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Archive for November 2nd, 2010

The Department of Finance has released the Exchequer statement for October 2010.  It shows the €250m recoupable advance to NAMA, provided by the Exchequer in May 2010 which was supposed to have been repaid with interest in October 2010,  has been repaid and is showing as a repayment on  note 3 on  page 3. The DoF has confirmed that the interest on the NAMA advance advance was €1,065,625 and is included in Note 2 of the Exchequer Statement under Interest on Loans.

It would seem that NAMA is unable or unwilling to access the funding markets. At the start of September 2010, it announced a €2.5bn short term euro programme to help fund short term projects. This seems to have been abandoned at least for the time being. There has not been any recent statement by NAMA on the subject.

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Though it is more likely a result of the Department of Finance’s lethargy, NAMA has today unleashed a flood of new information. This entry will, later on, examine the Annual Statement required under section 53 of the NAMA Act which is supposed to set out the objectives and strategy for the 2011 financial year (not entirely clear yet but take it to mean January – December 2011).

Just one point at this stage, it seems that the €5bn funding programme for NAMA has been put on ice, if I am interpreting the following correctly. Which means that NAMA was unlikely to have repaid the €250m recoupable advance due last week to the Exchequer (we’ll know in a couple of days when the October Exchequer statement is released).

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Due over a month ago, NAMA has just published its report and accounts for the second quarter ending 30th June 2010.

The press release announcing the results is here. The quarterly report is here. The quarterly accounts are here. There will be analysis and comment here later on. There is a separate entry on the elephant in the room which is completely ignored in NAMA’s accounts –  NAMA is valuing loans it is acquiring by reference to 30th November, 2009 and property prices have dropped considerably since then in NAMA’ s main market (Ireland, partly offset by increases in other markets) and NAMA is paying a premium above current market prices (the Long Term Economic Value premium) partly offset by the fact that part of the consideration paid by NAMA – the 5% subordinated debt – won’t be honoured if NAMA makes an overall loss during its lifespan. What follows here is really the small change.

(1) NAMA recorded a profit of €6 million for the second quarter to the 30 of June 2010. In Q1 NAMA made a €7m loss. So overall year to date NAMA has made a €1m loss though this includes significant start-up costs which cannot be recharged.

(2)  The proportion of the acquired loan portfolio that was performing at 30 June 2010 was 29%. Therefore 71% were non-performing. The definition of “non-performing loans” is set out in section 4(3)(4) and is a loan that is (a) it is in the course of being foreclosed or otherwise enforced, (b) principal or interest or both are in arrears, (c) interest is being or has been capitalised or otherwise deferred otherwise than in accordance with its terms,  (d) payments are not being, or have not been, met,  (e) its covenants are not being, or have not been, complied with, or (f) other obligations are not being or have not been complied with.

(3) Income of €94 million was earned for the second quarter ended 30 June on a loan portfolio that increased to €16.4 billion. The significant items that reduce total operating income are interest due on NAMA securities of €14 million, expenses of €9.6million and the mark-to-market negative movement on hedging derivatives and foreign exchange movements of €64 million.

(4) In terms of cash performance, NAMA generated €130 million net positive cashflow from operating activities in the second quarter. Cash was primarily generated from receipts from borrowers (interest paid on loans) of €117 million and NAMA derivative net cash inflows of €73 million.

(5) The significant cash outflow for the second quarter period was €47 million advanced to borrowers to complete projects and fund working capital.

(6) By the 30th of June, NAMA had issued €8.1 billion in NAMA bonds and €425 million in NAMA subordinated debtas consideration for eligible assets acquired from the five participating institutions. This represents an injection of €8.5 billion of liquidity into the Irish banking system. It seems that none of the banks had exchanged these funds at the ECB and indeed Anglo discounted the value of the bonds by 9%.

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I suppose though, that the nation that gave us surnames such as “Doyle” and “McManus” and place names like “Waterford” and “Wexford”, can’t be completely foreign. This morning Denmark’s largest banking group, Danske Bank, released its results for the nine months ending September 2010 and included in their results are those of the Irish subsidiary, National Irish Bank (NIB). NIB enjoys an Aa3 Stable rating from Moody’s (free registration is required) which sets it apart from the two remaining main “Irish” banks, Bank of Ireland (Moody’s rating of A1 Rating Under Review) and Allied Irish Banks (Moody’s rating of A1 Rating Under Review possible downgrade) – the Aa series is superior to the A series. NIB is a small part of the Dansk Group and no doubt benefits from the overall health of the parent but it is nonetheless instructive to look at its performance in Ireland for first three quarters of 2010 (the Danske report is here which examines the Irish operation in the context of the group’s reporting and there is a separate press release specifically for NIB here).

The Danske group says that “The trend in loan impairment charges reflects the improving situation for the Group’s units. The difficult market conditions in Ireland persisted, though.” – so Ireland is singled out by a group that has operations in Latvia and Estonia that are supposedly facing crises much worse than ours.

“The future level of loan impairment charges in Ireland will depend extensively on the economic recovery.” This is probably stating the obvious but future economic recovery is uncertain. This morning Reuters took a poll of economists who forecast average growth in 2011 of 2% and 2012 of 3% (and a negative 0.4% for 2010 which echoes the ESRI forecast of negative 0.25% two weeks ago). The economists polled point to exports driving growth though it’s unclear if this is the likes of Google routing their advertising revenue through Ireland’s 12.5% Corporation Tax facility or more sustainable (and employment rich) domestic industry not dependent on an artificial competitive advantage (artificial in the sense that it could disappear with outside intervention or competitors can spring up elsewhere). “In view of the uncertainty surrounding the Irish economy, [impairment or in the Danes’ lingo “allowance”] charges are likely to remain high in the coming quarters” says the Danske Group.

The Group had €9.6bn of loans outstanding in Ireland at the end of September 2010 against which it has booked just over €1.4bn of provisions (page 19 using an exchange rate of €1 = DANISH KRONE 7.5), that is a provision of 15%. Compare that with the AIB provision at the end of June 2010 on non-NAMA loans of under 4% (or 8% across all lending including NAMA-bound loans). Are NIB’s loans truly twice as toxic as AIB’s? I would suggest the more likely reason for the difference is AIB is in such a weakened state that it cannot afford to recognize impairments at a realistic level as it would render that bank insolvent.

The company reminds us that NIB has a market share here of 4.7% of all lending in the State and holds 3.6% of all deposits so although a small market share it is large enough to be representative. Lastly the company gives an outlook for house prices for the remainder of 2010 (that is October, November and December 2010) and says “Ireland and Northern Ireland are likely to see a fall”

The honesty of foreigners indeed.

UPDATE: 3rd November, 2010. Laura Noonan in the Independent gets some additional detail on the results from NIB’s deputy chief executive Kevin Gallen “About 75pc of our commercial property exposure is to commercial investment properties, so the overall quality of our book is better [than the loans being taken over by NAMA] because those tend to have a rent roll”. NIB is also not being shy in taking legal action to recover commercial debt – it has carried out “33 receiverships in the past 13 months.” And finally as regards residential mortgages “NIB’s mortgage book is also in a far healthier state than most Irish banks, with less than 250 accounts in arrears at the end of September”. And yet this bank has double the provision for losses compared with AIB.

UPDATE: 6th November, 2010. The Royal Bank of Scotland (RBS) has released its results for Q3 of 2010. RBS operates in Ireland (North and South) under the Ulster Bank brand.  We can see that the total gross lending (before impairments) at the end of September 2010 was GBP £38.8bn (comprising mortgage lending GBP £€21.4bn, commercial property GBP £5.3bn, commercial lending GBP £9.4bn  and other lending GBP £1.7bn) – page 34/35 of the latest accounts. This compares with gross lending at the end of 2009 of GBP £39.4bn (comprising mortgage lending GBP £16.2bn, commercial property GBP £10.1bn, commercial other GBP £11bn, other lending GBP £2.4bn). In Q3, 2010 alone Ulster Bank seems to have reduced its lending exposure to commercial property from GBP £9.5bn to GBP £5.3bn, an enormous reduction. Ulster Bank recorded an impairment of GBP £107m on commercial property lending in Q3 alone representing 2% of its total commercial property lending. Mortgage lending has increased by GBP £6.5bn in Q3 which suggests there may be some reclassification of lending going on between commercial property and mortgage lending. RBS highlight Ireland’s economy as a continuing source of concern in the accompanying commentary to the numbers – “Impairment losses in Ulster Bank, however, remained severe, reflecting the continuing deterioration in credit metrics across the Irish economy”

UPDATE: 6th November, 2010. Lloyds Bank has also issued an “Interim management statement” for Q3, 2010. Lloyds had been quite active in Ireland with both the Bank of Scotland (Ireland) and Halifax brand and records in their statement “In Ireland, impairment levels are expected currently to continue at similar levels to the first half of the year reflecting the well documented ongoing difficulties in the Irish economy.” Financial data is not available from the group for Ireland for Q3.

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It sounds like the kind of decision a family around the death bed of a loved one faces. Though perhaps the comparison isn’t in the best taste, the reality is that the venerable 185-year old bank is facing insolvency and it is only the dogmatic government strategy of maintaining a duopoly of “Irish” banks not to mention over €10bn of public funds and significant ECB funds that is keeping the bank afloat. This entry examines the status of AIB and the cost of keeping it alive.

Firstly for our international friends, AIB is Allied Irish Banks PLC – note the plural “Banks”. It has nothing to do with the biggest failure in Irish corporate history, Anglo Irish Bank which is referred to domestically simply as “Anglo”. AIB was conceived in 1825 with the opening of a bank called Provincial Bank and over the next century and a half merged with other domestic banks to give us the Allied Irish Banks that we know today. Alongside Bank of Ireland it is seen as the rock of Irish banking.

During the property boom in the 2000s the bank was a late participant in the mania but there is evidence that once it arrived at the party it wasted no time in trying to catch up with the existing party-goers. The Minister for Finance estimates that the bank’s remaining NAMA loans are worth 40c in the euro (including long term economic value).

Its most recent set of accounts for the first six months of 2010 show that the bank had assets of €169bn, liabilities of €160bn and capital of €9bn. So it is a huge business in an Irish context but clearly solvent by reference to these results. Unfortunately the results don’t reflect the true condition of the loan assets. The cumulative provision for losses on NAMA loans in the interim results was 26% – that is, the loans were worth 74c in the euro. The most recent ministerial estimate is 40c in the euro. This should result in a further loss to AIB of €5.5bn. But NAMA loans form a small part of AIB’s total loanbook and the company will have some €81bn of non-NAMA loans (plus €4.5bn of €5-20m formerly NAMA loans) once NAMA has absorbed the poison. The cumulative provision on these loans in June 2010 was just €3bn (note 22 on page 83). Given that these loans include commercial property and business lending in a state which has suffered the greatest contraction in GDP amongst developed countries in modern times, I would suggest that provision is utter fantasy.

Like some shady cash-in-hand sole trader, AIB maintain a second set of books under the auspices of the Financial Regulator who in March this year set out the capital requirements for AIB and other banks (the Prudential Capital Assessment Review). In September using this second set of books, the Regulator announced that AIB needed raise €10.4bn by the end of this year. AIB’s strategy was to dispose of some assets and then to raise additional equity underwritten by the State. There is a detailed entry on these capital raising efforts here but in summary the bank disposed of its Polish operation (still subject to approvals) which yielded €2.5bn capital from the €3.1bn sale price and yesterday AIB held an EGM in which shareholders approved the sale of the bank’s stake in US bank M&T which should add €0.9bn to the capital coffers. The bank announced yesterday that it was placing the sale of the UK operation on hold (though there appears to be some back-pedalling on these comments this morning). Unless there is some dynamic between the UK sale and capital that means that the bank still needs €7bn in new capital in the next 60 days. And there is only sucker with that level of available funding that is willing to invest in what is likely to be an insolvent bank, and that’s the government who seem intent on placing just under one half of our National Pension Reserve Fund (that’s the €3.5bn invested in preference shares last year and the €7bn now needed as a proportion of the €24bn funds in the NPRF) in one basket (case) – AIB. UPDATE/CORRECTION 4th November, 2010. It has been pointed out that in the Minister’s statement on 30th September 2010, he stated that €1.7bn of any shortfall in take-up of the forthcoming AIB share issue would be via a conversion of the existing €3.5bn investment in AIB preference shares made by the NPRF at the Minister’s direction. And that should the sales of assets (now just of Bank Zachodni and M&T) not materialise by 31st March 2011, then the remaining €1.8bn of preference shares would be converted to ordinary shares. This means that for now (and on the basis that the sales of Bank Zachodni and M&T will complete by 31st March 2011 and it seems that Bank Zachodni’s sale is progressing slowly) the additional investment in AIB is €3.5bn and not €7bn as shown above. And that consequently just less than one third (as opposed to just less than one half) of the NPRF’s total funds will be invested in this one company. The remaining analysis stands.

The government strategy seems chauvinistic (“we need a duopoly of Irish banks”), knee-jerked, immoral (not a word you’ll often see on here but taking money from the pension fund to prop up an insolvent bank is flagitious when there are other options to protect a functioning banking system), recklessly risky (one half of the pension fund is “invested” in one company in one sector). AIB should be taken into 100% state ownership immediately, the State should assess the value of any shareholdings in AIB (I expect they are worth nothing), negotiate with the €4bn+ of junior bondholders the company had at June 2010 and assess if senior bondholders might make a contribution to the insolvent bank. Only then should the State assess the systemic importance of AIB and should probably seek a buyer for the rump of that company. Even if the state is left with only one Irish bank so what? We have a Financial Regulator with 520 staff that should be able to regulate a restricted market to combat uncompetitive practices and when the Irish economy recovers other banks may see prospects here.

If on the other hand, we maintain the pretence that AIB is a viable bank then €7bn will need be found in the next 60 days. At the very best we are set to lose €1.8bn if we continue with the madness of the NPRF underwriting a share issue at €0.50 per share when the shares are presently trading at €0.35. With the healthiest Irish bank, Bank of Ireland, having to borrow 3-year funds at 5.875% last week (excluding costs) in a market where mortgages and commercial lending is still available at 3%, the prospects for profitability at AIB are slim in the context of the NPRF’s investment strategy which allows it invest in any market across the globe.

It is time to say our goodbyes and pull the plug.

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