Archive for March 17th, 2010

It is this author’s view that the key assumption in NAMA’s draft business plan is the 20% default rate (or the 80% non-default rate). The plan describes the rationale for this assumption :  (page 10 bottom) “Over a five year period in the early 1990s one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the NAMA portfolio and the possibility of a prolonged recession, a 20% default rate assumption has been made. It is also assumed that €4bn will be realised from the sale of underlying assets secured by the defaulting loans of €15bn. These are conservative and prudent assumptions.” That’s it, nothing more is said about the source of the 20% default rate, its stress testing, its appropriateness to Ireland in 2010. The Irish Times reported on the 15th October, 2009 that the “UK bank was Barclays” and that “Barclays was the hardest hit of the British banks during the collapse of the UK property market.”

It is not clear what NAMA mean by loan default rate. If you consult Barclay’s annual reports for the five years 1990-1994 inclusive, one can see that the annual bad debts incurred (and written off) were £1237m in 1990, £1208m in 1991, £1849k in 1992, £1565m in 1993 and £1123m in 1994. The corresponding total amount of lending outstanding for each of those five years was £84bn, £85bn, £88bn, £97bn and £87bn. Because the Reports are not in a searchable PDF format for ease, I obtained the figures from the 1991 Report (which shows 1990 as a comparison) on page 37 of the 1991 Report, 1992 Report on pages 66 and 67 of the report and from the 1994 Report (which shows 1993 as a comparison) on pages 99 and 100 of the report. However these loans include international loans, residential mortgages and commercial and consumer lending. If you take the bad debts written off which total £6,982m as a proportion of the average loan book of £88bn you get 8% approx. I have no idea if this is the means by which the 10% rate for the “UK bank” referred to in the draft plan was deduced.

There is no reference whatsoever to the term “default” in the reports that I could see. So the concern again is, how did NAMA source the 10% default rate used in the draft business plan.

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Today’s Irish Times continues to describe the bloodbath taking place in the residential development market. It should be noted that the €15m price for 17 acres opposite the Castleknock Golf Club is an asking price and represents a 62.5% drop from the peak valuation of €40m (though when last transacted the value was €25m). The other site, 9.6 acres in Sallins, Kildare sold for “somewhat less” than €2.5m, “somewhat” more than a 75% drop from its peak value. Luckily NAMA valuers should be able to access Land Registry and Revenue records to establish the exact price, a facility not available to non-NAMA valuers and the general public.

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