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Archive for September 21st, 2010

The Educational Building Society (EBS) today released its results for the six months to the end of June 2010 (I am still trying to obtain full results including notes to the accounts). EBS is a participant in the NAMA scheme though it is expected it will contribute an less than €1bn of the total of €81bn loans that NAMA is absorbing from the five Irish financial institutions (AIB, Anglo, BoI, EBS and INBS). And thus far EBS has transferred €180m (€157m at the end of the six month period ending June 2010) of loans with a cumulative average discount of 38% (just behind top of the class BoI with 36%).

Like the other NAMA financial institutions, EBS is engaging in fairytale accounting for its losses on NAMA-bound loans and is presumably hiding behind the fact that IFRS 9 is optional until 2013 so that it does not have to take realistic provisions for losses against its loan portfolio until the loans are actually transferred to NAMA or realised. After deducting the NAMA tranches 1&2 and adding a further €52m to the provisions (as reported in the interim report), EBS still only has a 20% provision for losses against the residual NAMA loanbook. Of even more interest is EBS is showing net loans for transfer to NAMA at €409.6m which implies that some €232m of net NAMA-bound loans are no longer going to the agency. Are these more performing loans that NAMA is letting slip through its fingers perhaps to sweeten any sale of EBS?

Thus far EBS has received a total of €350m in state funding – €100m in cash and €250m in the form of a state-backed promissory note. The Irish Times today reports that the State may have to inject further sums up to a maximum of €437m, though it is unclear what provision for losses gives rise to that figure, and accordingly if there is risk of that figure rising.

EBS is of course presently up for sale with reports of three venture capital companies (JC Flowers, Cardinal and Doughty Hanson) and Ireland’s Irish Life and Permanent bancassurer making up the four potential bidders. It is expected that the four will be whittled down to two at the end of September 2010 and that a final purchaser will be selected at the end of October 2010.

UPDATE:  22nd October, 2010. The Minister for Finance, Brian Lenihan, has announced (or possibly confirmed newspaper reporting from 15th October onwards) that the two biddets for EBS will be Irish Life and Permanent (as expected) and a consortium led by Dublin’s Cardinal Capital Group which includes US leveraged buyout firms Carlyle Group and WL Ross and Co. Cardinal is led by Nigel McDermott and Nick Corcoran. The two bidders will now prepare detailed bids in “the coming weeks”.  EBS’s CEO, Fergus Murphy played down the imminence of concluding a sale some weeks ago and indeed the betting is that the sale may only conclude in principle at the end of 2010.

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Until the results of the 2011 Census are made public in 2012, the CSO’s estimate of population for April of each year will be the best indication we have of our overall population. This morning they released their estimates for April 2010 which show that the overall population of the State increased from 4,459,300 to 4,470,700, an increase of 11,400 the lowest increase since 1990 when there was an overall fall of 3,700. The other headline is that net outward migration for the year ending April 2010 was 34,500 (emigration of 65,300 partly offset by immigration of 30,800). Immigration is back to 1994 levels and emigration is back to 1989 levels.

Looking at the detail, Dublin’s population decreased by 0.3% (roughly 5,000 people) whilst the Midlands and East of the country increased by 1.6%. Our population is aging with 65+ numbering over 0.5m for the first time. Our birth rate remains one of the highest in the world and death rate one of the lowest.

Expected in the next few days will be the results of the partial review of ghost estates which is likely to show about 80-100,000 new empty homes. With a population growing at 11,400 per year and at 2.7 souls per household on average that means we have a need for 4,000 new homes plus about 5,000 to replace obsolete stock. New homes being completed this year are estimated at 10-15,000 with 8,383 homes completed to the end of August 2010.

Plainly we are building more homes than we need and we still have a substantial overhang of unsold homes. With supply:demand being an important factor in determining prices, there would appear to be overall pressure on existing price levels. Finally here is a compiled overview of our overall population for the past 20 years – and here is the spreadsheet.

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There aren’t that many participants in our institutions who enjoy the reputation of our own Central Bank governor, Patrick Honohan, who yesterday delivered a speech to the SUERF conference in Dublin. Honohan, the 60-year old economist appointed to the role of CB governor in September 2009 would be regarded as a “clean sleeve” with respect to the present national financial crisis – he was out of the country working for the World Bank during most of the Celtic Tiger years returning in 2007 to become a professor in economics at Trinity College Dublin. He has frequently been looked to for an honest and frank professional opinion on financial matters. He has considerable reputational capital.

And two weeks ago when the Minister for Finance announced that Anglo was to be split in two and effectively wound down, the Minister acknowledged the deep damage that uncertainty over Anglo’s final cost was doing to the State. The Minister placed the burden of delivering a credible “final” estimate of Anglo’s costs on the shoulders of the Central Bank. Initially it was reported that Financial Regulator Matthew Elderfield would confirm the final numbers but it now seems that the reputational capital of the governor himself is being put behind the publication of Anglo’s capital needs in the next two weeks.

The Irish Times today reports that the governor said yesterday that the final estimate was likely to be lower than some estimates that have recently been “touted around”. Who’s estimates was he referring to? I don’t know but here is a selection:

(1) Standard and Poor’s (August 2010, pre split announcement) – €35bn

(2) Mike Aynsley (September 2010, post split announcement) – €25-28.5bn

(3) Alan Dukes who didn’t deny €39bn losses (which would be partly offset by existing capital to give a final estimated cost)

Elsewhere independent banking consultant Peter Mathews has been estimating losses in the same region as Alan Dukes’ undenied (and in the modern media age therefore attributed) €39bn. Of course it is important to compare apples with apples – gross losses will be partly cushioned by the existing capital base and in addition to the losses on loans there may be other profits and losses (eg derivatives, redeeming debt).

It seems incredible to some observers that Patrick Honohan can deliver a credible estimate of the final cost of Anglo in two weeks. After all he will need a pretty good crystal ball to forecast future loan losses and the performance in particular of various property markets and NAMA’s discounts on nearly €55bn of loans. And whilst Patrick Honohan enjoys a relatively unscathed reputation, it is a fact that he has increased the estimate of the final cost of INBS from €2.5-2.7bn in May 2010 to an estimated €3.2bn in August 2010. Let us hope that his reputational capital is maintained following whatever announcements are made in the next two weeks.

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With €1-1.5bn of Irish 4- and 8-year debt being auctioned by the National Treasury Management Agency at 10am this morning, it is being reported that uncertainty over future NAMA discounts on loans from the five participating financial institutions (AIB, Anglo, BoI, EBS and INBS) is causing interest rates demanded on Irish government debt to reach record highs (at least record in the context of the period since joining the euro). Emmet Oliver at the Independent today cites an analyst note from Unicredit in which the analyst said (to quote what the Independent say) “that the main negative that could impact on Irish bond prices would be further deep discounts on loans by NAMA.”

Of course the discounts applied by NAMA to the first two tranches (averaging 52%) are considerably more than was envisaged a year ago in September 2009 when 30% was seen as likely. The third tranche is due to be transferred by the end of next week and the discounts are eagerly anticipated as tranche 3 is likely to be encompassing smaller-scale developers which may be indicative of the discounts on the remaining tranches. Many commentators have opined that future discounts will be higher than in tranche 1 and 2, but there would appear to be factors on both sides of the scales which might tip discounts higher or lower than 52% – thus the anticipation for the tranche 3 results.

The effect of higher NAMA discounts will be increased State recapitalizations of the five NAMA institutions which in turn will tend to push up the final cost of rescuing the Irish financial system and will add to national debt. Although it might ease the pressure on yields for Irish government debt if NAMA eased their level of discounts, NAMA is strictly regulated and its valuations are subject to oversight nationally and at EU level.

UPDATE: 21st September, 2010: With the benchmark 10-year Irish government dept dropping from 6.45% on opening to 6.3% just before the auction, the prices achieved at the auction are some 0.2% off closing interest rates last night with bid cover of 3-5 times. A good result for the NTMA – full details of the results of the auction are available from the NTMA here.

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