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Archive for February 11th, 2011

There are many questions hanging over the health of our banking sector at present; solvency issues stemming from bad loans and derivative exposures, liquidity issues as funding markets appear closed to the Irish banking sector and there is an ongoing deposit flight, reliance on the ECB and Central Bank of Ireland (CBI) for emergency and extraordinary support measures. Today sees the release of data by the CBI covering the period to the end of January 2011. Table A2 on the CBI’s website has not yet been updated (UPDATE: the table has now been uploaded and is available here). Nor is there a press release. But RTE is carrying the story.

Probably to the fore of the general public’s concerns is whether “deposit flight” is continuing or has stabilised following the intervention of the EU/IMF in November. Alas these figures today don’t provide direct answers, we need wait to the end of February 2011 for deposit data for January 2011 (and even then, the most granular data will relate to the 20 domestic financial institutions but many people really want to know what’s happening with the six “domestic” institutions – AIB, Anglo, Bank of Ireland, EBS and INBS)

But what the information provided today does tell us is that the CBI’s emergency liquidity assistance is flat at €51.1bn, exactly equal to the record high ELA in December 2010 if you believe RTE’s reporting. On the face of it this would mean some stability in banks’ reliance on the CBI to fund operations in the context of fleeing deposits. Alas, it seems that alternative funding has in fact increased by €14bn with banks “self-issuing” debt to themselves and converting it to liquidity at the ECB. Laura Noonan reports in today’s Irish Independent that two Barclays Capital (it being one of the troika presently stress-testing Irish banks along with the Boston Consulting Group and Blackshore) analysts “Laurent Fransolet and Guiseppe Maraffino say the fall [in CBI ELA, there was in fact no fall but the analysts gave their opinion in advance of the release of the CBI data] was achieved because Irish banks were able to issue €14bn of short-dated government guarantee bonds in late January”

Add the €14bn to the reported CBI ELA today and we are still back in new-record-breaking territory which would seem to indicate that funding issues have not gone away.

Also reported today is the total of special liquidity operations from the ECB in Irish banks (in this context “Irish” means the 430-odd financial institutions in Ireland’s “Liechtenstein by the Liffey”, the IFSC plus the 20 institutions that service the domestic economy (post office, credit union, NAMA banks, State-guaranteed banks, foreign owned subsidiaries like Ulster Bank, KBC, Rabo and others). The total at the end of January 2011 was €126bn, compared with €132bn in December 2010.

Overall therefore it seems that Irish banks’ reliance on ECB, CBI and self-issued debt has increased to €191.1bn at the end of January 2011 compared to €183.1bn at the end of December, 2010. Here are the numbers (they may be updated if the CBI formally update their website later today – the second Friday of the month is supposed to be the day when Table A2 gets updated)

UPDATE: 13th February, 2011. The €14bn of self-issuance might not need be added to the extraordinary liquidity figures as it may be the case that it will simply reduce CBI ELA by €14bn and increase ECB lending by €14bn. The self-issuance took place on the cusp of the month end reporting line. So it may be the case that ECB + CBI lending to Irish banks will have reduced by €6bn in January, 2011. The situation should become clearer with the release of the February, 2011 data next month.

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You might be forgiven for thinking the entries on here are all designed to draw attention to our dire circumstances and deepen depression. But the objective is to provide realistic comment and analysis particularly on NAMA and its integral connection to the banking sector. And one ray of hope from the latter part of last year was the reporting from the Credit Review Office (a new State agency created through the NAMA legislation) that credit availability to small and medium enterprises (SMEs) was easing, that is, that more and more SMEs were able to access the credit they need for what is universally accepted as a vital part of our economic recovery, particularly the recovery in employment.

Its third quarterly review was published today (it’s unclear what precise period it covers but since the agency was formed in the Spring of 2010, it is likely to cover the three months to February 2011). It paints an upbeat picture of credit availability to the SME sector and also promotes the positive role the CRO has both as a deterrent to inappropriate lending behaviour by the covered banks (formally all of the NAMA Participating Institutions – AIB, Anglo, Bank of Ireland, EBS and INBS, but in practice it’s really only AIB and Bank of Ireland that are advancing new loans) and in arbitrating loan applications.

The statistics produced by the agency show that 48 applications have now been made to the CRO by unhappy SME owners refused credit at AIB and BoI. Of the 48, 12 rejections have been overturned or the banks have reconsidered their rejection. The 12 represent total borrowings of €978,300 (an average of €82,000) and have helped secure 90 jobs. 18 referrals representing €1,009,753 were rejected and the banks’ decision upheld which apparently put 110 jobs at risk. The other 18 applications are at various stages of review though a small number have been withdrawn. The CRO is also careful to point out its involvement in the resolution of 11 cases which were not ultimately referred to the CRO. And of course the banks themselves adopted new internal procedures to ensure loan applicants had an internal right of appeal before any referral to the CRO. The overall message from today’s report is that credit conditions are easing for viable businesses and that banks are meeting their obligations to extend credit to SMEs and also provide fair procedures so that rejections can be appealed.

So a positive news story. Until you get the industry body representing SMEs’ response – “ISME slams credit review office performance” say the Irish Small and Medium Enterprises Association Limited. ISME claims the CRO has been a failure and puts the small number of referrals down to (a) Perception of process as just another layer of bureaucracy (b) A fear of ruining already fragile banking relationships and (c) Process seen as part of a discredited bank system, headed, staffed and funded by bankers.

ISME concedes that there has been a “small improvement” in credit availability with one third of loan applicants now being rejected but attacks what it sees as criticism by the CRO of business practices in SMEs contributing to rejections. It is a fact that the CRO criticised some SMEs for poor credit control (collection of debts) and using working capital to fund fixed asset purchases (this can jeopardise businesses’ liquidity).

Credit overall in the economy has plummeted according to the Central Bank of Ireland which is understandable following a 22% collapse in GNP. The CRO’s role is to ensure viable SMEs access the credit they need.

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Take a look at the screen-grab of the main webpage of Permanent TSB, one of Ireland’s major financial institutions.

PTSB has over 80,000 of the 792,000 extant mortgages in the State. Banking market-share statistics are hard to come by in Ireland but it seems that only four years ago PTSB had a 20% share. Its accounts for the first six months of 2010 would seem to indicate its share of new mortgage lending is now less than 5%.

Permanent TSB is part of the Irish Life and Permanent group and is one of the six State-guaranteed financial institutions. The State guarantee is acknowledged by the European Commission to be a form of state aid.

ILP has a loan to deposit ratio of 240% and is likely to be the institution with the most challenging deleveraging target under the IMF/EU bailout. A prediction on here some time ago was that the term “deleveraging” would enter common usage amongst the general population in 2011 as the true impact of reducing loan to deposit ratios became clear. And two of the key ways in which a financial  institution can deleverage is to increase deposits or reduce lending. So take a look at the PTSB main web page again.  You’ll notice the following:

(1) The emphasis is on increasing deposits through (a) current accounts (b) savings accounts (c) debit card services (note: not credit card services). And notice the interest rate available for 1 year euro deposits – 3.5%. Compare that with Germany which you’ll be lucky to get half that (these are two German banking comparison websites here and here)

(2) There is no mention of credit, save for the “Mortgage Repayment Difficulties” banner. The biggest mortgage lender in the State (by reference to number of mortgages outstanding) is no longer pushing its mortgage products.

Last week PTSB raised its standard variable mortgage rate by 1%. There was an entry on here asking whether PTSB was distorting competition in the State as its survival depends on state-aid in the form of the guarantee and yet this financial institution is increasing rates on mortgage holders, many of whom will be in negative equity and are unable to switch to lower cost providers (foreign-owned KBC’s standard variable rate today is still 3.85% for example). It remains noteworthy that our National Consumer Agency has failed to implement a term of the EC approval of the Bank of Ireland restructuring plan, namely to put a mortgage comparison section on its finance website, itsyourmoney.ie which was required at the end of 2010 by the EC but still has not been implemented.

Yesterday PTSB decided to increase its interest rates for its various fixed rate mortgages, the most eye-watering was a 3% increase on a 7-year fix from 6.1% to 9.1%. “Effectively people are being forced into accepting variable rates” said Rachel Doyle, director of Professional Insurance Brokers Association according to the Irish Times.

As the other Irish banks deleverage according to IMF/EU imposed targets, we can expect to see more of this – increased marketing aimed at getting deposits and deterring lending. That’s how you deleverage.

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There was a tongue-in-cheek entry on here during the week on the appearance of a new category heading on the debt maturity profile webpage of the NTMA. The new heading of “Liquid assets” had a garish “Barney the Dinosaur” shading and a little fun was had at the expense of the NTMA who had inserted an asterisk after the heading “Liquid assets” but not explained what the asterisk meant. There has been a short reply from the NTMA to say that it has now removed the asterisk and that “Liquid assets” refers to “Exchequer, Deposits and CSRA [Capital Services Redemption Account] account balances”. I am still awaiting a response to a follow-up query which asks if these funds are 100% available for debt redemption and what will happen in 2012 when then the funds will be exhausted. Although the entry was an attempt at some light-hearted relief, it had a more serious edge in asking how Ireland was going to fund debt that was maturing in coming years. And lo and behold, the EU produces a document yesterday which gives us the answer – we need return to the bond markets next year, in fact in a little over 12 months.

The report “The Economic Adjustment Programme for Ireland” written by the Staff of the Directorate-General for Economic and Financial Affairs is described as an occasional paper but we can expect similar reviews in future as part of our participation in the EFSF/EFSM bailout. It seems ludicrous but this document is the first publicly available that has a serious stab at addressing how Ireland is to fund its deficit AND maturing debt in the coming years. And it seems to confirm what has been suggested on here for some time – the €85bn bailout is not enough* to fund the State to 2014 and we will need return to the debt markets earlier – 2012 according to this report which says (PDF page 41)

“The Irish government does not need to tap international bond markets until the second half of 2012, but will gradually return to the markets thereafter. Available funds allow financing fiscal needs amounting to some €30 bn until end-2011, €17 bn in 2012 and €2 bn in 2013. Underlying this are assumptions of roll-over rates of maturing long-term debt of 0% until end-2011, 20% in 2012, and 80% in 2013. A further conservative estimate underlying the programme is that the rollover of short-term debt is significantly impaired in 2011 and access to private short-term debt funding will be restored only gradually.”

The maturing debt according to the NTMA this morning is €13.679bn in 2011, €6.852bn in 2012, €7.137bn in 2013 and €12.964bn in 2014. So it would seem the return to the bond markets in 2012 might be limited. That said, recent GDP projections seem to be consistently undercutting the government’s projections. And I see nowhere a reference to financing needs at NAMA (€5bn, and I note that the NAMA website still says that “Programme details will be published in Q4 2010” in respect of what I understand to be its abandoned medium debt programme) The elephant in the room (or should that be purple dinosaur!) is the future treatment of ECB and CBI emergency liquidity assistance. We can hope that funding markets regain confidence in Irish banks but if not, will the €180bn+ overdraft from the ECB and CBI today need be turned into a term-loan and added to the bailout?

And lastly, this is a politically impartial blog but it seems that the political mantras “we are fully funded to 2014” and “we won’t need return to the bond markets until 2014” are just plain false, which has been clear on here for some time but now the EC has confirmed the need to return early to the markets for funding. Given we are in the midst of a general election campaign, perhaps we might get some constructive and better informed debate on our debt options.

* The €85bn bailout is earmarked for deficit funding (€50bn) and bank capitalisation (up to €35bn). Central Bank governor, Patrick Honohan continues to claim that the bank recapitalisations might be contained in €10bn and that €25bn of the bailout might not therefore be needed. Others have suggested that we will need more than €35bn. The current stress testing of the banks might help clarify the position. There are two main reasons on here for suggesting the €85bn is inadequate – debt redemption of some €38bn in 2011-2014 and the expected need to replace ECB and CBI ELA with State funds.

 

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