Archive for December 1st, 2010

IMF/EU bailout deal published!

The Department of Finance has this afternoon published the Memorandum of Understanding for the IMF/EU bailout here (page 68 onwards).  The MoU seems to have been removed by the Department of Finance in Ireland so the link is to the IMF version of the document.

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The Irish Banking Federation which claims to represent banks which make up more than 95% of the Irish mortgage market has today issued its new mortgage statistics for Q3, 2010. Here are the highlights

(1) The number of new mortgages for property purchases has increased by 3% from Q2 to Q3, 2010 – some 5,118 new mortgages were advanced in Q3, 2010 compared with 4,947 in Q2, 2010 led by new mortgages for moving home which increased by 10% in volume terms from Q2 to Q3. First Time Buyer mortgage volumes were up by 1% whilst buy to let mortgages were down by 10% and at 254 mortgages signal that this sector of the mortgage market is effectively dead.

(2) The remortgage market and top-up mortgage segments suffered a significant decline with remortgage volumes down 41% from Q2, 2010 to 581.

(3) The value of new mortgage lending for property purchases also increased by 3% from Q2 to Q3, 2010 – €1.04bn of new mortgages  were advanced for property purchases.

(4) The average value of a mortgage for a FTB was €189,000 – if that represented a 75% Loan to Value then that would imply the average value of a FTB home of €252,000.

(5) The average value of a mortgage for someone moving home was €234,000 and again at a 75% LTV that would imply an average house price of €312,000.

(6) Whilst new mortgage lending for property purchase increased slightly the drop in remortgage and top-up business led to an overall decline of 6% approx in volumes and values.

(7) Mortgage lending is now 90% off the peak in 2006.

Here are the historical volumes for new mortgage lending with an analysis of movements at the bottom

Here are the historical values for new mortgage lending with an analysis of movements at the bottom

Here are the historical average values for new mortgage lending with an analysis of movements at the bottom – remember that these don’t equate to house values as most mortgages represent a proportion of a property’s value (the “LTV”).


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I have never seen an official statement from any government department or agency which uses such brutalising language in reacting to what is understood to be a report by a credible research company. But today NAMA has issued a statement reacting to the Construction Industry Federation (CIF) report on NAMA commissioned by CIF at some expense from the British consultancy, Lombard Street Research.

The 22-page report is not yet in the public domain but I hope to bring you detailed reporting on any points of interest. Press reporting (here and here and here for example) has suggested the report is highly critical of NAMA and blames NAMA for wider economic problems with the banks and the construction sector.

That NAMA should publicly respond to the report is in itself of interest. NAMA didn’t respond to the Minister’s statement on 30th September, 2010 which modified NAMA’s remit or indeed on the statement from last Sunday night which expanded its remit. NAMA hasn’t provided any update on its funding programme or on what some consider important aspects of its operations. But it has reacted forcefully to the CIF-commissioned report, using quite loaded and reactionary language. That NAMA should be robust and not a pushover is one thing – provocatively attacking a stakeholder (and CIF representing many of NAMA’s borrowers is a NAMA stakeholder) is another and I think NAMA might have communicated its message in more neutral but equally forceful language.

UPDATE: 3rd December, 2010.Having seen the CIF-commissioned report, it is easy to see why NAMA might have adopted a robust position in responding to it. The report is entitled “NAMA – a flawed concept and a failure” so NAMA was hardly going to embrace the report. I was puzzled why NAMA responded to the report in the first place and vanity/personalities aside, it might be because CIF has a representation role for many of the developers whose loans are now transferred to NAMA. But if it was this recognition that coaxed the normally taciturn agency into producing a press release, it is still confusing as to why NAMA would select such provocative phraseology. Anyway the highlights from the CIF-commissioned report:

(1) The report strongly criticizes NAMA’s pursuit of “every red cent” “to the ends of the earth” and claims this is not economically efficient and that NAMA should dispose of loans at a profit by reference to the value NAMA pays, as opposed to the par value of the loans.

(2) NAMA’s €5bn development pot is too little and should properly be €15bn according to the report.

(3) NAMA is deterring third party investment, and is insisting on being the sole provider of credit and funding

(4) NAMA is too conservative and is only back dead-cert development projects

(5) Senior NAMA personnel are heavily criticized (not by name)

(6) NAMA is criticized for being too slow

(7) NAMA should not be taking on unimpaired loans because that is only hurting the banks further

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I think I know what Minister for Finance, Brian Lenihan, meant in that infamous Citibank conference call when he tried to play down the risk of Ireland’s banks suffering a deposit flight by claiming the fact we are an island would mitigate  such a risk. He was, I think, referring to the c€100bn of deposits by households in the State. Theoretically of course households could withdraw their deposits and place them in banks in Northern Ireland (part of the same island) or the mainland UK. Indeed they could also transfer them to foreign-owned Irish banks operating here – KBC, National Irish Bank (Danske) or ACC (Rabobank) or Ulster Bank (RBS). But households suffer from inertia, that’s why sometimes banks might offer financial incentives to move your business to them, it’s hassle with changing direct debits, building up a relationship with another bank and what about credit cards and personal loans. It is clear however that households are concerned for the safety of their deposits though there are robust government and ECB backed guarantees in place.

And no doubt in part taking advantage of this concen, Nationwide UK (Ireland) opened its first high street branch yesterday on Merrion Row where it is providing a deposit-taking service only – that is, no lending. Take a look at the Nationwide (by the way no relation whatsoever with the 100% State-owned Irish Nationwide Building Society) website and prominently featured is a recent report in which it ranked in the world’s Top 50 Safest financial institutions. It makes clear that deposits are covered by UK’s deposit guarantee scheme

“Nationwide Building Society is a member of the Financial Services Compensation Scheme (FSCS) in the United Kingdom, which was established under the Financial Services and Markets Act 2000 to pay compensation if a firm is unable, or likely to be unable, to pay claims against it.

Payments under the FSCS are limited to a maximum of £50,000 or € equivalent per individual, that is 100% of the first £50,000 or € equivalent of an investor’s total lodgements. The limit applies to each investor and, since joint accounts will be deemed to be split equally between investors, two people with a joint account will have the € equivalent of a maximum of 100% of the first £100,000 guaranteed. Individual customers are restricted to one maximum amount of £50,000 across an organisation. If you have any further concerns you may wish to visit the FSCS website at fscs.org.uk.”

The financial institution has had a presence in the IFSC for the past twelve months but this is its first foray beyond that Pale.

So you could argue that Nationwide UK is exploiting the concerns held here about household deposits – on the other hand you could commend them for their business savvy for spotting the gap in the market and sourcing deposits from what is still by many standards a rich country. Significantly Nationwide UK is not providing credit in what is a troubled economy. Households may not make the effort to open accounts in Northern Ireland or mainland UK but there is less hassle with moving their deposits to a domestic financial institution even if foreign owned. And now you can do face-to-face business with them on Merrion Row, Dublin.

And herein lies a longer term strategic problem for Irish banking. At some point the economy will turn the corner and we will have a more stable banking system. But for banks that are acquiring medium term lending at 6%+ today, how will our banks compete with new foreign (or indeed domestic) entrants that can acquire funds at cheaper rates. And even today people are beginning to consider seeking loans internationally. I am familiar with a recent loan application at a domestic bank where the bank wanted the borrower to pledge a share portfolio worth more than the loan as security for the loan AND charge 6% for the property-related loan. With these terms, and aside from the hassle of dealing with a bank located in another country, why wouldn’t a borrower seek funds elsewhere and pledge the same share portfolio but get the euro loan at 3%? But then again perhaps Minister Lenihan is banking on that not being the case because after all we are an island.

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The Nationwide Building Society has this morning published its UK House Price data for November 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 £163,398 (compared with GBP £164,381 in October 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 12.1% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of November 2010 being GBP £163,398 (or €195,669  at GBP 1 = EUR 1.1975) is only 1.5% 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 0.39% 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 9.7% for NAMA to breakeven on a gross basis.

The short-term outlook for UK residential is modestly negative. On Monday this week, the newly created Office for Budgetary Responsibility (OBR) issued its latest forecast and predicts the UK economy to grow (by reference to GDP) by a respectable 1.8%, and sees 2011 growth at 2.1% and 2012 at 2.6%. Unemployment is forecast to peak at 8% in 2011 and property will drop by 2.7% over the next 12 months. Mortgage approvals are dropping off with confident at the low and middle market in the doldrums with reasonable supply (boosted by the abolition of Home Information Packs (similar in part to our BERs) in June 2010) and anaemic demand dampened by the prospect of public sector job cuts, VAT rises and an €81bn fiscal adjustment.

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 0.8% fall in prices between now and the end of the year.

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