Monday, August 23, 2010

Economics 24/8/10: Anglo Tranche 2 goes 'Boom!'

Two weeks ago in a post on Anglo (here) I provided a quick explanation of my forecasts for why the mid range expected capital hit on the entire Anglo book of ca €72bn worth of loans (original face value) will be in the region of €33bn. This estimate referred to the mid-range assumptions.

In the light of today's speculations/reports (here) that the final Tranche 2 haircut on Anglo loans will be 61.93% I am now more confident in my original lower- and mid-range estimates, though adjusting my upper margin loss estimate down a notch.

To repeat my projections are:
  • Worst case scenario for Anglo requires €38.6bn (down from €38.9bn)
  • The mid-range is €33bn in total hit (same as earlier)
  • The best case scenario is €30bn (same as earlier)
Some details: Tranche 2 of Anglo loans was valued at €6.75bn. Combined total amount of loans transferred to Nama in Tranche 2 is €11.9bn on an average discount of 55.6%. Tranches 1 & 2 combined is €27.2bn of the total €81 bn planned with an average discount of 52.3%. If this discount stands, remaining Tranche 3 transfers of €53.7bn to be completed by February 2011 will incur capital hit of RWA-adjusted €28.1bn - to a combined Nama-induced capital loss to all 6 banks of €42.3bn. Nama expects further €12bn to be transferred by the end of September - a highly unlikely deadline, at least if Anglo-INBS stuff were to be included here. Provisions by the

As telling as the haircuts are the assumed LTEVs - in Tranche 1 the implied LTEV was 11 percent. In Tranche 2 this is down to 9 percent. Since Nama marks to November 2009, this change can be explained either by lower quality of loans being taken on board (bad news for Nama, better news for banks) or by Nama aggressive drive into raising cash flow (good news for Nama, bad news for the banks).

Now, to my valuations. Table below summarizes:
Notice, I allow for interest margins of 1.5% pa in my mid-range assumptions. This is rather unlikely. To end of 2009, interest margin on Anglo loans (performing) was roughly 1% and this did not reflect Nama costs. In addition, my mid-range scenario assumes Nama recovering 100% of the principal amount of the loans - something that I believe to be equally unlikely. Either way, mid-range estimate implies that Messr Aynsley and Dukes will be coming in with new demands for cash soon - to the tune of €8.5bn more based on my mid-range scenario.


TrueEconomics said...

An edited post from the reader:


In April 2010 I started a petition calling for the immediate closure of Anglo Irish Bank including the demand for no extension of the banking guarantee in any form. Over 200 signatures came in within a week. More recently in July, the Independent poll of 24K people concluded with 95% to vote for the closure of Disaster Bank here:

TrueEconomics said...

Guys, please, keep in mind - we all have to be careful per legal restrictions on public discourse & media.

ottogunsche said...

The more one looks at this mess, the more it is apparent that Anglo should have been let fail.

If this goverment strategy is stabilising the financial situation and creating the conditions to start allowing the flow of credit in to the economy this goverment strategy has failed.
Failed absymally.

Fungus the Photo! said...

When the King of Siam wanted to curtail courtiers, he would present them with a white elephant.

Who gave Ireland its present banking "system"?

When the true economy reasserts itself, after the deficit stimulus disappears and banks have sacked half their workers, we will find that the FIRE part of the economy is far smaller. I worry that most of the good money being thrown into the banks will be wasted.