NAMA and its loan valuations

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!