No-one will have been surprised to hear the CEO of Ireland’s largest bank, Bank of Ireland, last week claim that Irish house prices were stabilising. Ritchie Boucher told the Independent “We think the property market is beginning to stabilise — in particular in urban areas”.
But there were many raised eyebrows earlier this year when sub-prime mortgage lender, GE Money, sold up its Irish mortgage book to Australian outfit, Pepper Home Loans, because the price paid for the mortgages was understood to have amounted to no more than 40c in the euro. Sure, GE Money was a sub-prime lender which did brisk business at the height of the property boom, and would accordingly be worst hit by the downturn which has seen 50% knocked off house prices and unemployment rocket to nearly 15%. But still, it was a startling loss.
Eye-brows were raised also last week at Bank of Ireland when it booked an extraordinarily large Irish mortgage impairment charge of €310m which resulted in an overall loss for the first six months of 2012 of over €1bn. And if you delved deeper into the accounts, you would see that impaired Irish mortgages rocketed by 68% from €1.3bn to €2.3bn in just six months. Yes, 68% at Bank of Ireland, widely considered the most prudent mortgage lender in Ireland. This blogpost examines the Irish mortgage books of the main banks operating in Ireland. There are links to the source documents at the bottom of this blogpost*.
What the above shows us is that the so-called “covered banks” or those guaranteed by the Irish government and which we often refer to as “Irish” – Bank of Ireland, AIB/EBS and PTSB have cumulative provisions for impairments which are generally in line with the the “foreign” banks, Ulster Bank, KBC and Danske. However, Bank of Scotland (Ireland) stands out with provisioning nearly three times that of the other banks. Royal Bank of Scotland’s – Ulster Bank’s parent company – CEO Stephen Hester recently conceded that forecasting future losses on loans was a very inexact science and that banks tend to pack together in their provisioning.
Future mortgage losses will be a function of the economy generally, unemployment and house prices. A couple of months ago, I would have cited the imminent Personal Insolvency Bill as a critical factor in future impairments, but the Bill which was introduced in June 2012 was a paper tiger in terms of offering practical routes to bankruptcy to heavily-indebted borrowers. It still appears to place enormous power in the hands of banks, and even in cases where individuals are in severe negative equity, the new legislation appears to prevent them pursuing bankruptcy without the approval of their bank. It preserves the status quo, and I don’t think we will see a spate of bankruptcies where there are mortgages.
With respect to the general economy, there has been a recent general uptick in forecasts of economic growth in 2012 which is positive, though growth at present is driven by international demand and we know international circumstances are changeable and challenging. Unemployment remains at a record in this crisis at 14.8%, or 310,000 with a total of 460,000 claiming some form of employment-related benefit, and the outlook for the next 18 months is not good, though most forecasters are predicting stabilisation.
House prices nationally are down 50% from peak and have fallen 6% so far this year and whilst there have been claims from some quarters of certain market segments stabilising/recovering, in reality the picture looks uncertain across the board, with S&P for example predicting a further 20% decline nationally.
We should get arrears data relating to the second quarter of 2012, from the Central Bank over the next week, but the data for Q1,2012 showed 77,630 mortgage accounts in arrears over 90 days and more than 116,000 mortgage accounts in arrears or restructured representing 15% of the 764,000 total number of mortgage accounts. It seemed on here that the pace of increase had relented in Q1, 2012 and it will be interesting to see if that was a blip or the start of a trend.
So, is there a latent crisis? Hard to say, but the level of provisions in BoSI – which has departed the Irish market for new lending and is running off its mortgage book – is starkly higher than the other main banks. The 68% increase in impaired mortgages at Bank of Ireland in the space of just six months must be of concern. An uncertain economic outlook with weak employment and property prices, all tend to suggest the problem will get more serious.
*Accounts used for analysis above
Bank of Ireland
AIB/EBS
PTSB
KBC
Danske
Royal Bank of Scotland (Ulster Bank)
Lloyds Bank (Bank of Scotland/Halifax)
NAMA Wine Lake 
@NWL
Excellent post on BOI. But did you miss a very relevant point on BOI provisions. It could be described as BOI ‘gilding the lily’, if there was a lily.
Despite the very large increase in impaired mortgages (68%) , it is interesting that BOI has reduced it provision on the impaired from 76% in Dec 2011 to 59% in June 2012. Now what would the logic of that be?
[The latest entrants to the impaired category must have more Lazarus like qualities.]
If BOI had retained the reserve provision percentage of 76% that it used in Dec 2011, it would have required an extra 17% of €2.259 billion, in other words a further €384 million off the bottom line. Now that was a neat and worthwhile reduction in the % provision.
The auditors no doubt concurred in BOI’s logic, as did the CBI.
Of further interest is that total impaired loans has gone from 13.4 billion in Dec 2011 to 15.4 billion in June 2012.
As is very apparent to anybody working in the real economy, the debt situation is getting worse not better. Much worse.
But from the banks, the drip feed goes on.
This is the reverse of that ‘rising tide lifts all boats’. And that brought out the truly delusional and the frankly cracked aspects in the Irish psyche.
Here we are again comparing a huge variety of very different housing markets as if they are one that operates evenly.
Remember that 5 from around the world that was in the IT. Where dimwits in Dublin Galway etc with a 3/4/5brm-semi had visions of their lifestyle with swimming pools and dressage ponies for little Tia Maria.
Reblogged this on Machholz's Blog.
What is worrying, but not surprising, is that the auditors are still nodding at whatever the bank management dream up and taking the juicy fees. It’s not us guv. blame the valuers!
Of more concern is that the CBI is again donning the green jersey.
Media in general a waste of space. All those juicy bank ads keep any chance of decent reporting under wraps.
Nothing changing…no lessons learned.
Bloody depressing.
A relative is the reporting script writer for a bank, and reckons that the better than expected raw results he sees are due to abilities of local management staff to decide whether or not an account is actually in arrears, apparently in at least his bank, managers can make adjustments of this sort to gild the lily, as you say. Apparently there is still a level of discretion as to how arrears are declared.
Slight quibble with your title…
By “latent” do you mean unfolding?
By “mortgage” do you mean default?
By “crisis” do you mean disaster?
Oh – and by “banks” do you mean zombie banks?
Because – based on these numbers – the title would make more sense reading:
Is there an unfolding default disaster in Irish zombie banks?
@NWL
You are correct in your comments regarding the personal insolvency bill – its a sop to the banks in almost every respect. This issue still represents the biggest elephant in the room that nobody wants to tackle because it goes to the heart of dire lending practices and equally dire regulation. The only, and I really mean the only long term solution to this mess is across the board debt forgiveness – we can debate the merits of it and the potential issues it creates but rest assured the problem does not resolve itself until the knives cut across the principals outstanding on these daft mortgage loans. Inflation will not work in austerity land.
The method required :- a marked to sustainable model house prices using a yield basis to value the properties – all other methods will prove and have to date proven ineffective. The single biggest obstacle in allowing this to happen is current stupid bank capital regulation – the current stupidly high watermark is daft in almost all respects because not only is it not allowing banks to take losses today its proven to be entirely the wrong policy choice at the wrong time. In case you think I’m talking nonsense please read Pritchard for a hugely accurate analysis of the policy errors and economic tides that haveeffected us all over the past 5 years.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9471018/Five-years-on-the-Great-Recession-is-turning-into-a-life-sentence.html
The last couple of lines hit the nail firmly on the head:
“…As for our debt mountain, we have barely begun the great purge. Michala Marcussen from Societe Generale says the healthy level is around 200pc of GDP for advanced economies. If so, we have 100 points to cut.
This cannot be achieved by austerity alone because economic contraction would tip us all into a Grecian vortex. Such a cure is self-defeating.
Much of the debt will have to be written off. Whether this done by inflation (1945-1952) or default (1930-1934) will be the great political battle of this decade. Pick your side. Pick your history…”
q.e.d as they say.
http://thepressnet.com/2010/11/08/if-you-thought-the-bank-bailout-was-bad-wait-until-the-mortgage-defaults-hit-home/
…link to the article on the subject from Morgan Kelly in the Irish Time Nov 8 2010 <>
…entitled: If you thought the bank bailout was bad, wait until the mortgage default hits home
Another very good piece of analysis by NWL.
We were told in March 2011 that PCAR had covered the covered banks recapitalisation requirements.
I wonder if the Boston/Blackrock PCAR analysis took a realistic account of the mortgage situation as it actually is, as opposed to what the banks would like it to be?