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Archive for February 20th, 2011

Fine Gael (FG) looks set to be at the centre of the next government. With just under a week to go to election day, the party is riding the high 30s in opinion polls and Paddy Power will this morning give you odds of 40/1-upwards that FG will NOT be in government. So it would seem likely that the manifesto pledges of this party will be put into action over the coming months and it is interesting to see their attitude towards the banks and in particular, Bank of Ireland (BoI).

FG’s vision for an “Irish” banking sector would seem to form around BoI, a foreign-owned AIB and a “third force” which might develop around Irish Life and Permanent, I would guess. It would seem that some effort will be expended in maintaining BoI as an “Irish” bank though I note that this might involve upping the State’s stake in that bank in the short term from the 36.5% held today. So with BoI being nominated as the Chosen One, the publication of that bank’s unaudited unconsolidated 2010 financial statements yesterday is of more than a little interest to the nation. And just to recap, this is how important BoI is in Ireland.

The financial statements are unconsolidated which allows all sorts of jiggery pokery – remember Anglo’s carouselling of €7.4bn loans at year end with Irish Life and Permanent? Well unconsolidated accounts allow such occlusion on a factored scale compared with that. The statements are also poorly prepared without comparisons or even a definition of the term “period”. Below is a better presentation with a 2009 comparison (the interim accounts for the six months ended June 2010 did not contain a company/bank balance sheet which would compare with last week’s results and the interim management statement in November 2010:

In terms of the big number movements

(1) Loans to customer have dropped by €24bn whilst loans to banks have increased by €24bn.

(2) Deposits from banks have increased by €44bn to €88bn, and that is probably a reflection of ECB/Central Bank of Ireland intervention

(3) Customer deposits have dropped €38bn from €89bn to €51bn

(4) Debt securities in issue which includes senior bondholders has dropped from €26bn to €12bn.

In terms of the BoI press statement on Friday, I think the following is significant:

(1) BoI say that deposits have stabilised since the end of November, 2010. This is in line with the IMF February 2011 Staff Report which said “Pressure from corporate deposit outflows have moderated, however, and retail deposits continue to be relatively stable.” Both statements would appear to be at odds with the facts, but what I think might be the correct interpretation is that deposit flight from the six State-guaranteed banks might have been in the €10bn/month zone in late 2010 but that has now moderated to low single digit billions. Information from the Central Bank later this coming week on January 2011 deposits might help clear up the apparent confusion.

(2) BoI say that the NAMA haircut has been an average of 44% but that some €0.9bn (before provisions) remains to be transferred. This is understood to be the objector developers’ loans and are good quality “cherry” assets which might have small haircuts so the 42% final forecast haircut that Minister for Finance, Brian Lenihan indicated in September 2010 might still be valid.

(3) The sub-€20m NAMA-eligible exposures amount to €4.1bn and we know from previous reporting that the €5-20m exposures are €2.5bn so that would mean there was some €1.6bn of sub-€5m exposures.

(4) It would seem that much of the profit for BoI for 2010 will flow from the redemption of bonds at a profit.

The poor quality of presentation of BoI’s financial statements on Friday last is surprising. Whilst the misspelling of the filename as “unadited” is forgivable the retained earnings figure for the start of the period appears to be wrong (it is shown as minus €474m and the 2009 accounts show it was €213m)(UPDATE: 20th February, 2011. Thanks to commenter Michael O’Donnell pointing out that foreign exchange reserves were previously categorised under “Other Reserves” though are now categorised under “Retained earnings (inclusive of foreign exchange reserves)”. The opening balance for foreign exchange reserves was minus €687m). Overall there is no indication as to how BoI is to raise the remaining €1.5bn originally deadlined for 28th February, 2011 nor is there any indication of the scale of additional losses from the current stress tests – CBI Governor Patrick Honohan says they will be larger than forecast across all banks. It seems that it will be some weeks yet before we get clarity on Bank of Ireland’s condition and I wonder if FG might need revise its commitment to the bank.

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