Yes – if the toxicity level of the residual loans left in the banks after extracting the NAMA loans is uncertain to a significant extent. This entry examines the residual loan books and uncertainty over residual loan values.
As NAMA makes its way through the transfers of the tranches of land and development and associated loans from the five NAMA financial institutions, it is clear that the residual loans left in the five banks are significant and impaired. First, let’s look at the lending profile of the five banks – the information is collated from the latest accounts (period ending December 2009 for Anglo, INBS and EBS and from the recent half year reports from AIB and BoI). AIB have produced a half year statement without full supporting accounts so there are some assumptions about gross loans and the distribution of impairments.
First a summary of the total loans split between NAMA and non-NAMA
Next a summary of the non-NAMA loans showing the gross loans and provisions for impairment
1. AIB Half Year presentation (page 21 shows an analysis of non-NAMA loans). The more complete accounts are here.
2. Anglo accounts for the 15 month period ending 31st December 2009 (page 8 for total lending, page 90 – note 27 to the accounts – for the breakdown of non-NAMA lending). Anglo are due to issue an update on the first half 2010 performance by the end of August 2010.
3. Bank of Ireland Half Year accounts 2010 (pages 101 and 102 show the breakdown of the gross loans and pages 51 and 104 show the breakdown of the provisions)
4. EBS accounts for the year ending 31 December 2009 (pages 41-42 of the accounts, notes 13 and 14 provide an analysis of lending and provisions)
5. INBS accounts for the year ending 31 December 2009 (pages 63-65 of the accounts provide an analysis of lending and provisions, assumptions have been made as to the allocation of total lending to the spreadsheet headings)
NAMA is supposedly dealing with “Land and Development” and “Associated” loans only. The residual loans in the banks cover everything from residential mortgages, personal loans and credit card balances to commercial loans (including commercial loans for property that falls outside the ambit of NAMA – mostly investment property you would expect). So let’s examine each of these categories of residual loan to see how clear their value is:
(1) Residential mortgages – part 1 (arrears and default). The latest statistics from the Financial Regulator for the first quarter of 2010 (Q2 is expected later this week) revealed that 32,000 of the 791,000 mortgages in the State were in arrears of more than 90 days and indeed of those 21,000 were more than 180 days in arrears. It is understood that in addition to these mortgages in arrears more than 50,000 mortgages have been restructured following difficulties so that they are now paying interest only, having payment holidays, longer periods to repay or some other reductions. The Financial Regulator has recently published a consultation paper which is set to make repossessions more difficult when borrowers are seen to engage in good faith with their banks.
(2) Residential mortgages – part 2 (losses on tracker mortgages). Ireland has a large number of tracker mortgages – of the 791,000 extant mortgages, 407,000 are trackers and a further 113,000 are fixed rate mortgages leaving 271,000 that are standard variable rate mortgages. Banks are widely suspected of losing money on tracker mortgages that will typically be priced at ECB + 0.75% – that is understood to be less than the cost of finance from depositors and money markets. Now these tracker mortgages might not be impaired but whilst ECB rates are set at a low level (which is certainly the immediate outlook over the next couple of years) banks are exposed to continuing losses which they will book as they occur.
(3) Personal loans – unsecured. Ireland presently has an unemployment rate of 13.7% (end July 2010) equivalent to approx 292,000 out of a workforce of 2,132,700 (end June 2010). Ireland maintains a Live Register in respect of people in receipt of employment benefits (this includes the unemployed but also those on low wages) and that total is now 466,824 (end July 2010). Over 20% of homes are understood to be in negative equity and headline wages have dropped 0.7% in 2009 and are forecast to drop by a further 2.7% in 2010 according to the Central Bank (Q2, 2010 Bulletin). Take home pay has been reduced by an income levy (2% for income up to €75k, 4% from €75-175k and 6% on income over €175k). There is a new tax on second homes of €200 per annum which worryingly has a far lower rate of collection in 2010 compared with 2009. Approximately 900 homes per month are having their electricity cut off by energy supplier ESB with a further 11,000 homes per month entering into arrangements to restructure their payment of electricity bills all from a total ESB customer base of 1.5m homes. So I think it is safe to say that there will be pressure on the recoverability of personal loans, particularly in the next couple of years until GNP recovery cascades down into people’s pockets.
(4) Commercial lending – property. Development land may have suffered most in the Irish property crash – indeed Savills have recently said that prices are up to 90% off peak – “Spend on development land in Ireland was down an estimated 90% in 2009 from the peak in 2006, while values have fallen by up to 75% to 90% from their peak particularly in provincial towns. Many sites purchased between 2005 and 2007 are now largely uneconomic to develop given the price paid” But we also know that what might be classed commercial investment property (finished offices, shops and industrial space) has dropped considerably in value. According to the IPD commercial capital values are now 58% off peak and the recent trend has been an acceleration in declines despite attempts by property companies to reassure and stabilise the market. Of course these assets are not acquired for development but the severe decline in their values must place non-NAMA property loans at some considerable risk.
(5) Commercial lending – non-property. Besides a property crash, Ireland is suffering a good ol’ fashioned recession with GNP declining by 17% from 2007 to late 2009 and expected to decline by in excess of 1% in 2010 before recovering in 2011. It has been ““the deepest and swiftest contraction suffered by a western economy since the Great Depression” according to economist Morgan Kelly. There were 917 corporate insolvencies in the first seven months of 2010 (compared with 1,406 for the full year 2009 and 773 for the full year 2008.
The analysis of the accounts and half year statements above show in relation to the non-NAMA loans that there is an overall estimated provision of €11.5bn against total loans of €261.7bn (a “haircut” of 4.4%) – is this adequate in light of the severe pressures on Irish businesses and households? Will external providers of funding to banks still consider there to be potentially nasty shocks in store after the NAMA loans have transferred?
So how much financial certainty will there be in the non-NAMA residue of loans in the five NAMA financial institutions come 2011 when NAMA is due to finish its transfers? There will plainly be some degree of uncertainty, the important question is whether the uncertainty will significantly impede the banks from attracting external non-government funding so that they can indeed return to normal lending to “viable homes and businesses”. And I think the answer to that question is far from clear.
NAMA Wine Lake 
This uncertainty is the main reason for the difference in the losses as estimated by Peter Mathews and Constantin Gudgiev. I’m afraid our new Central Bank regulator has gone “native” at this stage and his numbers have lost all credibility. As I understand it, Constantin’s estimates take in to account the deterioration of which you speak in the values of the non-NAMA loans – Peter’s doesn’t allow for them fully yet, but he will get there.
BTW, sources inside the banks tell me that open warfare now exists between them and NAMA and that the tranches now number up to seven and that the quality of the loans and also of the security is deteriorating, not improving.
There is no way that they can all be transferred by early 2011.
Also, my NAMA sources tell me that the €5 billion allocated to support the viable loans has been found to be completely inadequate. This will result in assets that require investment in order to be viable, not receiving that investment and thereby being unable to achieve the level paid to the “participating institution” for them. (Don’t you just love all these new buzzwords “participating institutions” for “banks” and “debtors” for “borrowers” – I hope that they are as creative when they get down to the real business of marketing these properties.)
An example of this is a development site where NAMA has paid €30 million for a €120 million loan. There is a requirement to introduce a further €10 million for external infrastructure. This seems to have been “overlooked” by NAMA’s “expert” valuer. NAMA now have to decide whether to throw good money after bad and hope that they find a buyer at the inflated level, or allow the land to go back to agricultural and take the hit on the €30 million. Interesting times….. It’s like watching a slow train wreck.
Many thanks for that, what you say is very interesting – it is a sad aspect of the lack of NAMA transparency that such information, verifiable or not, will be closely analysed.