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Archive for October 28th, 2010

It’s enough to make you want to go home and put the duvet over your head. Alan Dukes, Anglo’s chairman since June this year is reported by RTE to have today called for another NAMA to be set up to act as a receptacle for banks’  remaining distressed loans once NAMA has concluded its work. The five NAMA Participating Institutions will still have some €70bn of commercial property lending (including some land and development, eg sub-€20m at AIB,BoI, sub-€5m at Anglo), a significant proportion of which will be impaired. Alan wants these impaired loans transferred to a new NAMA organisation.

It is gobsmackingly incredible that focus is now turning to the non-NAMA loans. It is bewildering that these issues had not been considered in the context of Anglo at the start of September 2010 when the Minister for Finance Brian Lenihan announced the Asset Recovery Bank and Funding Bank split (and by the way, reports this morning indicate that nearly eight weeks after that ministerial announcement, the new Anglo plan (that’s version 3.0 after v1.0 was ridiculed and v2.0 never even made it to a formal decision by the EU) still hasn’t been prepared –  according to the Independent this morning “the Government and the bank are currently working on a plan to submit to the EU Commission and Finance Minister Brian Lenihan claims it is likely to get the support of the commission”)

The subject of the PIs’ residual loans has been the subject of several entries on here (examples here and here). Calls to have NAMA absorb these residual loans have been dismissed as being an “unnecessary distraction”.

UPDATE: 29th October, 2010. Simon Carswell in the Irish Times today claims that Alan Dukes confirmed to reporters outside his formal presentation to the Leinster Society of Chartered Accountants Ireland that a plan has in fact been sent to the European Commission – “the bank had sent the European Commission the revised Government plan for the creation of the funding and asset recovery banks out of Anglo, he [Alan Dukes] said” This is at odds with the Independent report yesterday morning (see above) – perhaps the plan was sent sometime yesterday afternoon!It seems to me having read Simon’s article that Alan Dukes is not exactly settled on the Asset Recovery Bank and Funding Bank split and that he is still clinging to some future for Anglo, possibly as a capitalised receptacle of other distressed loans but with some new lending capability. That Alan Dukes is recognising the scale of problems with non-NAMA loans (and I estimate these non-residential mortgage property loans to be €70bn+ and that includes the €6.6bn of €5-20m land and development loans that will not remain with AIB and BoI following the Minister’s decision to increase the threshold for those two banks only) is to be welcomed, although it is bizarre that it is only happening at this late stage. But that there seems to be uncertainty about Anglo’s future shows a lack of planning.

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Our governor of the Central Bank, the formidable Patrick Honohan, delivered a speech to the Institute of Certified Public Accountants yesterday. In it he summarised for the umpteenth time the background to our financial crisis but extracted the role that accounting has played, and bemoaned how badly we have been served by practices which failed to look beyond the balance sheet date. It seems a little cowardly though that he didn’t go further in his speech and call for the immediate implementation of an accounting standard, International Financial Reporting Standard 9 (IFRS 9), which will be mandatory from 2013 onward but is discretionary until then.

The accounting business (or profession if you must) as a whole decided when the global financial crisis kicked off that its practices were unsuitable for valuing loans in environments had led to enormous losses which were not signposted in financial statements. Loans had been valued by reference to International Accounting Standard 39 and in 2009 accountants introduced a replacement that might be more fit for purpose, IFRS 9, which allows for more realistic valuations. IFRS 9 will become mandatory from 1st January 2013 and until then offers some discretion which each of the five NAMA Participating Institutions (PIs – AIB, Anglo, BoI, EBS and INBS) has opted to take advantage of. From the interim report for each of the five PIs (except INBS which didn’t produce interim figures so its full year 2009 results are used) here are the % loss provisions for the remaining tranches at 30th June 2010, the discounts on Tranche 1 which was completed in May 2010 and the final estimate from Minister for Finance Brian Lenihan in the Dail on 13th October, 2010.

So we have the above fantasy accounting from banks which does not give a “true and fair view” of losses and this fantasy is only a couple of months old in all save INBS’s case and was allowed by the governor who has been in post since September 2009. Of course the governor might think that now is not the time to bring forward the crystallisation of losses. If that were to be done, then the likelihood is that Bank of Ireland would tip over into majority State control. So it seems the governor’s speech lacked the courage of its convictions.

Elsewhere in his speech he claims that NAMA “agreed to conduct a sample review of the full range of tranches” before providing the estimated haircuts that were announced at the end of September. Sadly it may take up to 12 months after the last tranche is transferred before we know how productive that exercise was and how realistic the final estimated haircuts have been. Aside from the berating of accounting practices, the speech might be best remembered for criticising the Stability and Growth Pact for not being helpful in dealing with shocks to the system.

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The Nationwide Building Society has this morning published its UK House Price data for October 2010. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £164,381 (compared with GBP £166,757 in September and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 11.6% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of September 2010 being GBP £164,381 (or €188,003  at GBP 1 = EUR 1.1437) is only 5.4% below the €198,689 which the Permanent TSB/ESRI said was the average nationally here at the end of September 2010.

With the latest release from Nationwide, UK house prices have risen by 0.99% since 30th November, 2009 the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index has declined to 911 meaning that average prices of NAMA property must increase by 9.8% for NAMA to breakeven on a gross basis.

Recent forecasts for the UK housing market have not tended to be good. Whilst Capital Economics has produced yet another headline-grabbing prediction of a 25% decline in the next 2-3 years, most commentators are suggesting an easing of prices. The EU bank stress tests published at the end of July 2010 suggested a base case of no change in UK residential prices in 2010 which would mean an 1.41% fall in prices between now and the end of the year. The UK economy is showing surprising resilience – figures released earlier this week showed GDP grew by 0.8% in Q3 following a 1.2% spurt in Q2. Last week’s spending review proposed massive cuts to public sector employment and brought home the far-from-certain position of the UK economy. Supply of property for sale has been bolstered by the abolition of HIPS (akin to BER certs) in June 2010 and which had cost about £300 and the Royal Institution of Chartered Surveyors (RICS) has also suggested that more sellers are returning to the market but that there are fewer would-be buyers, suggesting declines are in prospect.

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