Suspicion lingers over the true financial condition of NAMA

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.