Archive for May 28th, 2012

Ahead of the Fiscal Compact referendum on Thursday  this week, there is an argument thatIrelandis on the road back from the abyss and that a “no” vote might stamp out the fragile green shoots of recovery. This blogpost examines the latest economic statistics and concludes that we are not yet in recovery mode.

We’re in recession. The top-level measure of a country’s economic performance is its Gross Domestic Product (GDP) which tries to measure the total value of goods and services produced by a country and Gross National Produce (GNP) which measures what we produce but excludes profits made by foreign companies – those are simplifications. Economists define a “recession” as GDP declines in two successive quarters. Unfortunately there is no widely accepted definition of a “depression” though some have suggested you’re in a depression when you have a GDP decline of over 10%. So what do the latest numbers which relate to 2011 tell us? We’re back in recession with GDP contracting in the last two quarters of 2011 and with GDP down 9.5% from €178bn in 2007,Ireland might be said to be in a depression. The results for the first quarter of 2012 will be available at the end of June 2012.

Bond yields are rising: our notional borrowing costs are stable to rising at present. We say “notional” becauseIreland is not actively issuing debt at present, we get all our funding from the Troika bailout, but we can see the interest rates that apply on the secondary markets where holders of our bonds sell to one another. In November 2010 when we sought our first bailout, our notional cost of borrowing was 7% and it increased to 10% in March 2011 when the bank stress tests gave some confidence and there was a temporary decline to 9% but when Portugal sought its bailout in April 2011 and Greece started lurching from crisis to crisis our yields rose to a high of 14% in July 2011 when the EU decided to cut our interest rate along with Greece’s and Portugal and it reached a low of 7.5% a the start of October 2011 before increasing again to 10% as concerns grew for Italy in particular and then at the end of November 2011, the ECB announced it was practically printing money by offering 3-year loans to banks at 1% which banks could use to buy bonds, and that lead to a gradual reduction in our yield to 6.7% thought it steadied at 6.9% before the latest bout of jitters about Greece and Spain and this morning it stands at 7.5% again. Sustainable long term borrowing is perceived to be about 5-6% or lower. 7.5% is seen as unsustainable and indeed so also was 6.7% our low in the past six months.


Retail sales are falling: A good indicator of the domestic economy is the value of retail sales, what we are spending in the shops, and the latest monthly figures were published by the CSO this morning which show the value of retail sales was down 1.1% on a monthly basis in the month of April 2012 and down 1.8% on an annual basis and is down 26% from the peak in 2007.

Construction activity is falling: the latest index from Ulster Bank published at the start of May 2012 stated “activity in the Irish construction sector decreased markedly in April as fragile client confidence led to a drop in new business.”

Residential and commercial property prices are falling: the latest monthly indices from the CSO show that nationally property prices continue to decline, by over 16% in the past year and 1.1% in the month of April 2012. There have been two consecutive months of increases in Dublin, the first time that has happened since the peak in 2007 though we did have Dublin apartment prices increasing in two months last year before seeing substantial decreases this year. The latest commercial price indices from Jones Lang LaSalle and the SCSI/IPD both show commercial property continues to decline despite Budget 2013 being one of the most pro-property budgets for more than a decade.

Mortgage lending is falling: We saw with the latest quarterly lending figures from the Irish Banking Federation a fortnight ago that mortgage lending is practically flat-lining and for Q1, 2012 a total of €450m in new lending was approved, down 95%-plus from the peak, down from the previous quarter and down from the previous year’s Q1, 2011. The only bright spark is the annual pace of decline has eased but given the VERY low base of current lending that is hardly cause for optimism.

Business lending is falling by about 2% annually: anecdotally small and medium sized businesses complain about lack of access to credit. Referrals to the Credit Review Office confirm there are problems but suggest they’re not as bad as companies claim – companies counterclaim that to keep relationships with local banks, they won’t complain. The official figures however confirm that lending is declining.

Mortgage arrears are rising: We saw with the latest mortgage arrears figures that another 6,000 mortgage accounts went into arrears in Q1, 2012 though the pace of increase slowed slightly. One in 13 mortgages is more than six months in arrears, a time period after which there is generally considered to be little chance of the account becoming performing again. 15% of mortgage accounts are in arrears or have been restructured.

Our deficit: I think it is fair to say that our deficit is under control in the sense that monthly results are now in line with, or better than, projections, and that is no mean feat, even if many of the measures introduced have been mandated by the bailout programme with the IMF/EU. However, our deficit is second highest in Europe after the UK’s and although it is hoped it will be less than 8.6% in 2012 and less than 7.5% in 2013, this will rely on projections of economic growth as well as another €3.5bn of cuts and new taxes to be announced in six months time in Budget 2013. And we will need adjust our budget by €3.1bn in 2014 (on top of previous years’ adjustments) and €2.5bn in 2015 (on top of previous years’ adjustments) – in other words in 2015 we will have an adjustment of €8.6bn compared with 2012, that’s €5,000 per household in new taxes and cuts.

Our debt: our national debt is rising and next year is expected to peak at 120.3% as long as we meet deficit targets and have some economic growth. Arguably it is this debt which is unnerving bond markets and preventing our bond yields coming back below 5% where we could sustainably borrow. This is our gross government debt but it excludes any loss on NAMA and we know that NAMA paid €5bn more for its loans than they were worth in November 2009.

But is it all negative? Absolutely not, even in the figures above, there are rays of hope, there is some evidence of a slowing in the declines in residential property prices in Dublin, the number of mortgage accounts 90-180 days in arrears grew by just 300 in Q1,2012 the lowest increase on record. And in general, the forecasts this year are for modest growth.

Unemployment is stable and has been for a year and half now. It is still 14.3% which is very high compared with the UK’s 8.5% but nowhere as bad as Spain at 24% or Greece at 22%. We are creating jobs but the problem is we are still shedding jobs – we hear about large scale job announcements like Paypal’s 1,000 new jobs in Dundalk but in reality, many job announcements lead to recruitment which is spaced over a period of years and meantime there is a drip-drip of layoffs, many of which don’t make the national headlines. Our unemployment rate has stayed largely the same for 18 months fluctuating between 14.1% and 14.6%. We don’t know what effect emigration is having on the unemployment figures. It is almost criminal in Ireland, a country scourged by emigration that there is no comprehensive measurement of emigration and we must rely on estimates which tend to be out of date and wrong. The latest estimate for the year ended April 2011 was that 76,400 emigrated whilst 42,300 immigrated. Forecasts for 2012 tend to project unemployment staying at current levels.

Deposits are stable: monthly reports from the Central Bank ofIreland show that since the middle of 2011, deposits have stopped flowing out of Irish bank accounts. But since then there has been a stabilisation rather than growth. There has been growth of deposits at Irish banks outside of Ireland, eg with the Bank of Ireland/Post Office joint venture in the UK, but it is difficult to see what benefit this confers on the Irish economy.

Residential and commercial rents are showing signs of stabilisation: Residential rents have in fact been stable for well over a year and indeed until last month were beginning to increase by 2-4% annually. Last month’s 0.9% month-to-month decline might have been a blip but it might also herald reductions envisaged when social welfare rates were reduced in January 2012. Commercial rents rose by 0.7% during Q1, 2012 according to JLL, the first increase since 2008.

Inflation is low: we don’t have deflation in Ireland which is a mixed blessing. On one hand it would help sustain standards of living but on the other would lead to lower wages and might ignite a cycle which economists refer to as stagflation. The latest inflation  figures show annual CPI inflation running at 1.9% with energy prices being a significant contributor.

Consumer confidence is up: the KBC bank/ESRI publish a monthly consumer confidence index and it has been showing signs of improvement in the last two months having risen from 54.3 to 60.1. Mind you, this index appears to be volatile and if you examine previous figures, you will see 20% declines in two months. At 60.1 it is at its highest level since September 2010, but then again it was at 59.0 in November 2011 only to decline to 54.3 in February 2012.

So do we have the fragile green shoots of recovery? Based on current statistics, no we don’t. The main economic indicator, GDP, shows we are in a double-dip recession – that’s black and white. Lending to our economy is in decline, and in some sectors is moribund. Our notional borrowing costs are unsustainable and are levels above those that applied on the eve of our first bailout and are currently trending upwards. Our deficit is a horror story though we are meeting our monthly projections. Our debt is also a horror story and is growing. Asset prices represented by property are declining. Our unemployment rate is stable but it seems that new jobs generated are being offset by job losses. Our inflation is low but above zero which is a positive and some surveys indicate a growth in consumer confidence from a low base.

Overall, based on the most recent statistics, you would have to say that we are not yet recovering.


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Last Thursday, NAMA published its quarterly report and accounts for the three months ended 31st December 2011 and the 12 months ended 31st December 2011. This blogpost examines the accounts in some greater detail.

Before starting on any analysis, it’s worth stepping back and considering what NAMA does now. It has acquired €74bn of property-related loans from certain Irish banks; it only paid some €32bn for those loans because the underlying security had collapsed in value following our property crash; NAMA has another nine years in which these loans must be reduced to zero; NAMA paid for the loans with bonds on which NAMA must pay just over 1% interest per annum; on the other hand developers pay NAMA just over 3% on their loans; the loans will drop to zero by (1) NAMA selling the loans (2) developers repaying the loans, sometimes from the sale of property or (3) NAMA foreclosing on the loans and getting the best price it can for the property it secures. NAMA incurs expenses in managing the loans – it has its own staff but also third party suppliers. And lastly NAMA buys insurance (technically “hedging” and “derivatives”) so as to protect the Agency from the ECB increasing interest rates, or foreign exchange rates between the euro and other currencies changing.

So, treating NAMA as a business, what figures should we look at, in order to assess how the Agency is performing? Profit will be the main performance indicator. Profit represents the difference between a business’s sales and its costs and overall NAMA made a profit of €200m in 2011. Its “costs” include not just those expenses paid out during a period, but also the change in the value of assets held by the business – in particular the decline in value of its loans as a result of declines in underlying property securing the loans, this is called the “impairment charge”. In 2010, the Agency booked an impairment charge of €810m and this is the single biggest item in the Agency’s annual accounts. What do we know about the composition of the impairment charge? Next to nothing, unfortunately and the full note to the accounts states the following

“In the case of debtor cashflows with a net discounted deficit (comparing the discounted cashflows to the NAMA carrying value of the loans, including any accrued interest income under the EIR method) any deficits are provided for in full as loan impairments.A collective loss assessment has also been performed on the unassessed element of the loanbook, taking into account the loss levels evident in the assessed cashflows. The total impairment provision recognized based on the cashflow assessment at 31 December 2011, for both the individually significant and the collectively assessed loans, was€2.3bn.This results in a net charge tothe Q4 2011 income statement of €810m, as a related provision of €1.48bn had already been recognised in 2010.”

So no analysis by property sector, geographical market, age/size of loan, nothing, nada, nichevo. And this is the biggest figure on the accounts. Also based on a general analysis of the markets in which NAMA is active, it looks too low unless NAMA is making assumptions about the terminal disposal value of assets in years to come, being far higher than pertains today.

Unfortunately the lack of transparency on the biggest number in the NAMA accounts is replicated throughout. NAMA made a profit of €170m in Q4,2011 from the repayment of loans. Was this down to sales of loan portfolios eg the Maybourne loans for €800m, refinancing of loans eg David Daly’s, normal repayments by borrowers, sales of property by receivers/developers? Again, we have next to no idea.

NAMA is a little more forthcoming on its interest income and, following pressure from politicians including Sean Fleming and Pearse Doherty, NAMA is now telling us that of the €1.2bn booked as interest in 2011, €900m was received in cash and a further €0.1bn was later deducted as NAMA didn’t think it would eventually receive it. That still means that nearly 20% of the interest booked by NAMA in 2011 was an estimate of proceeds from the eventual sale of assets and wasn’t received in solid cash.

The above are the big numbers, and it is almost farcical to concentrate a blogpost on the smaller numbers, the salaries, the legal fees, the payment to Capita etc when so little information is available on the important numbers which go to the heart of what NAMA does.

NAMA made an unaudited profit of €200m in 2011, that’s a major turnaround from the €1.1bn loss in 2010 but remember that in 2010, the impairment charge increased by €0.5bn from €1bn to €1.5bn when the audit annual report was published, so it may yet be the case that NAMA ends up with a loss for 2011. We will find out mid-July 2012 when the annual report is published.

It is also worth pointing out that NAMA should be making a very healthy profit. The Agency pays interest on its bonds (roughly €32bn) at the so-called “6 month Euribor rate” of 1% yet it collects interest on the face value of the loans – roughly €74bn – at 3%. So if all of NAMA’s loans were performing and paying quarterly interest, then the Agency would be taking down 3% of €74bn for 3 months (or roughly €600m) each quarter and would only be paying out 1% of €32bn for 3 months (or roughly €100m). So purely looking at interest, NAMA should be really profitable every quarter if all its loans were performing and paying quarterly interest. That’s not the case, and NAMA now says that only 20% of its loans are performing so the interest receivable each quarter falls to 3% of 20% of €74bn for 3 months or just over €100m. So NAMA should be generating a profit each quarter on interest, even if it is just a few million. NAMA says that it received interest of €365m in Q4 and paid out interest on its bonds of €129m.

NAMA also generates a profit if it gets more for its loans than it acquired them for, from the banks. For the sake of illustration only – the NAMA acquisition costs are not in the public domain – say NAMA acquired the loans in the Maybourne group for €700m. In September 2011, it was reported that these loans had been sold to the Barclay brothers for €800m. So NAMA would have booked a profit of €100m, based on the illustrative acquisition price. NAMA says it made a profit of €170m in Q4, 2011 from the disposal of loans, and from inception to Q4 has made a profit of €300m from the disposal of loans. Given that these are likely to be the most attractive, most liquid and best performing loans, this is not exactly auguring well for NAMA’s future.

NAMA can also generate a profit if it forecloses on its loans, and appoints a receiver to assets and those assets are sold for more than the NAMA loan acquisition price. Again to illustrate, it is understood that the Odeon site in Leicester Square in London which was sold last week by a NAMA receiver for a price understood to be around €120m, the site was originally assembled by Limerick’s Steamboat Developments for a reported GBP 58m (€70m). It is not clear what NAMA paid for the loans used to finance the development. But on the face of it, it seems likely that NAMA will have made a profit on the transaction.

There is a fourth activity which may generate profit for NAMA, but it has not happened to date, and that is where NAMA forecloses on a property and takes possession of it – remember that to date, NAMA has just appointed receivers and if the receivers recover more than the value of the loan due by the developer, then the developer will normally be given that excess. If NAMA truly forecloses, then it takes possession of the property and may make a profit on its disposal which doesn’t need be returned to the developer. This hasn’t happened yet.

Cash flow
Beyond profit, what is worth examining in the NAMA accounts? Normally cash-flow is critical to many businesses but it is not likely to be an issue for NAMA, as interest receipts should cover interest payments and expenses, particularly in the early years. Cash flow will become an issue for NAMA as it progresses towards 2020 when its bonds are due for repayment. NAMA overpaid for the loans it purchased by €5bn according to the Comptroller and Auditor General and unless NAMA sees a recovery in property prices or manages its assets so as to generate more than was paid for them, then NAMA is looking at a healthy shortfall in 2020 which will then be picked up by the taxpayer. On cash flow, NAMA has healthy receipts from loan repayments including loan interest and has paid out less than €0.5bn in advances to developers.

The one detailed small-value item extracted from the accounts this quarter is the dividend paid. In 2011, NAMA paid a dividend amounting to €5.093m to its SPV investors “from its retained earnings”. In fact NAMA made a loss of €1.1bn in 2010, but the three investors from AIB, Bank of Ireland and Irish Life and Permanent were paid regardless. There is no indication of a dividend paid to these investors in 2012 but last year’s management accounts didn’t indicate any dividend either, and it was an unpleasant surprise on the last page of the annual report to find that a dividend had been paid, despite the €1bn-plus loss.

Absence of transparency.
NAMA will tell you that it is the most transparent Govt or semi-state organisation in Ireland, and to an extent it is correct but that just means most Govt organisations are opaque. I must say that with an accountant’s hat on, the quarterly management accounts and report produced by NAMA are becoming increasingly difficult to interpret.

When Minister Lenihan was leading the NAMA legislation through the Oireachtas, there was a provision that NAMA would publish every quarter “sums recovered from property sales in the relevant quarter” – section 55(6)(g) of the NAMA Act. But NAMA has not to date given any details of “property sales” and instead interprets the section of the Act to mean sales where the Agency has foreclosed, and NAMA doesn’t regard the appointment of receivers or liquidators as “foreclosure”. So although we know NAMA has approved €6.8bn of assets for sale to the end of December 2011, NAMA will presumably provide no detail of such sales, as might have been envisaged when the NAMA Act was being drafted. It would be laughable if it weren’t so serious.

Along similar lines, there is a requirement for NAMA to provide details of advances made during each quarter (pursuant to s54 (2)(c) which s55 requires to be updated quarterly). NAMA interprets this to exclude advances made to developers! So all we get are inter-company advances within the NAMA group which tells us nothing meaningful.

NAMA is also required by s54(3)(e) to provide a quarterly “list of all asset portfolios” held by the Agency which NAMA interprets to be merely a total for debtors, a total for cash, a total for other receivables etc, but again this provides no really meaningful information.

I regret to say that NAMA has now lost me in terms of its derivative and hedging activity. We can see each quarter that NAMA books profits and losses, and one assumes that is because of interest rate or foreign exchange bets that have paid off or resulted in losses. It is unclear from the accounts what exposure NAMA has to these products.

Revenue and costs summary for the 2011

I leave you with the summary of revenue and costs for the four reported quarters of 2011 for the main NAMA company, National Asset Management Limited. You can see that some of the costs are beginning to become quite meaty. Presumably “Portfolio Management” includes receivers costs.

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