I am a little confused by the way in which Irish Nationwide Building Society’s (INBS) results for 2010 were released. Most mainstream media carried reporting on the results on 20th May, 2011 (for example here and here). There was a press release on the INBS website on that date which summarised the results for 2010. But there was no annual report. And for much of the past fortnight, I have checked daily on the INBS website and still no annual report was available. Which was irritating, because I wanted to get a proper look at the full accounts and also to update the NAMA wine lake page which has links to Irish banks’ financial reporting since the crisis began in 2008. And then on Tuesday this week, 31st May 2011, I checked again and lo and behold the accounts for 2010 were finally available though oddly INBS claim it uploaded the report on 20th May, 2011 which I’m pretty sure it didn’t. “So what?” you might ask, we have the annual report now so what’s the big deal? This entry will answer that.
With an accountant’s hat on, when you pick an annual report you tend to skip immediately to the audit opinion and check for qualifications and then quickly proceed to the financial statements and the accompanying notes. INBS’s auditors, KPMG give the financial institution’s accounts a clean bill of health in terms of providing a true and fair view of the company’s financial position. But then the balance sheet on page 22 of the annual report shows that INBS is insolvent, or at least was insolvent on 31 December 2010. By “insolvent” I mean that its assets were less than its liabilities by €18.3m. Yes €18.3m isn’t a huge number and remembering that INBS is being run down, mightn’t immediately ring any alarm bells.
Next I confirmed that the insolvent position had arisen after the government had injected €5.4bn of public funds into INBS. So even after shovelling in €5.4bn, we the people who own 100% of INBS are potentially on the hook for €18.3m or since we’re going to be talking about “red cents” shortly, 1.8bn cents. That was the position on 31 December 2010, what about transactions since? Well we know that INBS made a profit of some €125m on the buyback of subordinated bonds in March 2011. But the betting is that INBS made a book loss on the sale of its deposits to Irish Life and Permanent. And the stress test results two days ago indicate that INBS will need another €50-200m of loss provisions that are not yet accounted for. So at 2nd June, 2011 it is not clear if INBS remains insolvent but I would have said there was a good chance that it still is. That being the case, the State may have to inject some more into INBS.
But wait a moment; Fine Gael has said that it will not put another “red cent” into INBS above the €5.4bn already injected unless senior bondholders take a haircut. And INBS still has €601m of “unguaranteed unsecured” senior bondholders. Wonderful, so will we at last see a senior bondholder burned? Actually, the quantum of burning is less important than the principle. If we burn €18m from €601m of senior bondholders for example, then why can’t we burn the whole lot? After all it is our €5.4bn that has kept INBS afloat. INBS’s senior bondholders comprise €598m which matures on 26th June 2012 (bond identifier XS0306307694) and €3m which also matures on 26th June 2012 (bond identifier XS0306306613).
So Minister Noonan, time now to start burning senior bondholders in INBS? And if so, what sort of principle might that establish in other state-funded banks?
The Central Bank of Irelandhas been asked for a comment on INBS’s apparently insolvent position on 31 December 2010 and also for an estimate of future cash injections. This post will be updated with any response.
NAMA Wine Lake 
The level of loss at INBS is mindboggling. “50 per cent – the losses as a percentage of total loans at peak”. A ‘traditional’ bank shouldn’t be capable of this level of loss. It takes incompetence to a new level and should be investigated for criminal activity.
This link is to a different IT article. I came across it looking for strats of the INBS mortgage book. The relative levels of projected losses on INBS mortgages versus other lenders are striking.
This quote should prompt some investigation:
“He said that in “a very significant proportion” of the building society’s €8.9 billion Nama loans Irish Nationwide had no recourse to the client, particularly in the UK where property deals were set up using special purpose vehicles.
McGinn said the building society was “heavily over-reliant” on property values and financing “land and early-stage property development”. This is the riskiest end of development lending.
Matters were made worse by the lender’s “appalling” files and documentation and the fact that there was “no orthodox management structure”, said McGinn.”
I think you’d want to check if it’s ‘appalling’ files or files that have gone missing?
Off topic: You might have covered this, but the 6M euribor has been steadily rising over the last few months. This will put pressure on NAMA cashflow when their snr bonds hit their next reset dates.
http://www.euribor-rates.eu/euribor-rate-6-months.asp
@Ahura, thanks for that, and there may well be a separate entry on INBS’s results for 2010 now that the annual report is available. There will also be a separate entry on the stress test results which are still being analysed. Your point about Euribor is well made though I understand that NAMA has some hedging in place.
The main focus of the entry above though is the precarious financial position of INBS which should be prompting the government to deliver on its promise to burn senior bondholders.
NWL: “So at 2nd June, 2010 it is not clear if INBS remains insolvent” 2011? :-)
@WSTT, thanks for pointing that and that has been corrected.
I think it might have been Varadkar who made the “not another red cent” claim. Which might be convenient.
No, this time it was the stated position of both Taoiseach Kenny and Minister Noonan, that if either Anglo or INBS needed more bailout funding than the €29.3bn or the €5.4bn respectively already injected, then senior (not junior) bondholders would be required to contribute.
Well now, we’re apparently at that juncture. So what will Minister Noonan do?
I know the additional funding for INBS is not going to be huge (if you accept the stress test results two days ago) but it is the principle that is now very significant. And if the principle of senior bondholders being burned can apply to a case where INBS needs a slight top-up on its €5.4bn bailout, then why not apply expand the principle and wipe out the Anglo €3.1bn unsecured unguaranteed senior bondholders as well.
To whom are these bonds due, or do we know? In our march today, met a most condescending individual, who informed us that most of the ‘bondholders’ we want to burn are in fact Irish, and most of those are Credit Unions – nonsense, I believe, but is there any definitive accounting of the bondholders?
@everyone, Diarmuid O’Flynn has covered over 150 miles on foot this week to draw attention to the colossal sums being consumed by bust banks’ bondholders in this country. Today he ends up at Parnell Square/Kildare Street and plans to hand in a petition for a referendum on dealing with banks’ bondholders. Diarmuid is also at the fore of a weekly non-political, peaceful protest in the beautiful village of Ballyhea in Cork, again protesting the repayment of bondholders in banks that would be bust without public funds. He also maintains a Facebook protest page and pens his own blog. All beside his day job as a journalist with the Irish Examiner. I hope you give him a cheer or a beep if you come across him. Details of his crucifying runs this week and today’s schedule are on his blog here
http://thechatteringmagpie14.blogspot.com/
@Diarmuid, with respect to your question, there has never been a definitive list of bondholders. The Guido Fawkes website published partial lists and from memory all the holders were foreign. Senator David Norris started to reveal names under privilege in the Seanad but was stopped. The Central Bank has provided some figures but because the Bank regards foreign banks in the IFSC that don’t service the Irish economy as “resident”, it is not possible to assess the Irish holdings. As for the credit unions, it may well be the case that they hold some bonds. Given how often the credit unions are wheeled out in defence of bondholders generally, it is truly remarkable that the Bank has not revealed the overall total of bonds held by credit unions; if you were a cynic you might think it was marginal.
Finally Diarmuid, you asked previously the very reasonable question about when the bondholders are due to be repaid. And following some research and a lot of data manipulation, there will be a post later today with a detailed answer, by financial institution, by month.