Archive for September 3rd, 2012

When Minister for Finance Michael Noonan made the Big Bang announcement in the aftermath of the stress testing of Irish banks in March 2011, and outlined the strategy of supporting two pillar banks, there was criticism on here – after all, why do we need two pillar banks in relatively small economy, wouldn’t just one be sufficient alongside credit unions, post offices and foreign banks.

But the “two pillar” concept was embraced and since March 2011, we have seen the merger of EBS into AIB, and we have seen both AIB/EBS and Bank of Ireland recapitalised with our money. In many towns throughout the land, we still have an AIB and Bank of Ireland competing with each other. We own 99.8% of AIB. On paper we own just 15% of Bank of Ireland having flogged 35% to a bunch of five Yanks, but in actual fact our €1.5bn of preference shares in that bank practically give us the means to take majority control if we so wish. For all intents and purposes, we control both pillar banks.

But what wasn’t announced with any fanfare was the decision to support a third “pillar bank” in the guise of Permanent TSB, and somehow events have unfolded over the past 12 months so that we now own 99% of a third bank which competes with the other two pillars and indeed, is busying itself in strengthening the foundations of its own pillar. It was questionable whether or not we needed two pillar banks, supporting a third is an extravagance we can’t afford, and now is the time for robust intervention to put a stop to yet another money pit which is competing for resources and customers, which is not just duplicating but triplicating costs and which is stealing funding that would otherwise go to more deserving parts of our society and economy.

On Wednesday last, Permanent TSB published its report and accounts for the first half of 2012. It is striking how similar this bank is to Anglo in early 2010, when the incoming top team of Mike Aynsley and Alan Dukes were fighting tooth-and-nail to keep Anglo afloat as a going concern. Ultimately the European Commission decided that Anglo couldn’t be supported, and it may well be the case that the pending Commission decision on Permanent TSB – whose restructuring plan was delivered to the EC at the end of June 2012 – will receive a similar thumbs-down from the EC. But we should not be relying on the Commission to show us the right course of action, we should at this stage be capable of accepting the inevitable and dealing with PTSB ourselves.

Permanent TSB is a basket case
On Wednesday last, the state-owned PTSB announced that it had lost nearly €600m in the first six months of 2012, that’s nearly four times the 2012 household charge if there was 100% compliance and more than a year’s worth of cuts in the health service. We have become desensitised to these losses at the banks, convinced that they are inevitable to prop up the wider economy, but (a) they’re not inevitable and (b) at this stage in the crisis when we have dealt with AIB and Bank of Ireland, the fallout from closing PTSB would not capsize our economy. PTSB itself says it doesn’t expect a profit before 2015. This is what the overview of its lending looks like today.

This is its Republic of Ireland mortgage lending book

Most of PTSB’s lending is with so-called tracker products which means that PTSB charges a margin on the central bank’s main lending rate. In the case of both the UK and EuroZone, the main lending rate is 0.5% and 0.75% respectively which means PTSB is receiving very little on its loans, whilst at the same time, its cost of funding is 3-4%.

If PTSB’s tracker mortgage book with €23bn of loans, comprising two thirds of PTSB’s total loan book is doing so badly when the ECB main interest rate is 0.75% what will happen in a couple of years if the main rate has risen to 2-3% and Ireland still has an unemployment rate of 12%-plus? The outlook for Irish residential property is not good in the short term with a consensus of estimates from economists and commentators which gravitate around a 60% decline from peak, compared with a 50% decline today. Mortgage arrears continue to grow and 22% of Irish owner occupier mortgage accounts are either in arrears or have been restructured. The buy to let mortgage books are understood to be in a worst condition. Both are deteriorating.

Why we don’t need a third pillar bank.
Contained in a recent Central Bank of Ireland report was an analysis of competition in Ireland’s mortgage lending sector. The report’s authors produced so-called Herfindahl-Hirshman indices (HHI) which aim to measure competition in an industry – Wiki has a helpful entry on what the index measures, how it is calculated and what its results mean. The authors of the recent CBI report calculated that at present our banking sector has a HHI of 0.19 – the Americans consider a Herfindahl index between 0.15 and 0.25 to be moderately concentrated, and given the distress in the Irish economy, it doesn’t seem harmful to have a Herfindahl index in the mid-20s which is where it would likely be if PTSB shut up shop. In terms of competition, we have two pillar banks practically controlled by the Irish state, we have credit unions which offer savings and loans, we have post offices which provide savings. We have at least four large foreign banks with branches. We have two thirds of Irish households having access to broadband and by extension internet banking. We have a reasonable network of ATMs which would not be significantly diminished by PTSB’s exit.

The cost of maintaining PTSB as a third pillar bank
On Wednesday, the PTSB CEO Jeremy Masding claimed it would be 2014 or “the start of 2015” when PTSB returned to profitability. Given the uncertain nature of our economy, he might as well said “the start of 2020”. The immediate outlook for PTSB is a vista of impairments, losses and retrenchment.  The cost of maintaining PTSB includes maintaining a branch network which triplicates the state-owned pillar banking offering, there is triplication of management, IT, finance and other functions which would benefit from economies of scale if PTSB’s operations were to be merged into another bank.

The benefit of shutting PTSB down and merging remnants into the other two pillar banks
Although, PTSB still has several billion of bonds to repay, the main ones are guaranteed by the Government, so shutting down PTSB will not avoid these payments, unless the Government wants to deeply upset the ECB and our creditors. The main benefit of closing down PTSB should be the removal of a triplication of costs, and dysfunctional competition for resources and customers. PTSB has run up operating costs of €136m for the first six months of 2012, almost the same as the €135m run up in the first half of 2011. We would expect annual operating costs at PTSB to be €250-300m. How much would be saved by merging branches with another bank like AIB or Bank of Ireland, transferring accounts and loans, and then eliminating large swathes of centralised operations? Difficult to say, but a figure north of €100m per annum would not be surprising.

Closing PTSB
PTSB has three main components (1) a UK buy to let mortgage operation called Capital Home Loans or “CHL” (2) an impaired Irish mortgage book and a colossal loss-making tracker mortgage portfolio and (3) some good loans and a branch network. The UK operation, CHL can be separated out from PTSB and sold at an opportune time, last year it came on the market but the offers were deemed too low, ultimately we don’t need a UK mortgage operation so it is just a matter of getting an acceptable price. The impaired Irish lending can be flogged off to IBRC or NAMA and the good business can be sold to the highest bidder.


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We learn today from the Irish Times today that the Blackrock Baths – a derelict open-air swimming/diving venue with seating for 1,000 spectators on the seafront in the upmarket Dublin suburb of Blackrock – are to be demolished after the local council determined that the structures had become dangerous.  The Irish Times reports that the baths were acquired by NAMA Top10 developer, Treasury Holdings in 1997.

Last year, a local Labour councillor called for the baths to be acquired by the council – if NAMA owned loans relating to the site – and for the baths to be restored to their former glory. With outbreaks of ecoli on our beaches this summer, not to mention sewage spills and reports of the potentially deadly Portugese man-o-war jellyfish turning up on our beaches, you might have thought there would be demand for a safe outdoor swimming venue.

In recent months, embattled Treasury Holdings has frequently been in the headlines as NAMA takes action to foreclose on loans to the property development group which was founded by Johnny Ronan and Richard Barrett. We know that NAMA has had receivers appointed to over 30 Irish companies in the Treasury group, but Blackrock Baths don’t appear to be on the current NAMA foreclosure list but remember (a) the foreclosure list is rife with errors and (b) NAMA has only foreclosed on a fraction of the properties subject to its loans – most property is still being managed by the developer. So Blackrock Baths might or might not be in NAMA.

In May 2012, NAMA announced vague plans to spend €2bn on developing assets securing its loans, over the next four years. There has been little detail provided to date on how the €2bn will be spent. NAMA has been cutting its teeth with the wrecking ball in July 2012 when it demolished an apartment block in the Gleann Riada estate in Longford.

This morning, a spokesman for NAMA had no comment on the reported demolition.

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Last month in Dublin’s High Court, AIB failed in its bid to have former Fine Gael minister, Newstalk presenter and owner of Celtic Bookmakers, Ivan Yates, made bankrupt. The judgment in the case is published today, and in it, we find Ivan more than capable of brushing off AIB’s clumsy attempt to make him bankrupt in Ireland where he would have faced up to 12 years of draconian measures. You will be surprised to learn that Ivan did not even need to resort to the defence that his Centre of Main Interest (COMI) was not in the Republic, but the UK where Ivan lost no time after his victory over AIB here, and succeeded in getting a bankruptcy order in Wales last Friday morning!

The overview of the AIB case is this: the bank was seeking the repayment of €3.7m arising from  loans to Ivan’s business which had been personally guaranteed by Ivan. AIB seemingly served Ivan with a pre-bankruptcy demand in April 2012, AIB then attempted to serve a bankruptcy summons on 14th May. There is reference to difficulty in serving Ivan and he was subsequently served in June. In response, Ivan applied to the Irish High Court on 25th June 2012 to resist AIB’s application, and the case was heard in August with the judge ruling on 21st August that AIB’s application was not valid. Lickety-split Ivan then obtained a bankruptcy order from the Swansea County Court on 31st August 2012.

We have all known for some time that Ivan was in financial difficulty, he made no bones about it and indeed wrote in newspapers in 2011 how he might have to leave Ireland to seek bankruptcy in the UK. So how on earth did AIB fail in its bid to make Ivan bankrupt here?

Firstly Ivan and his legal team threw a lot of mud which didn’t stick. For example, Ivan claimed that the personal guarantees produced by AIB were “poor and indistinct” photocopies so he couldn’t confirm if he had signed them. He claimed the bankruptcy demand served on 6th April was invalid because of a formal demand issued in March 2012 which allowed for payment by mid-May 2012.

Irish bankruptcy case law has established that even a relatively minor overclaim by the creditor in a bankruptcy application – IRL £1,000 in the context of a IRL £167,000 claim – may render the application by the creditor invalid. Bankruptcy is held by the courts to be a penal matter, so the sums claimed by the creditor need to be correct. In this case, Ivan disputed nearly €300,000 of the sums claimed. Ivan claimed there was an agreement with AIB which placed a cap on the fees paid to the receivers appointed to his bookmaking business at the behest of AIB, and in this case the receiver, Neil Hughes of Hughes Blake Accountants received a “kicker payment” – seemingly a bonus or commission – for the sale of one of the Celtic Bookmakers premises on Lombard Street in Dublin. Ivan also claimed that he had an agreement to stop the clock on interest being charged on certain loans. The personal guarantee provided for a certificate to be issued by “an officer of the bank” should the guarantee be called in, and it seems the judge very narrowly construed this requirement and the judge ruled that “it was noted that, contrary to the express requirements of the guarantee, no officer of the bank is named in the certificate or avers on affidavit to having prepared the certificate. Instead the certificate purports to emanate from the bank as a corporation and is signed by two authorised signatories on behalf of the bank.” The judge held that “the issues raised are real and substantial and have some prospect of success”

So the lesson for creditors pursuing bankruptcy against debtors in Irish courts is that they must ensure the amount claimed is correct and not in dispute. It may be that a judgment order is required as a prerequisite to pursuing bankruptcy. And it seems Irish judges can be quite pedantic in closely following the letter of any agreement.

As we own 99.8% of AIB, we will be footing the cost of AIB’s cackhanded and failed attempt to have Ivan made bankrupt here, and we are entitled to demand answers and accountability for the expenditure of our money.

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Last week’s announcement of cuts by Minister for Health James Reilly’s Department of Health – announcements from which Minister Reilly was notably absent – seems to have struck a nerve in the Fine Gael/Labour coalition, with the junior Labour partners more than a little peeved at the apparent lack of prior consultation, and the fact that the cuts – totalling €500m in 2012 of which the €130m announced last week are new – will affect the provision of frontline services to the core Labour constituency, has particularly exercised the centre-left party. Sabres are now being rattled by the Labour party with talk of snap elections and withdrawal from the Coalition. “Calm down dear” is the Fine Gael response and the health cuts are set to be discussed tomorrow at the first Cabinet meeting after the summer recess. Meanwhile…

It is reported in today’s Irish Times that the largest public hospital in the State, St James’s in Dublin – annual budget of €414m, of which over €300m comes from the Health Service Executive (HSE), deals with over 300,000 patients per annum – is “in talks that could see it taking over the private Mount Carmel hospital” The private Mount Carmel hospital is owned by NAMA developer, Gerry Conlon (sometimes “Jerry Conlon”) and the Irish Times says that borrowings on the Mount Carmel hospital are in NAMA. The notion that a State-run hospital is considering a foray into private medical care at this time when it is imposing swingeing cuts on frontline services to the most vulnerable, has the potential to raise hackles further.

St James’s itself is playing down the possibility of a take-over and is quoted as saying it is merely “exploring the development of a link between the two hospitals” but the fact that Mount Carmel is in NAMA, and NAMA is actively disposing of assets may just serve to emphasise the possibility of the take-over referred to today by the Irish Times.

Minister Reilly is set for a difficult Cabinet meeting tomorrow…

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