Take a step back from today’s announcement of NAMA’s final results for 2010 which revealed a €1.1bn loss in its first full year’s operation. Okay, we have gotten used to billion-euro-plus losses with our banks – in fact Anglo Irish Bank’s loss for 2010 was €17bn, which made the top 15 global corporate losses in history; but in the league table of Irish corporate results, a €1bn loss is exceptional.
NAMA was created with a clean slate in December 2009 and it acquired loans using stringent valuation and due diligence standards. Perhaps it should be surprising, even shocking, therefore that the agency has racked up such a large loss in its first year of operation. Indeed were it not for NAMA’s accounting treatment of part of the consideration it pays the banks – the subordinated bonds which will only be honoured if NAMA makes a profit – then NAMA might have been forced into a position today of asking the Government for further capital of at least €1bn.
It is an astounding loss.
It mostly arises from the fact that NAMA chose the 30th November, 2009 as its “valuation date” which means that the underlying property securing the loans acquired by NAMA, was valued by reference to values pertaining at that date. And in Ireland, the country where most of the property securing NAMA’s loans is located, both commercial and residential markets have tanked since November 2009. And not just in 2010 – there is some evidence to suggest that subsequent to the NAMA year end, the decline has accelerated; for example the 5.7% decline in commercial property prices in quarter two of 2011 was the biggest quarterly decline since NAMA was created, and the property industry is saying that commercial property will decline a further 20-30% if expected changes are made in the Autumn to abolish Upward Only Rent Review leases. Of the €1.1bn losses reported today, €1.485bn comes from revaluing loans at the end of 2010 and as bad as those figures are, the 2011 losses might be considerably worse and the betting on here is that NAMA will indeed need additional capital from the State at the end of 2011 to cover what is likely to then be a substantial negative capital position.
Normally if a new company had recorded such unanticipated losses – and when I say “unanticipated”, I mean absent from the NAMA business plans or statements made prior to and during the creation of NAMA – the whole board would be given their marching orders. What’s different here? Arguably two things:
(1) NAMA accepted constraints on the way in which it valued the loans it was acquiring, and did not apparently seek changes to those constraints, even when it became clear that the Irish property market was slipping from the frying pan to the fire. NAMA didn’t seek to change its valuation date from 30th November 2009, something called for frequently on here . Former Minister for Finance, the late Brian Lenihan famously said in June 2010 that changes to property prices had a “broadly neutral” effect on NAMA’s finances. Governor of the Central Bank of Ireland, Patrick Honohan, said late last year he “wasn’t excited” at the decline in values when quizzed by Vincent Browne.
(2) If NAMA had imposed deeper discounts on the loans it acquired, then the banks, which we mostly own, would have needed additional capital. But it wasn’t all swings and roundabouts, because Bank of Ireland is relatively healthy so there might well have been room for Bank of Ireland to absorb more losses. Bank of Ireland comprises about one seventh of NAMA’s loans, and you could argue that that bank’s existing shareholders are walking away with a substantial gift from the Irish taxpayer.
So can you blame the NAMA board for what is a disgraceful loss? Difficult to say. If the agency was focussed on maximising its profit, it should at the very least have alerted the Minister for Finance to the fall in property values and made the Minister aware of the impact of not changing its valuation date. There is evidence that NAMA viewed the decline in Irish property values as incidental to rises to other markets, which seems to indicate that NAMA had not gotten a handle on its portfolio. NAMA wrote to the Minister for Finance in May 2010 drawing his attention to the effect of abolishing Upward Only Rent Review leases on the value of the NAMA portfolio, so you would have expected a similar letter on the effect of continuing to value by reference to 30th November, 2009. As for the decline in property values themselves, NAMA has been partly unlucky, though it is understood that NAMA’s Head of Portfolio Management, John Mulcahy was instrumental in Minister Lenihan believing we were close to the bottom of the cycle in terms of property prices.
NAMA is keen to emphasise that the loss reported today is a paper loss and that over the remaining nine year lifespan of the agency, there is scope to recoup that loss. That is true, though the short term outlook for Irish property markets does look challenging. The projection on here in the short term is that NAMA will continue to rack up losses for the next 1-2 years but will then start to see a rise in the value of the underlying property. The question then will be whether the annual rise in property prices is greater than the substantial costs of managing the loans. On that last point, estimates in theUKthat it costs 5% of the value of a distressed loan each year just to manage the loan might mean that NAMA needs revisit its budgets.
Finally on the issue of losses, whilst NAMA stresses the losses reported are paper losses (which is true), if NAMA had revalued the underlying property at the end of 2010 and assumed all loans would default so that all NAMA was left with was the underlying property, then the loan impairment loss reported today would be substantially more than €1.485bn, the estimate on here is €2-3bn; the reason the losses aren’t as bad as that is because NAMA does not have to assume there is 100% default.
NAMA Wine Lake 
The loss is exacerbated by the fact they can’t book the uplift in UK property portfolio prices under IFRS, so writedown figure is somewhat skewed. Somewhat being the key word. Interesting to hear them say they made a loss on some of their Irish disposals.
hi NWL,
You said: ” The projection on here in the short term is that NAMA will continue to rack up losses for the next 1-2 years but will then start to see a rise in the value of the underlying property.”
On what basis do you expect a rise?
Thanks.
@Humanist, would expect by end 2013, growth will have returned to the economy, perhaps not the 2-3% officially projected but who knows, but I would expect some return to growth. I would expect access to credit to increase from present levels as some new banking landscape emerges. I would expect the effect of any forthcoming UORR legislation to have worked its way through prices. I would expect to see some specific shortages eg particular locations, specifications. That’s a projection needless to say.
There are what I would term extremes both positive and negative eg the EuroZone decides to quantitatively ease to deal with debt so we get 5%+ inflation. In such case NAMA might be one of the most profitable enterprises ever because it’s investment is in debt/property. At what I would consider the other extreme, we might have a messy default or fissure of the euro which would beat prices down relative to euro debt, and also a fissure would probably prolong the economic collapse.
Thanks for your reply. However, I’m still wondering why you expect to see a rise in property values by 2013. Couldn’t you equally expect a fall in values by then? (And why not use ‘prices’ instead of the somewhat more emotive ‘values’ term?) Personally, I see no basis for a rise in values in the next 5-10 years. Unless – unless – the ECB goes all out to print money. Is that what you anticipate?
@Humanist, I take your point about the distinction between “prices” and “values”. I used the term “projection” to describe the view here. And for the reasons given in the comment below, the projection is that prices will bottom and stabilise. Quantitaive easing in the EU is a possible scenario whereby we simply print more money to deal with legacy debt, which would mean that inflation would rise above the 2% target and with that, property would rise also. Other scenarios include federalisation of debt whereby creditor countries or banks take losses on their loans, exit of current euro countries from the euro, a messy crash of the currency or an extension of current strategy for minor debt write-off and austerity.
Well this is the whole thing right here isn’t it? The board members are–in NAMA’s case above all others–being paid to make sure that the company is making money, and following its brief. Now we have the the agency making a huge loss, selling assets prematurely instead of chasing its creditors and now the whole operation appears to have wandered completely outside its brief.
What is going on at NAMA?
Presumably in theory, the board are accountable for the agencies running, so if it’s not being run properly, then the blame falls by default on the board members. Ireland appears to have a different culture in this regard, but at the very least the entire NAMA board should appear before a Dail committee to explain how things have gone so horribly wrong.
We’re not talking about a country council road grit fund here. This is the largest property agency in the world; It has to be made accountable to someone, property crisis or no property crisis.
This is another big issue. NAMA is costing far too much run day to day. There was a lot of work initially with the loan valuations and legal work, but right now NAMA is not much more than a holding company for loans and properties. The receiverships, liquidations, sales and auctions are all contracted out, so it’s time for the agency to downsize.
Along these lines, the proposed mortgage scheme will cost a huge amount to run, and there’s no reason that the government couldn’t run such a scheme from the banks anyway. NAMA has no business getting involved in anything other than watching and waiting for the right time to sell. It should move itself to a nice quiet (inexpensive) office in its portfolio and carry out its work in the background over the next 20-30 years. If all goes well, everyone can get together again for an RTE retrospective in 2031.
@Neil Callanan, I think you are putting too much faith in the quality of assets NAMA holds in the UK. Looking at the list of properties in receivership they are of mostly secondary/tertiary quality. A good chunk of development land which is very tricky at present as a lot of permissions are no longer viable and need re-planning. So I don’t think the UK will be NAMA’s saviour as they are trying to spin it!
The real issue here is ‘actual asset sales’ vs. ‘Approved asset sales’. I have calculated this to be roughly €550m to the end March 2011. Hardly very encouraging in light of NAMA’s announcements of sales (a lot of which look like they haven’t gone through).
@Obsessive would it shock you if I said we needed to at least double the amount of staff in NAMA ans probably increase the budget by 150%? NAMA simply does not have the manpower to effectively deal with its portfolio and this is one of the real causes of the losses being incurred by the Agency. However I am still beating my drum and I expect that we will see large portfolio sales to funds sooner rather than later.
NAMA’s self-evident purpose (regardless of the political demagoguery at the time or the articles of assoc) is to prevent a collapse of the 2 large retail banks with its consequent Latin Americanisation of Ireland and Eurozone panic.
AIB and BoI are still in business and have imposed no depositor losses, To that extent NAMA is a success. Had NAMA not been created then BoI and AIB would have needed a further 13.7bn asset writedown. NAMA is subsidised by the ECB which is providing a below cost off-balance sheet loan of 30bn to finance the operation through its repo window.
If you are familiar with company accounts you will know that profit figures don’t mean much. Companies book large losses (the ‘big bath’) to manipulate future profits and construct growth charts as required by their financial analysts. I have had companies request that I delay billing them for a year because they need to show yoy growth. Free cash flow gives a better indication of reality.
Yes Irish property values have slid as predicted by one and all and those assets writedowns will now be booked by NAMA rather than the banks.
The argument that the price NAMA pays for assets is irrelevant because the assets are being purchased from state owned institutions still holds water. Yes BoI is now mostly privately held and the new shareholders have benefited from state largesse. but this is a drop in the ocean of 70bn odd of state money used to save the banks. And the success of BoI in floating away from state dependence is a good news story that is a prerequisite for the re-entry of the sovereign into the market.
I’m sure NAMA has its flaws and that they’re overstretched and making mistakes but we couldn’t just leave 70bn of rubbish loans with the same institutions that had created and mismanaged them and were refusing to take any remedial action other than to roll up interest for ever.
Again I have great respect for what you’re doing here – although I do wonder how you can afford the time to do it – are you sucking on the state tit by any chance?
@Kirsten, thanks for that. However I think you are softening the impact of the announcement yesterday. A company created with a clean slate in December 2009 has made a loss of €1.1bn in its first year. You can certainly massage accounts, and like you I have used personal discretion, lightly audited by the external auditors, in estimating provisions and dealing with accruals/prepayments/asset valuations, particularly goodwill. So you can certainly massage a result. But I don’t think NAMA could have escaped with a provision for losses on loans of much less than €1.485bn and if you valued the underlying property assuming further 100% default, that loss would more properly be €2-3bn for 2010 and looking like a similar figure in 2011.
Your point about the NAMA banks being mostly state-owned is well made. Still, BoI shareholders have benefitted but I’d agree the benefit is small relatively.
NAMA’s losses are likely to be more significant (in effect if not also in quantum) in 2011 because a negative capital position in December 2011 might give rise to the need for a large injection of capital. Yes,there is a good probability I would have said that NAMA will need a bailout.
Do you think NAMA won’t have enough income from sales and rent and loan repayments to make the coupon payments on its bonds? Or do you think there will be an accountancy requirement for more cash to balance the books?
@Kirsten, the second one! Even with 23% performing loans and some sales, NAMA should be able to comfortably fund its coupon payments for some years, but eventually that cash flow will turn negative unless there is an improvement in the underlying value of property.
I may soil the discussion here with my basic question but:
If Nama had an impairment charge of 1.4bn in 2010 because of a further 5% fall in property values since Nov 2009, then what woudl happen if prices increase by 1% in 2011? Ok, lets say 2012 actually?
Will there be a corresponding “bonus” to their accounts as a result?
Basically, over a ten year lifespan, is it not conceivable (just conceivable now) that prices falls in 2010-2013 could be cancelled out (or partially so) by increases between 2014-2020?
(although I naturally understand that the amount of loans Nama’s books will shrink every year)
@Rob, NAMA is an asset management company, like that giant BlackRock which did our stress tests in March or Fidelity which just bought into Bank of Ireland .
There has been more rubbish written in the last 24 hours about how you can’t judge NAMA’s performance by reference to just one year, when every other asset management company in the world is subjected to annual reviews. Emmet Oliver in today’s Independent seems to think that it will only be 2018 when we can judge NAMA’s performance. http://www.independent.ie/opinion/analysis/emmet-oliver-well-wait-years-to-see-if-nama-was-right-choice-2834684.html
I can just imagine Fidelity using that line with its clients! Once the laughter had died down, there would be firings or withdrawals of funds.
NAMA made a €1bn loss. It’s abysmal, and if the State had to capitalise NAMA to make up that loss now there would be uproar. The State may well have to capitalise NAMA in 2011 to cover additional losses.
From today prices need to increase an average of 16% so that the property securing the loans reaches the price paid by NAMA for those loans (less the 5% in subordinated bonds which are only payable if NAMA makes a profit). NAMA meanwhile has operating costs and interest on its loans – and an emerging concern is that NAMA has not properly budgeted for the ongoing costs of managing a distressed loan (5% of the loan value per annum seems to be the experience in the UK). In the short term property is likely to drop further.
So the question is not just can NAMA rely on a 16% increase in average property prices across all its markets in the next eight years, which doesn’t seem inconceivable, but how much further will property drop and what are NAMA’s annual operating costs. We may all have our own views on the future.
If Fidelity or BlackRock reported the results reported by NAMA yesterday, heads would probably be rolling. There are reasons, perhaps good reasons, why NAMA made a loss last year. But the lack of scrutiny in the media generally of yesterday’s announcement is just incredible. And it’s worth saying again – an Irish company which started in banking/property with clean slate in December 2009 made a loss of €1bn in its first year.
Rob,
Remember also that a 1% loss isn’t canceled out by a 1% gain. For example, if something is worth 100 and it losses 10% – it’s worth 90. It has to gain 11.1% to get back to 100.
Frank, sure I get the proportions.
@NWL,
Was an asset Management Agency setup in the middle of an economy with fall property prices ever going to experience anything but a loss in its first year?
Also, is that impairment charge on the book value of the loans or the cost of acquiring them? (72.3bn or 30.2bn?)
From further reading in the report I have answer my own question about the positive impairments…its seems the accounting rules force you to write down a probably loss straight away but will not let you use something (like a general increase in property prices) to prop up your figures until the item (s) have actually been sold.
@Rob, notwithstanding the fact that NAMA was set up at what was advertised as the bottom, or close to the bottom of the property crash, NAMA could have sought to alter its valuation date and bring it forward from November 2009. It might also have sought changes to the Long Term Economic Value regulations to allow it to account for information generated after January 2010. On both counts NAMA might have been turned down by Government, but NAMA did write to the Government in May 2010 on the proposed changes to Upward Only Rent Review leases and the impact of their abolition, so you would have expected a similar letter on its valuation date.
The impairment charge booked by NAMA is by reference to the NAMA acquisition value. That is a loan of 100 in the banks was bought by NAMA for 42 and NAMA has now booked a provision of 2 against that 42.
Your reading of the report is partly right – yes anticipated losses are recognised whereas profits are not. However NAMA does not assume there will be 100% default and NAMA will have to rely on the underly assets. If it did then taking the anticipated losses AND profits into account, NAMA would have booked a loss of €2-3bn in 2010.
[…] is known as the “impairment loss”. It is excluded from operating profit; for example in 2010, NAMA made an operating profit of some €400m but there was an impairment loss of some €1.5bn which mean that NAMA overall made a loss of […]