NAMA’s interest income comes under the spotlight

Fianna Fail TD Sean Fleming has promised NAMA a show-down on the subject of NAMA’s interest income reported in its accounts. Whilst we’re waiting for High Noon, the Sinn Fein finance spokesman, Pearse Doherty has extracted information from NAMA this week which shows that NAMA is receiving far less interest in cash terms than it is showing in its accounts – €249m less in fact for the first nine months of 2011. Why? Because NAMA uses a convoluted accounting method to calculate what interest the Agency thinks it should be getting.

It’s unfortunate that the Effective Interest Rate (EIR) method of calculating interest means that interest income recognised now is greater than the actual cash coming in the door. It could theoretically be the other way round, with income less than cash received, but we wouldn’t be so concerned in that case, because cash is trusted more than some convoluted accounting calculation. We are also living through the legacy of a banking collapse which had previously seen banks booking rolled up interest and deferred interest as income, and we know now only too well that such practices led to over-inflated bank profits which later vanished and were replaced with crippling losses. So NAMA should expect its disclosure of its interest reporting policies to be met with guffaws of cynicism, and if NAMA were a little more transparent then this may not have been an issue at all.

What do we learn:

Because the EIR method uses projections of interest that will be received in future, NAMA can expect further questioning about the basis for those projections. Remember NAMA originally thought it was going to make a €5bn profit in Net Present Value terms, its latest business plan shows a central  scenario profit of €1bn. NAMA thought Irish property values were at a bottom in November 2009 and yet both commercial and residential have fallen by 20-30% since then. So NAMA might understand if its projections for interest income are robustly tested –  the Agency’s history with financial projections hasn’t exactly been covered in glory.

We also learn that for the at 30th September, 2011 the average blended rate charged on performing loans (21% of the NAMA total by reference to original par values, 24% of the total number of loans) was 3.4% per annum – that is likely to have come down by about 0.5% in the last quarter of 2011 as the ECB reduced its benchmark interest rate by 0.25% in each of two months during Q4,2011. So the betting is the average blended rate today would be 2.9%.

However we also learned that in respect of the non-performing loans that NAMA also receives some interest and that it worked out at 0.38% per annum by reference to the original values of the loans. So to illustrate, if NAMA has €74bn of loans, about €15bn are performing and paying interest at 2.9% now. Of the remaining €59bn, NAMA is getting 0.38% or €224m per annum which is useful.

UPDATE: 23rd February, 2012. In the Dail yesterday, the Sinn Fein finance spokesperson Pearse Doherty focussed on NAMA’s accounting for interest received and receivable. It fell to the Minister of State at the Department of Finance, Brian Hayes to field the questions. The exchange is here, and the upshot is that the Department of Finance is satisfied that because the Comptroller and Auditor General has not raised any issue with NAMA’s EIR accounting for interest receivable that all is fine and dandy. Reference was also made to  ” comments made at the Committee of Public Accounts, NAMA has advised that it is examining with the Office of the Comptroller and Auditor General how it could enhance its disclosures on the movement in the original par value of NAMA’s loans”. What doesn’t inspire confidence is junior Minister Hayes claiming that NAMA had “supremely discounted” the loans acquired from the banks. As we have seen property values in Ireland have decline 20-30% since November 2009 – NAMA’s valuation date – and NAMA paid a 10% average Long Term Economic Value, to boot. The EIR methodology subjectively depends on NAMA’s expert view of what will be realised from the underlying security, and given NAMA’s unwarranted optimism which has been proved wrong at practically every turn, this EIR methodology should give us cause for concern.