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.