and these smaller loans at both AIB and BoI are understood to be worth less than €16bn at par value (d) AIB is a zombie that is effectively 90% + owned by the State and will depend on the State for a €4.7bn Core Tier 1 capital injection in 30 days time.
The Irish Times claim that “it is estimated” that these smaller loans will bring some 4,000 additional borrowers into the NAMA net (on top of the 850 €20m+ borrowers). These borrowers may represent the solid middle class spine of the country and many are understood to be “amateur” developers whose day jobs were in the professions. NAMA always claimed one of its prime advantages was its ability to deal impartially with developers absent the cosy relationships that had built up between local banks and long-standing customers and which contributed to reckless lending decisions and abysmal paperwork. NAMA has previously claimed that it will work to ensure the original credit officers are removed from dealing with the loans at the banks when the loans come under NAMA’s control – a Code of Practice in this area would be helpful. You would have to wonder if the true motivations of AIB in lobbying the Department of Finance have more to do with the protection of future careers at AIB or the protection of a sheltered segment of Irish society. At times like this, it is good to know the IMF will be involved in any decision-making, though I think even the IMF will be a little frustrated that it took the Department of Finance two months to draft an amendment to the NAMA Act to fast-track the absorption of sub-€20m loans and only then when the passage of the legislation was rendered impossible by political developments.
UPDATE: 31st January, 2011. Without naming sources or basis, John McManus in the Irish Times today writes as if the treatment of NAMA’s sub-€20m loans is a fait accompli. He claims that banks have successfully lobbied to keep associated lending. He claims that the NAMA Bill published last week stops NAMA taking over associated lending – there’s no mention of a change in this area so God knows what the Irish Times is on about this time.
UPDATE: 5th February, 2011. Simon Carswell returns to the AIB-lobbying-NAMA-2 theme in today’s Irish Times where he claims that the Department of Finance conceded a vital point in what is being described by the Irish Times today as serious concerns about the plans to suck an estimated €16bn of sub-€20m exposures out of AIB and Bank of Ireland. The lobbying was led by AIB’s new executive chairman, David Hodgkinson (the former HSBC banker from the UK that took over last November 2010). The vital point which Simon Carswell claims was conceded was that associated borrowings by the same borrower whose sub-€20m loans are to be absorbed by NAMA will now not transfer. Remember that NAMA is supposed to apply the same discount (aka haircut) that it applied to the larger expsoures, to these sub-€20m exposures. So omitting the associated lending (that is, the non-land and development eg commercial property, share portfolios, fine wines, non-development residential property in Ireland and abroad) is likely, in my view, to reduce the value of core sub-€20m land and development loans. That’s why this reported concession is important. It will be examined by the next government so it would be helpful if the political parties could set out their stalls on the matter. Of course it will be the EU that examines any new valuation method but they don’t seem to be too bothered that NAMA stuck with the November 30th, 2009 valuation date or were acquiring loans using a 10-year bond rate that had skyrocketed – the EU are “big picture” observers it seems and may not change what the DoF has apparently decided.