Archive for July 10th, 2012

Having written off the Oireachtas hearing on Thursday last when NAMA schlepped up to the public accounts committee, as not revealing anything new, it seems that there are a few nuggets buried in the discourse. NAMA was asked about its “carrying values” and “fair values” for its vast loan portfolio, and the answer is pretty astonishing when compared with Irish banks.

First off, when you read the financial statements in the annual reports of our banks, you will see “loans” and the figure shown in the balance sheet will be the so-called “carrying value” of the loans. This is worked out by the bank estimating what it will receive for the loan in the future, which involves assessment of the chances of the borrower repaying the loan. Most Irish banks also show the so-called “fair value” as a note to the accounts, and this is what the loans are estimated to be worth today. There is quite a difference between the two. For 2011, the total “carrying value” recorded by AIB, Bank of Ireland and Irish Life and Permanent was €218bn and the “fair value” was €180bn – that’s a €38bn difference or 17% of the “carrying value”. Here’s the analysis:


In the case of the two pillar Irish banks plus Irish Life, the difference between “carrying value” and “fair value” ranges from 15-26%.

Last week, the NAMA CEO Brendan McDonagh responded to a question from Fine Gael’s Paschal Donohoe and told him “at the end of 2011, our loan balances net of impairment is approximately €25.5 billion and we also had to disclose the fair value. Our fair value is approximately €25 billion” So in NAMA’s case the “fair value” is just 2% less than the “carrying value”

So why is NAMA so different? You might think it is because NAMA has overall paid €32bn for loans that have a face value of €74bn, and have already weeded out much of the impairment and bad or doubtful debt in the €32bn, because it acquired the loans in the last couple of years. But this would be to ignore what the “carrying value” and “fair value” are supposed to represent and that they are supposed to be re-assessed annually. NAMA recently said that it was complying with the same provisioning guidelines adopted by the banks, and which were published by the Central Bank of Ireland last December 2011 – central bank press release is here and guidelines are here. So NAMA’s carrying and fair values should be comparable with the Irish banks.

From this position, it looks as if NAMA is overestimating “fair value” substantially because it is so out of line with the estimates in the main Irish banks.

As a footnote, and separate to the above topic, it’s worth noting that Brendan didn’t want to disclose the audited impairment charge for 2011, this was apparently signed off a fortnight ago but hasn’t yet been approved by Minister Noonan and won’t be published until 26th July 2012 when the NAMA Annual Report is published. But given the “carrying value” after impairment in 2011 is €25.5bn, according to Brendan at the Committee hearing, and that is what we assume is value in the Annual Report, and the value stated in the 2011 management accounts was €25,906,462,000 after an unaudited impairment of €810,000,000, you might be on the money in concluding that the audited impairment for 2011 is likely to be €1.2bn, or €406m more than the estimate in the management accounts, as presumably the loan value won’t have changed after the audit, but the impairment charge will, following scrutiny by the Comptroller and Auditor General. In 2010, the impairment charge increased by €485m from €1bn to €1.485bn between the unaudited results and the Annual Report. Looks like it has increased by €400m this year! NAMA has reaffirmed that its net profit is still €200m for 2011, so if its impairment has increased by €400m, then NAMA must have found €400m of extra profit also, since it published the unaudited reports, which will make the Annual Report in a fortnight a fascinating read!


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Although NAMA didn’t bother to issue any statement when it entered into its biggest financial transaction to date – the short term lending of €3.06bn to the Government so that the Anglo promissory note could be paid last March 2012 – nor did it issue a statement when it got the money back, it appears the transaction has now been completed and this is a short blogpost to record it. After all, it is NAMA’s biggest financial transaction to date…

The NAMA CEO Brendan McDonagh told an Oireachtas committee last Thursday that NAMA has now received back the €3.06bn that it was directed to lend to IBRC by the Government last March 2012 – in total the money was lent for less than 90 days and NAMA got its money back on 21st June. On 27th June, 2012 NAMA announced that it had redeemed a further €2bn of its senior bonds – remember NAMA issued €32bn of bonds, or IOUs, to buy the €74bn of loans from the bans and these bonds need to be redeemed by 2020.

Brendan says that NAMA made a profit of €6-7m on the transaction. Mind you, he says in the same breath that NAMA’s cost of funds was 2% so NAMA made a 0.35% or “35 basis points” profit on the transaction. For the arithmetically sharp amongst you, you’ll see the inconsistency – 0.35% of €3.06bn is €10.7m per annum and would be just €2.3m for 80 days – from 3rd April 2012 when NAMA handed over the €3.06bn to 21st June 2012 when it received it back. Yet Brendan claims a profit of treble that – good man, Brendan! Let’s hope that isn’t typical of the NAMA approach to calculating profits!

The loan transaction is detailed here and the Direction issued to NAMA by Minister for Finance Michael Noonan is examined here.

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September 2009 – Profit of €4.8bn
June 2010 – Profit of €1bn
July 2012 – Profit of zero (and subordinated bonds will not be honoured)
July 2012 – Loss of €1.594bn, representing the total of subordinated bonds
NAMA’s life-time profit projections

The NAMA CEO last week confirmed what the Minister for Finance Michael Noonan has been saying the Dail for several weeks – for example here  – NAMA is projected to break even by 2020 and cover the repayment of its senior bonds, its additional advances to developers and its operating costs. There is now no mention of NAMA’s subordinated bonds which today amount to €1.594bn. And if these are not honoured by 2020, then it is the banks which will shoulder the loss, and as we own the banking system, that is a loss which we will bear*

So between the draft NAMA business plan in September 2009 and today, we have gone from a profit of €4.8bn to a loss of €1.594bn. But will we be lucky enough to exit the NAMA scheme in 2020 with only a €1.594bn loss?

At this stage, no-one, including NAMA, can really say.

NAMA is sitting on a paper accounting loss today of €1bn, comprising a loss of €1.2bn in 2010 partly offset by a profit of €0.2bn in 2011. NAMA paid €5.6bn in state aid for its loans, and that will materialise as a loss unless the loans or underlying property increase in value at a faster rate than NAMA runs up its costs – about €200m a year plus, presently about €500m in interest on its bonds.

The immediate outlook for property in Ireland remains challenging in the sense that further declines are expected in residential nationally. We will find out what has happened to commercial in Q2, 2012 over the next week as Jones Lang LaSalle releases its quarterly index, but the betting is that the market was weak. With both residential and commercial, there are serious oversupply issues overall, though it should be said that in specific areas for specific types of property, there are claims of normal supply and even scarcity.

NAMA itself controls about 13,000 homes in Ireland, which isn’t insignificant in terms of an 80-100,000 overhang of excess residential property but it’s not market dominating either. On the other hand, NAMA controls €6-7bn of Irish commercial property and that does potentially give NAMA a dominant role. But with both residential and commercial, it is likely to be the economy domestically and internationally that determines prices, and, as big and powerful as NAMA is, the overall economy is beyond its control!

What will our economy look like in the second half of this decade? Very difficult to say, we have projections to 2015 which assume growth returning to about 3% per annum, but in truth Ireland’s performance will be dependent on what happens principally in Europe, both economically and in terms of banking and money supply, and these are matters outside our control.

And that’s why I say, no-one, even NAMA can project to 2020.

But it is sobering that the trend in NAMA’s projections of its financial outturn, since September 2009 has been negative, and it should be appreciated now that we may end up with billions of euros of losses which will be shouldered by the Irish taxpayer from 2020.

It may be time to start planning what to do with these losses, and perhaps incorporate NAMA into discussions in Europe on our overall debt burden.

*We own 15% of Bank of Ireland which has €280m of NAMA subordinated bonds, so arguably 85% of €280m will be absorbed by the other shareholders in Bank of Ireland. But for the rest, we own 100% of IBRC and we own 99.8% of AIB/EBS.

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