Archive for July 25th, 2012

Alongside the launch of the 2011 NAMA Annual Report today, the Agency has this afternoon  published its management accounts and report for the three months ending 31st March, 2012.

There will be a review of the report and accounts over the next day, but a quick skim of the accounts and report shows the following:

1. Performing loans as a proportion of total NAMA loans are now 19% down from 20% at Q4, 2011 and remember these include loan restructures. By reference to original loan values, the estimation on here is that only 15% of NAMA loans are performing, down from 18% in Q4, 2011.

2. Profit before impairments for Q1, 2012 total €133m. Impairments are likely to have wiped this out, but impairments are only calculated once at year at the year end.

3. Legal fees were just €23,000 during Q1, 2012 and costs overall seem remarkably subdued with just €25m of costs versus a full year budget of €193m.

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You should have some sympathy for the 214 staff at NAMA. If property prices had risen by 10% in Ireland in 2011, chances are the Agency would be reporting a €1-2bn profit in its annual report today. But property prices declined 10-20% last year, so NAMA is today reporting a profit before tax of €11m – yes eleven million euros – a profit after- tax of €247m and a profit after tax and dividends of €242m.

Truth be told, NAMA’s profitability is less affected by the effort of the 214 staff, than by the change in property prices which to a large extent is outside the control of NAMA. And the word on the street, even amongst NAMA detractors, is that the staff are hard-working and that the NAMA CEO Brendan McDonagh has built up a decent team from scratch. And for that, and for turning in a profit today, they deserve a pat on the back.

But in truth, today’s results are awful. Given that we had the unaudited accounts for 2011 at the start of May 2012, you mightn’t have expected too many surprises today but there were a few. Impairments for 2011 stand at €1.3bn compared with an estimate of €0.8bn in the provisional unaudited accounts. NAMA “found” extra profit of €0.2bn someplace – it’s not clear – since the start of May and also magicked up an “income tax credit” of €235m. Read notes 12 and 26 to the accounts and you will see that the income tax credit, which comes from the Irish state is dependent on NAMA making profits in future. That is not guaranteed at all, and NAMA is running up annual costs of €700m in interest  and operating costs at present and it seems on here that it will very shortly be unable to cover its expenses if the percentage of performing loans decline. NAMA is still cash-rich because it has sold one quarter of its portfolio and only repaid one tenth of the bonds it used to acquire that portfolio, but that cash mountain will be levelled as the Agency moves in 2013. And from 2014, the Agency may need a handout.

Unless the property market picks up.

And by “picks up”, I mean prices stabilise and possibly increase, and buyers have access to funding. NAMA is seeking to address the latter point with its €2bn of staple financing, but it seems on here that the Agency is sailing very close to anti-competitive winds, but even if NAMA makes €2bn available to the buyers of its commercial property, those buyers will still only pay what they think the property is worth, and will have an eye on future price trends. And the immediate outlook is challenging with commercial and residential still appearing to be some way off the bottom.

Last year when NAMA published its annual report at the end of July 2011, it also published its management accounts for the first quarter. This year, it hasn’t and the word on the street is that the portion of NAMA’s loans that is performing has continued to deteriorate and the Agency may now have reached the point where its expenses are not covered by accounting income.

It is again worth noting that there is very little information on the calculation of NAMA’s impairment charge, and the suspicion remains that NAMA is assuming a recovery in prices to November 2009 levels.

Lastly at this point, it is remarkable that NAMA’s “fair value” of its loans is €25.045m whereas the value shown in the accounts, the “carrying value” is €25.607m. NAMA’s fair values are just 2% less than carrying values whereas our banks are 14-27% less.

There will be a detailed blogpost on the 2011 annual report over the next day.

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A couple of weeks ago, Sinn Fein’s finance spokesperson Pearse Doherty asked Minister for Finance Michael Noonan for the analysis of NAMA’s property by county in Ireland, after two TDs had successfully had questions answered which showed the values for Wicklow and Meath. Sinn Fein was fobbed off with the commitment that NAMA would produce the analysis in its Annual Report, and thus today, we find out how much NAMA has in each county in Ireland.

The values shown above are the November 2009 values, and these are likely to have decreased further since then. Commercial property has declined by an average of 24% since November 2009 according to Jones Lang LaSalle and residential property nationally is down 31% since then according to the CSO. Development property is probably down 20% but no-one produces an index for this property segment.

Having said that, it is surprising that there is very little in NAMA from Leitrim, Cavan, Monaghan and Longford – each with just €5-20m of assets – areas of the country famous for tax-incentive led ghost estates and over-development. Just as surprising perhaps is the relatively high value of assets in Louth (€350m) and Waterford (€175m).

The list excludes NAMA’s assets in Dublin and Cork and shows the split of approximately €5bn of Irish assets by reference to November 2009 values. Deputy Doherty in fact asked for the split amongst the 32 counties on the island, but NAMA seems to have confined its analysis to the Republic only.

UPDATE: 25th July, 2012. The Northern Ireland analysis is in fact in the report and is as follows:

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[The annual report is now available here]

NAMA is publishing its 2011 Annual Report today. The profit and loss account and balance sheet shouldn’t be much changed from the unaudited 2011 accounts published at the start of May 2012.

But they are.

The impairment provision for 2011 has increased by a staggering €467m from €800m to €1,267m. NAMA has decided that it can book a “tax credit” of €235m, something not apparently contemplated when the unaudited accounts were published, and NAMA seems to have “found” profit elsewhere of €185m. We wait for the publication of the report to look for further clues.

Overall NAMA is declaring an audited profit before the tax credit of €12m, and after tax of €247m. That compares with €200m in the unaudited accounts for both headings. Given that it is the State that is on the hook for the tax credit, you might say the more accurate reflection of performance in this instance is the pre tax profit.

There is a press conference with the duo at the top of NAMA, and Minister for Finance Michael Noonan presently ongoing at NAMA HQ in Dublin, and the full annual report is expected here shortly.

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This morning at 11.30am, there is a press conference scheduled at the NAMA HQ in Dublin to launch the 2011 Annual Report – previewed here. The NAMA CEO Brendan McDonagh and the NAMA chairman Frank Daly will present the report, just as they did last year. They will however be joined on this occasion by the Minister for Finance, Michael Noonan, and the optics of the Minister’s presence should not be overlooked – in the past year, NAMA has been brought firmly within the political compass, and that is something about which we should be worried. It is not just bankers, developers, audit firms, law firms and the media that have failed this country, but history shows politicians share much of the blame, and you should be concerned as politicians encroach upon what was supposed to be an independent asset management company which could pursue its own decisions in support of the objectives given to it in the NAMA Act.

But let’s review the past year

(1) And let’s start our review with the review of NAMA by the former HSBC boss who was criticised in last week’s US Senate report on money laundering. It seems that it was Minister Noonan who commissioned the review in September 2011. The NAMA Act provides for an overarching review of the Agency but that is not scheduled until 2013. This was a special review, and demonstrated to NAMA that the Minister now had the whip hand.

(2) NAMA advisory board, the Minister decided to create an advisory board with Michael Geoghegan, Northern Ireland quango king Denis Rooney and NAMA’s own Frank Daly. The role of the board is to advise on remuneration and appointments and NAMA strategy, but it is obviously a half-way house for the Minister to impose his will on NAMA.

(3) NAMA departures and appointments, two NAMA directors have resigned in the past year and only one has been replaced with the appointment by Minister Noonan of John Mulcahy, less than 12 hours after the deadline for applications had closed. The other vacancy has not yet been filled by Minister Noonan whose responsibility it is for NAMA board appointments, despite the resignations taking place in October and November last year.

(4) Anglo promissory note, NAMA was directed to hand over €3bn of cash to zombie bank IBRC in March 2012 on foot of a formal Direction from Minister Noonan. Some thought this act represented a crossing of the Rubicon in political interference in NAMA, as the transaction had little to do with what NAMA was intended for, when it was conceived in 2009.

(5) Change to Troika agreement for debt repayment, Minister Noonan removed any flexibility in NAMA’s repayment of debt by the end of 2013, when he unilaterally agreed with the Troika in May 2012 that NAMA would repay €7.5bn of its senior debt by the end of 2013. This was previously an internal target in NAMA which would have been flexible. That flexibility has been removed, and for what?

(6) Ministerial interference, we learned earlier this year that Ministers had gotten involved in NAMA decisions on commercial property in Dublin. From Minister Richard Bruton’s intervention – he says it was with the IDA – on the BSkyB letting at Burlington Plaza to Minister Phil Hogan’s intervention at Google, it now seems it is open season on ministers contacting NAMA, directly or indirectly, so as to influence decisions.

(7) Senators and TDs contacting NAMA, remember when TDs and indeed ministers had conniptions in deciding whether or not they could contact NAMA without breaking NAMA’s anti-lobbying rules? There’s no such anxiety now, with NAMA providing TDs and Senators with a dedicated phone number and email address, oir@nama.ie

(8) Budget 2013 and Upward Only Rent Reviews, this was the greatest possible budget for NAMA. Although NAMA rejects the notion it lobbied government to abandon plans to reform UORR laws, and merely drew the government’s attention to the catastrophic effect the reforms might have on NAMA’s asset values, the Agency did “get its way” when the plans were formally dumped last December. With the reduction in commercial stamp duty, the capital gains tax incentivisations and reliefs on motgage interest, this was a Fantasy Budget which NAMA might have written itself.

(9) Relationship management, in January 2012, NAMA recruited what it called a “Relationship Manager”, Martin Phelan formerly the communication director at the Construction Industry Federation. Martin is now “Head of Relationship Management” at NAMA and there have been recent advertisement(s) for Relationship Officer(s). When asked last week in the Dail for the budget, headcount and purposes of this department in NAMA, Minister Noonan would merely say “The function of relationship management, which relates to the Agency’s engagement with members of the Oireachtas and other key stakeholders” and he refused to provide budget or headcount on Data Protection grounds.

(10) And finally, let’s not forget that Minister Noonan’s very own Director of Elections in his Limerick constituency in 2011 was none other than Brian McEnery of Howarth Bastow Charleton, accountants and insolvency practitioners who also happens to be on the NAMA board, though it should be said his appointment predates Minister Noonan’s ascension into office.

Yes, a year on, NAMA is a far more politicised Agency and that will be further evidenced by Minister Noonan’s presence at the press launch of the Annual Report this morning. You won’t see the other “third party independent investors” who own 51% of NAMA, but you will see the long shadow from Merrion Street. As NAMA board member and former IMFer, Steven Seelig remarked in a working paper he did at the IMF in 2004, political interference in asset management companies generally doesn’t end well.

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