- Operating loss is €10mln in H1 2010, down from a loss of €51mln H1 2009 – causes – lack of further deterioration on 2009 figures on the bank side and serious gains on the life insurance side.
- Operating profits on the life side are €92mln (up from €84mln in H1 2009)
- Bank operating loss of €131mln – equivalent to that in H1 2009. Its clear that 'healthy' IL&P is bleeding heavily on ptsb side.
- Ptsb is one of the largest mortgages lenders in the country, so their mortgages book should be – on average – performing above other banks. Here are some data: arrears > 90 days to the end of June 2010 in Irish residential mortgage book increased to 5.2% of the portfolio (H12009 figure was 3.9% so there was a significant jump). Non-performing mortgages are at 6.9% of the total loan book, up on 4.9% at the end of H2 2009. 32% of arrears cases are related to 100% mortgages – a predictable result as (a) 100% interest-only mortgages are of more recent vintage, hence written against younger families with higher probability of unemployment, and (b) these types of mortgages are more likely to involve purchases of buy-to-rent properties .
- Bad debt provisions are at €150mln compared with €189mln in H1 2009, highlighting the fact that more realistic provisioning earlier in cycle usually helps to underpin the book better than the AIB-style denials. Overall provisions balance is up €141mln to €618m.
- Margins are down to 0.81% (2009 full year margin was a poor 0.83%) despite hikes in the mortgage rates.
- As IL&P needs to raise ca €1.3-1.8bn more in bonds (good luck to them trying), higher cost of borrowing is going to further depress margins. So expect even more mortgage rates hikes from IL&P in months ahead. The bank has currently a €8 billion reliance on the ECB, unchanged. Hefty for a minnow.
- Bank’s loan to deposit ratio was down to 240% from 246% - far, far away from the prudential banking model that would imply LTDs of 95-100%.
Tuesday, August 31, 2010
Economics 31/8/10: IL&P reporting
The ‘healthiest of the sick’, IL&P reports its numbers today. Here are the headlines:
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Do you have any comment on the cumulative bad debt provision for Irish residential mortgages which is 1% of the loan book whereas almost 7% of the mortgage value is in arrears over 90 days. Do you consider a 1% provision to be realistic, particularly with forecasts of future declines in property values and a plateauing of unemployment for the next 18 months?
Realistic?! 7% are in official arrears, countless other mortgages have been pushed off to interest only or 'renegotiated' to a longer maturity term. Majority of these will be in arrears at some point in the future. Property values will continue falling, albeit at slower rates and bottom will come around average price decline of 60-65% to the peak (we are now at around 40% + margin swing on asking price of 10-15%), so another 10% downside is possible. Property prices long term trend is also lower, so reversion to the mean will be slower and recovery will be extremely anemic. Top this with my expectation that outside major urban area (Dublin, Cork, and lesser extent Limerick and Galway) there will be L-shaped period post-bottom, as propensity to trade is much lower there, so markets are thin.
On unemployment - forget official unemployment rate. Think of it as Live Register + discouraged workers + underemployed (people on 2 days a week making 20K pa and thinking 'Grand, I can manage' until annual car tax/home insurance etc come in the post. Think of labour force - shrinking, selection bias in this change - working against productivity gains across the economy, and hence against income expansion.
Looks like Japan minus stock of capital wealth that Japan has? You bet!
So 1% provision set against 'recognized' arrears of 7% and implied arrears of 10%(?) or 15%(?) is equivalent to an ostrich with the head so deeply buried in the sand that you can't even tell if its an Anastatica hierochuntica or a living creature of sorts.
Anastatica hierochuntica Or Rafflesia arnoldii??
The mind boggles....
Made my day, that analogy.
Thank you Professor.
I think that your house price forecast is fairly OK....but areas outside of Dublin have a much faster price dispersion trend on the downside than to the upside. Therefore, you can expect rural mortgage defaults to follow Dublin to the downside and then not move up when the housing market levels off. I personally think that you can see 20% of all residential mortgages in Ireland over 90 days in arrears very, very soon....
The further implications may involve the "new" Regulatory regime ......
The truth is plain to those who can and do think.
Those regulators who cower behind the desk waiting for retirement with the paw out for as much as they can get have been succeeded by what?
There should be an immediate audit by the regulator, some hope of that! He clearly has privately given a green light for whatever is now acceptable.
There will be more bad news dragging down Ireland's reputation for integrity and as a finance centre.
This will affect jobs as other instiututions seek to disassociate from such poor reassurance to investors. On the other hand, it will attract all the wrong sort .....
Ireland sinks further into the mire and the bill will only get higher as a result of unacceptable accounting methods. It seems there are no good banks left!
James, yes - this is what I mean by L-shaped adjustment to equilibrium outside Dublin in my earlier reply to Jagdip.
The problem for the homeowners outside main cities in Ireland is that the era of Spatial Development Strategies and other massive transfers is over. The structural nature of change underway in this economy will act to continuously reduce younger, more mobile, but also more productive, population in rural areas as younger workers migrate to where the real jobs are. Surplus of properties built in these areas will remain an overhang for the shrinking demand.
This means that the new normal for rural Ireland will be associated with a new equilibrium price underpinned by a much wider gap between city and rural house prices.
20% of mortgages in arrears across Ireland is certainly a possibility should the current economic conditions prevail through 2011 and should the banks elect to actually recognize the reality.
Jeez, nice coment re Japan. Have been saying that for bloody ages now, nice to see someone who knows what they are talking about agree :)
Also what is very much over looked at present is the massive debt households are currently holding in relation to credit cards,car loans credit union loans ect.
As most people are probably prioritising there home mortgage how long before the bad debt of these other loans start to way heavily on peoples copacity to spend into the economy.
Also what has not been spoken about is with the governments rush to reduce spenditure through cuts to social welfare ect is the effect this has on the economy as a whole while it is critial to deal with the national debt it has not been handled in the correct way in by reducing spending cost first before reduction to the very vunrable in this country.
As most will know people on the lower rung of the financial ladder are usually the ones that will spend most into local business,shops ect as this has been cut this is putting business on a downward spiral along with tighting credit markets locally thus speeding up the decline in the economy.
So in my opinion we are not even close to the end of this downwards spiral in the economy, i feel we wont hit the true bottom untill we see the full reduction of government cuts from here we will then be able to see were we are as an economy and from this point can talk of a bottoming out can only begin until this time i fear for what way the country is moving and think that we are now moving to a position that we shall become a national debt servicing economy for decades to come and this to me is totally imorral
With apologies for accidentally erased comment:
On the potential downside for property prices, your forecast seems to be for another 10-15% downside. Simultaneously you comment that we should see overall 60-65% reductions but that we're only at 40% down so far. These two remarks don't seem to match.
If I start at 100 and am down 40% then the price is 60, with 10% variations bringing me from 54 to 66. If I'm down 60% then the price is 40 which another 33% reduction on the original value of 60, not 10-15%.
So, I'm puzzled by your comment on house price forecasts. Am I missing something?
Hugh, my apologies again for accidentally deleting your comment. Let me explain:
I should have qualified - a drop of 10% on peak asking price, not on current asking price.
We are roughly at 40% asking price contraction already. Before the crisis, asking price was below sale price by roughly 12.5% (think auctions and bid premia in private sales at the peak of the market, average between 10% and 15%)
Asking price at a peak = 100
Was selling for = 112.5 at peak
Now has asking price of 60
And is selling for 52.5
Which means with 10% reduction on peak (again, should have qualified before) asking price, bottom is:
Bottom asking price = 50
Bottom selling price = 43.75
Drop from peak selling price to bottom selling price of 61.1%
If instead of 12.5% average swing I take 10%, then I get peak to trough selling price drop of 59%. For 15% swing I get 63% peak to trough.
Personally, I believe (perhaps too optimistically) that we will end up at roughly 60% peak to trough (selling prices) bottom. But overshooting can be significant in the short run and on top of that these are just guesses...
Now, Daft.ie Q2 2010 report on sales shows that average prices were down 37% and Dublin prices were down 40%. Quarterly deterioration in the prices was -6% and -4.2% in Dublin and the country. Taking these rates, compounded monthly, applying to July and August, we are around -42.5% for Dublin and -38.7% for the country as a whole in asking prices relative to peak. Average is just under 41%. That average looks pretty accurate to me, as I believe that data outside Dublin is relatively thin.
Hope this helps,
I think that we are getting to the same point on this, but am less optimistic than you are because of the point that you mentioned. However, in addition to the price dispersion mechanism (spatially) in the Irish market over the past 40 or so years, rather than be L-shaped, as you suggest, it will be a drunken L-shape with a downward slope....so while Dublin is an L, outside of Dublin will keep falling even if the economy improves....I think that we may be measuring the same thing.....
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