Thursday, April 16, 2009

Time to dump some bad risk? and ESB's rip-off 'investments'

EXCLUSIVE: Is it time to let Nationwide sink?
Here is an opportunity to show the financial world that we are serious about cleaning up the mess. It is also a good opportunity to show the world that we understand, as a country, that finance is about controlling the downside as much as exploiting the upside - in other words, that risky trades must be closed off. Nationwide is one of the riskiest plays in town - so the Government should let the stronger ones - including international banks - bid for the pieces. In other words, the Government should not mix Nationwide in with the systemic banks for nationalization or future re-capitalisations, or indeed NAMA cover.

Here are tomorrow's results from the Nationwide:
  1. Loss after tax €243mln on a loan impairment charge of €464m (2007 pre-tax profit of €309mln), Operating profits €260mln
  2. Total Capital at 10.2%, Core Tier 1 at 7.2% (not spectacular, but on par with other Irish banks - hardly impressive for internationals)
  3. Total assets at €14.43bn - down 10% (unrealistic assessment, given equity and property markets conditions and shut down of land markets - details below)
  4. Loan Book at €10.474bn - down 15% (so lending stalled, the patient is dead)
  5. Customer accounts €6.785bn, so accounts cover 65% of loans - up from 59% cover in 2007 (but at what cost did Nationwide achieve this gain in cover?)
  6. Cost-income ratio at 17% - the lowest among Irish financial institutions (i.e they have no soft-savings left to achieve as a cushion against future losses)
  7. Liquid assets stand at €3.26bn - liquidity ratio of 24% - again, good luck to them if they think they can actually sell the stuff they hold against the loans...
  8. Society reserves are at €1.2bn
"The Society did a very detailed examination of the loan book with the result that the sum allocated for provisions was a very robust figure of €464m for the year under review in line with market expectations... The Society’s loan book decreased in 2008 to €10,474m from €12,332 at the end of 2007. €1,339 of the reduction was attributable to the decline in the value of sterling; the balance was a reduction in capital balances. The commercial loan book now stands at €8,183m with the residential book at €2,291ml. As a result the total assets of the Society were reduced from €16,099m in 2007 to €14,429m in 2008."

So the impairment charge is of 3.22% of the total asset base and 4.43% of the property book. This is laughable. Also, Nationwide claims that as a part of its strategy it was actively reducing its exposure to commercial loans. But this active reduction took out at most only €331mln (16,099-14,429-1,339) in real assets, or ca 4%. This is in the time when property values fell over 20% and equity values are down more than 80%?

"Because of the reserves built up over the years from cumulative profits the Society was able to absorb the impairment provision. The Society still has total reserves of €1.2 Billion to absorb further impairment charges should they arise."

Well, now, suppose real impairment rises to 15% of the property-related loan book on commercial and 5% on residential. You have a need for €1.34bn in cash right there but you have only €1.2bn... and that is in the form of Tier 1 capital...

So are Nationwide's numbers (especially in the area of impairment) a case of exemplary management? Or of reckless 'ostrich' syndrome? You decide, but it does look to me like something is amiss. Here's what.

In 2008, Nationwide repaid some €750mln plus £500mln in debt securities, and in December 2008 it raised £325mln in new term notes maturing September 2010 (note the date?). But the beast still has €2.23bn in debt maturing in 2009 alone and "the Society plans to finance [this] through reduction of its loan book, the securitization of loans as well as the issue of new loans."

Yes, you did hear this right - securitization of loans (presumably Irish buy-to-let properties in the UK and Irish developers toxic waste in Ireland have strong market with ready buyers?). Of course they have no such hope, so in reality the Society is most likely looking for refinancing.

And here comes the confession: "the ability of the Society to raise wholesale funding on a continuing basis depends on the Government Guarantee. The Government intends in line with its previous indication to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years... The society's ability to remain a going concern and achieve its Business Plan is dependant on the continuation of Government support. As a systematically important institution Irish Nationwide was included in the guarantee Scheme. The Irish Government is committed to ensuring the continued viability and stability of systemically important credit institutions."

So here is Nationwide's survival strategy in a nutshell: "Give us more tax money! Now!"

In the end, Nationvile has €2.23bn of debt maturing this year alone and needs the extension of the Government guarantee to keep itself going. It also has an acute case of denial when it comes to potential losses it faces on its asset base and its loans, so it will need even more tax money to survive. This looks like they've gone to the markets to raise refinancing, but the markets laughed at them, they've gone to the auditors for a life-line on their NAV and they got that extension, so now its up to rich Uncle Taxpayer to rescue a systemically important private estate. Hmmm...

ESB's 'stimulus'
For shortage of time - more analysis of this is to follow, but in the nutshell, ESB announced new plans to 'create' 3,700 jobs through 2013... The Government & Opposition have welcomed the move that will see a notorious state monopoly
  • using consumers' and businesses' cash (remember - it cannot pass cost reductions to its clients because it's out of town subsidiary - CER - doesn't let it)
  • hire more grossly overpaid (remember, ESB runs a unionized closed shop with highest salaries in the entire public sector and work pracices that allow its employees draw full pay even when are asigned for years to plants producing absolutely nothing)
  • to expand its dominance in the market that is so starved of competition, that much of our economy's competitiveness loss can be attributed to the ESB's existence.
This is a farce that passes in this country for industrial, fiscal and economic policies. Instead of breaking up a noxious monopoly, the state will allow ESB to piggy-bank the revenue it gains from ripping off its customers into 'developing new infrastructure such as smart metering and a system to allow for the recharging of electric cars'.

You might also notice that the two investment objectives are a red herring. Smart metering is already widely available and does not require any 'infrastructure' - you can install smart meter at your own home. Electric cars are about as widely spread in Ireland (or indeed anywhere else in the world) as dinosaurs. By 2013, this is unlikely to change.

Lastly, the Government has been calling for increasing ESB's and other state monopolies contributions to the Exchequer to compensate for some of the revenue losses incurred in this crisis. Now, the same Government is welcoming ESB chipping into this contribution. Who will make for the shortfall? Well, the same people who will be paying for those 3,700 new jobs to be 'created' by the ESB - you, me and the rest of taxpayers. ESB claims it can raise funding for the investment in private markets. Maybe so, but it can't raise funding for interest charges on the loans and it can't raise funding for paying lavish salaries to its new employees. At over €80,000 per average ESB job, this 'green investment' will cost the consumers some €300mln per annum in wage costs alone. Now that's what I call 'smart' metering.

WSJ today (here) has an excellent parallel story to the ESB circus.


Anonymous said...

That Marx quote is a hoax btw

TrueEconomics said...

Indeed, I just searched through Volume 1 of Capital and there is no such quote. It appears that you are right, so I removed it. Thanks for pointing this out!

Anonymous said...

Interesting article from WSJ.

Apart from ESB, one has to wonder about the opportunity cost to Ireland of all the subsidies to construction that were handed out for hotels, car parks, hospitals etc.