When the NAMA CEO Brendan McDonagh spoke at an accountant’s gathering in London on 22nd March 2013, he indicated that Minister for Finance Michael Noonan would, the following week, announce the top-level financial results for the Agency for 2012. Alas, that didn’t happen but we do know that NAMA is required to have submitted its management accounts to Minister Noonan by 31st March 2013, so the unaudited results for NAMA for 2012 should now be available in the Department of Finance, and they will hopefully be made public shortly.
Remember that NAMA will produce two sets of results for 2012, the unaudited management accounts imminently and then in July 2013 we should get the glossy annual report which will include fully audited results, in theory there shouldn’t be much difference between the two, but in practice, experience of the last two years shows us the auditors tend to be far more pessimistic/prudent on the impairment provision.
We have the NAMA management accounts for Q1,Q2 and Q3 2012 and NAMA now calculates its impairment provision twice a year so we have an impairment estimate for Q1 and Q2 2012. A profit before impairment of €141m was generated in Q3,2012. NAMA has reported profits after impairment of €222m for H1,2012 – the impairment charge for H1,2012 was €128m. So can we predict what the overall results for NAMA will be for the year? It’s difficult but we can have a stab at estimating it.
We do know that NAMA says it is generating an almost-incredible €1.2bn a year in rent of which €0.1bn comes from Irish residential property and the rest is global rent, mostly on commercial property. We also know that NAMA pays just over 1% on its NAMA bonds – in theory the interest rate should be the main ECB interest rate, currently 0.75%, but in practice NAMA hedges the interest rate or buys insurance against increases and that insurance pushes the cost up, and it is believed to be just over 1%. So NAMA pays about 1% of €27bn of senior bonds in interest. NAMA also has operating costs of about €0.2bn including payments to receivers and legal fees which are capitalised. So, NAMA should be generating over €700m in operating profit.
The purists among you will point out that NAMA’s income is the interest on its loans, not the rent received, but given that 85% of its loans are impaired, you probably won’t be a million miles out by substituting rent for interest income. NAMA does produce an “effective interest rate” calculation but this is based on NAMA’s predictions of future income.
But what about the impairment? If the value of the underlying security for a loan which is mostly property in Ireland has deteriorated over the past year, then given that most loans are non-performing then NAMA should be looking at another large impairment charge. Jones Lang LaSalle says commercial property declined by 8.0% in 2012 and the CSO says that residential property declined by 4.5%. Development land is probably at the bottom having fallen 90-98% from peak. However, NAMA is not required to write down the value of its loans to the value of the underlying property. No, current accounting standards allow NAMA to make all sorts of flaky assumptions about the value of the loan, and the value of the underlying is only part of the consideration. Still, I would expect NAMA to take an impairment charge of at least €500m in 2012 and the €128m reported by NAMA for H1,2012 looks low.
It remains to be seen if NAMA will be brazen enough to claim another €0.2bn tax credit in 2012, but if it did, that would flatter the profit after tax figure. There is a lot of jiggery pokery that goes on at NAMA in recognizing and not recognizing profits on disposals, with NAMA only recognizing profits when the entire loans of a debtor are 100% resolved.
At the end of 2011, NAMA had accumulated losses of about €1bn, a loss of €1.1bn in 2010 and a profit of €0.2bn in 2011 (though almost all of the 2011 profit was a tax credit).
So, overall for 2012, we should expect NAMA to report a profit, probably €400-500m before tax though remember the unaudited accounts have traditionally shown a lower impairment than the audited accounts included in the glossy annual report . NAMA is likely to be sitting on a cash mountain though the direction from Minister Noonan to make €1bn available for the IBRC liquidation will make a dent in that, but that is post year end.
NAMA will face scrutiny over its claims of generating €1.2bn in rent. It will also be challenged about the quality of its remaining assets with NAMA recently getting tetchy about claims that it has been disposing the “low hanging fruit” or quality assets in the UK for which there is a market.