From the Dolmen guys - today's preview of AIB results announcement tomorrow -
"We expect operating income of €2bn for the year, impacted by lack of demand for credit by Irish consumers and lower Net Interest Margins (NIM). Due to a pre-tax loss of €2.7bn, equity tier 1 of the group will move down to 5%. Overall, the market will be looking for guidance on NAMA, capital raise and credit quality in the non-NAMA loan book. It is also likely the group will announce an exchange offer on its Lower Tier 2 debt."
Note the figure of 5% Tier 1. Internationally (e.g. UK) target is for 8%+ Tier 1, for banks with Loan-to-Deposits (LTD) ratios in excess of 100%. AIB's latest accounts I have access to show LTD ratio of over 150%. This means that the AIB will be on the hook for up to Euro 4 billion in order to plug in the Tier 1 capital gap with its international peers. And this is before the expected loans losses of Euro 5-5.3 billion expected in the tomorrow's announcement. So on the net, H1 2010 demand for funding should be around €3.8-4.5 billion before Nama kicks in and before provisions for a new batch of bad loans...
This is more than 3 times the current market capitalization of the bank!
Also note Dolmen's reference to the lack of demand for credit. Spot on - the problem is that no matter how one spins the current credit crunch, consumers and businesses (burdened by massive debt and facing rising tax curve into the foreseable future, along with high risk of unemployment and huge uncertainty about the future performance of the economy) are simply in no position to borrow. This, along with the crippling expected cost of Nama to the real economy means that there is not a snowball's chance in hell the credit bubble can be relaunched in Ireland... at any level of interest rates...
Showing posts with label AIB Nama. Show all posts
Showing posts with label AIB Nama. Show all posts
Monday, March 1, 2010
Saturday, February 6, 2010
Economics 06/02/2010: Nama stalling at the EU doorsteps
For those of you who missed my Thursday musings on Nama in the Irish Daily Mail, here is an unedited version of that article:
Two friends from the distant land of global finance have caught up with me the other day. ‘What’s going on with your Nama?’ they demanded to know.
Their concerns were about the latest hiatus created around our Bank Rescue scheme.
Yesterday’s news that NTMA is to take over management of the Exchequer affairs relating to bank shares bought with taxpayers’ cash is the case in point. Apparently, NTMA – the parent institution to Nama – will hold talks on capital needs with the banks as well as engage in their realignment or restructuring. It will also advise on banking matters, and crisis prevention, management and resolution. Just exactly can this task be achieved without creating a severe conflict of interest between NTMA and Nama, or without stepping on the heels of the Central Bank and Financial Regulator is anybody’s guess. But the bigger problem here is whether such a role for NTMA will constitute an undue interference in the financial markets for banks shares.
This activist approach to managing Nama news is not new, however. Following the quiet publication of the last piece of legislative jigsaw, Nama (Designation of Eligible Bank Assets) Regulations 2009, on the day before Christmas Eve, our Government has gone into an overdrive, trying to spin Nama as a panacea for all economic ills of the country.
Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.
Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.
The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.
By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.
But wait, as the discounts estimates increase, so are the concerns in Brussels and Frankfurt about Irish Government’s plan. First, the ECB is now seriously worried about the quality of Irish banks collateral deposited in its vaults. Second, the EU Commission is more concerned that approving Nama will produce poor optics internationally, as Nama will be openly buying trash with taxpayers cash and Europe’s approval.
As if these two issues were not enough, we now have two official versions of financial theory – the Frank Fahey’s Proposition and an Alan Ahearne’s Theorem.
The former claims that ECB is giving us a free lunch – a deeply discomforting statement from ECB’s point of view as it undermines the bank’s credibility.
The latter states that the banks, repaired by Nama, will “stimulate demand” for consumer loans. So our economic policy is being shaped by people who think that the banks can drive up demand for credit in the economy stuck in negative equity, with consumers facing higher taxes and falling incomes. And, of course, there is an added concern about the ordinary homeowners and their bad debts. As the Government is preparing to create another massively risky scheme for ‘helping’ defaulting mortgage holders, the Commission is starting to think – was Nama a limited undertaking, or will Irish banking crisis spill over into a general economic crisis as well.
Then there is an ongoing saga with loans. Back in the days before Nama Bill was passed, we were told that the Government has an excellent idea as to what security they can get on Nama-bound loans. It turns out they hadn’t a clue. As Namacrats are discovering, the loans held by the Irish banks often have a secondary claim to the underlying assets. And, they are finding that the poorer the loan the lower, usually, is the underlying security.
Suppose the bank has a loan for Euro 10 million secured against the property worth Euro 5 million. Suppose Nama buys the loan for the face value of the underlying property, implying a haircut of 50%. But if loan seniority is secondary in seniority, given the recent cases of our top builders going through the insolvency courts, the post-default value of the asset is somewhere between half a million and nil. Subtract the legal costs of fighting the borrower and better-secured lenders in the courts. The state will be lucky to get a euro from the deal.
This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.
So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.
Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.
Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama.
Two friends from the distant land of global finance have caught up with me the other day. ‘What’s going on with your Nama?’ they demanded to know.
Their concerns were about the latest hiatus created around our Bank Rescue scheme.
Yesterday’s news that NTMA is to take over management of the Exchequer affairs relating to bank shares bought with taxpayers’ cash is the case in point. Apparently, NTMA – the parent institution to Nama – will hold talks on capital needs with the banks as well as engage in their realignment or restructuring. It will also advise on banking matters, and crisis prevention, management and resolution. Just exactly can this task be achieved without creating a severe conflict of interest between NTMA and Nama, or without stepping on the heels of the Central Bank and Financial Regulator is anybody’s guess. But the bigger problem here is whether such a role for NTMA will constitute an undue interference in the financial markets for banks shares.
This activist approach to managing Nama news is not new, however. Following the quiet publication of the last piece of legislative jigsaw, Nama (Designation of Eligible Bank Assets) Regulations 2009, on the day before Christmas Eve, our Government has gone into an overdrive, trying to spin Nama as a panacea for all economic ills of the country.
Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.
Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.
The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.
By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.
But wait, as the discounts estimates increase, so are the concerns in Brussels and Frankfurt about Irish Government’s plan. First, the ECB is now seriously worried about the quality of Irish banks collateral deposited in its vaults. Second, the EU Commission is more concerned that approving Nama will produce poor optics internationally, as Nama will be openly buying trash with taxpayers cash and Europe’s approval.
As if these two issues were not enough, we now have two official versions of financial theory – the Frank Fahey’s Proposition and an Alan Ahearne’s Theorem.
The former claims that ECB is giving us a free lunch – a deeply discomforting statement from ECB’s point of view as it undermines the bank’s credibility.
The latter states that the banks, repaired by Nama, will “stimulate demand” for consumer loans. So our economic policy is being shaped by people who think that the banks can drive up demand for credit in the economy stuck in negative equity, with consumers facing higher taxes and falling incomes. And, of course, there is an added concern about the ordinary homeowners and their bad debts. As the Government is preparing to create another massively risky scheme for ‘helping’ defaulting mortgage holders, the Commission is starting to think – was Nama a limited undertaking, or will Irish banking crisis spill over into a general economic crisis as well.
Then there is an ongoing saga with loans. Back in the days before Nama Bill was passed, we were told that the Government has an excellent idea as to what security they can get on Nama-bound loans. It turns out they hadn’t a clue. As Namacrats are discovering, the loans held by the Irish banks often have a secondary claim to the underlying assets. And, they are finding that the poorer the loan the lower, usually, is the underlying security.
Suppose the bank has a loan for Euro 10 million secured against the property worth Euro 5 million. Suppose Nama buys the loan for the face value of the underlying property, implying a haircut of 50%. But if loan seniority is secondary in seniority, given the recent cases of our top builders going through the insolvency courts, the post-default value of the asset is somewhere between half a million and nil. Subtract the legal costs of fighting the borrower and better-secured lenders in the courts. The state will be lucky to get a euro from the deal.
This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.
So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.
Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.
Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama.
Tuesday, January 26, 2010
Economics 26/01/2010: S&P Note on Irish Banks
Standard & Poor's has finally thrown in the towel and after having to “periodically increase” their “credit loss assumptions over the course of the current economic cycle” concluded “that Irish banks' asset quality and earnings will, in general, likely remain under significant pressure over the medium term”.
Anyone surprised so far?
“We have considered the implications for each rated Irish bank and lowered the ratings on some of them.” But even after that action, “the ratings on all Irish banks are currently uplifted because of our view of high systemic importance to Ireland and related government support, or their relationship with a higher-rated parent.”
We never would have guessed that if not for the State guarantee plus 11 billion worth of public capital, plus Nama’s countless billions of pledged support, the banks bonds would be junk. Wait, some of them actually would be ‘high risk junk’ as one Russian fund manager once described to me his own bonds (I ran away as fast as I could).
How junk? Take a load of honesty from S&P (with my emphasis added):
“We have lowered the ratings on Allied Irish Banks PLC (A-/Negative/A-2) by a notch. This reflects our view that the environment will remain challenging over the medium term, leading to high credit losses, and a weakened revenue base. We consider AIB to be of high systemic importance and the Irish government to have made a strong statement of support, as a result of which we have incorporated five notches of support into the ratings. The negative outlook reflects our view that AIB's anticipated recapitalization may not fully occur in 2010, and may be of an insufficient size to support an 'A-' rating, as well downside risk to our earnings expectations arising from the weak environment.”
Absent state support, AIB should be BB/Negative/C+. Errr, that is squarely in the junk bonds category.
“We have also lowered the ratings on Bank of Ireland (A-/Stable/A-2) by a notch. This reflects our view that the environment will remain challenging over the medium term and BOI's financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and BOI continuing to make losses through 2011. We consider BOI to be of high systemic importance and the Irish government to have made a strong statement of support, as a result of which we have incorporated four notches of support into the ratings. The stable outlook reflects our expectation that the government will remain highly supportive of BOI, BOI's core Irish banking franchise will remain materially intact, and it will raise significant equity capital in 2010, from the market or the government or both.”
So absent support, BofI would be at BB+/Negative/BB-. Junk status as well.
“The ratings on Irish Life & Permanent PLC (ILP; BBB+/Stable/A-2) are unchanged. In our view, ILP faces continuing uncertainty around its strategic direction and desired business profile, in addition to the near-term pressure on the banking operations from weak earnings prospects and difficult wholesale funding conditions. Nevertheless, the ratings continue to benefit from the relative strength of the ILP group's life assurance operations. They also incorporate two notches of government support, reflecting our view of ILP's high systemic importance and our expectation that the Irish government would provide further support if required. The expectation of government support also underpins the stable outlook."
Absent state aid IL&P would be, then, at BBB-/Negative/B. Barely above water line.
Please, be mindful – S&P expects (and prices in) that the Irish state will be likely to buy equity in the banks. So we all can become investors in junk bonds-issuing institutions.
Very good, although bland, outlook statement:
“We consider the current operating conditions for the Irish banking industry to be weak, and expect that any recovery in earnings prospects will prove to be sluggish. In the coming year, we anticipate that many of the Irish banks may undergo operational and financial restructuring, which will likely lead to consolidation in the sector. Our overall assessment of the sector incorporates our opinions reflected in the following key points:
In country rankings analysis, S&P highlights that they expect the need for significant deleveraging by the banks in the future, reflective, presumably, of the lack thereof so far in the crisis – a risk I warned about consistently over time.
“The impact of the continuing challenging economic environment, which we view as weakening asset quality and earnings prospects” – presumably the S&P is on the same note as the rest of sane analysts: poor economy will drag banks down. Which means that Government logic – restore banks and see economy recover – is out of the window.
Next – a gem: “We have additionally revised our assessment of Gross Problematic Assets (GPAs) in the system to 15%-30% from 10%-20%. GPAs are our estimation of a country's potential problem loans to the private sector and nonfinancial public enterprises in a severe economic downturn, such as that being experienced in Ireland, and includes restructured and foreclosed assets, as well as overdue loans, and nonperforming loans sold to special-purpose vehicles.”
Oh yes – up to 30% GPA means that we can expect 45-50% of the loans to be stressed one way or the other at some point in time – some defaulting, some skipping couple of payments, some restructuring with various haircuts. That is, potentially, up to €200 billion in loans in various forms of distress for the 6 guaranteed banks alone.
With this sort of an outlook, not surprisingly, AIB's CDSs are now at around 650bps, BofI's at 250bps and virtually no action is taking place in bonds. Which, of course, does hint at the market reading Irish banks' bonds as being in effect a purely speculative bet on one probability - that of survival...
The share prices are yet to follow the same path of logic.
Anyone surprised so far?
“We have considered the implications for each rated Irish bank and lowered the ratings on some of them.” But even after that action, “the ratings on all Irish banks are currently uplifted because of our view of high systemic importance to Ireland and related government support, or their relationship with a higher-rated parent.”
We never would have guessed that if not for the State guarantee plus 11 billion worth of public capital, plus Nama’s countless billions of pledged support, the banks bonds would be junk. Wait, some of them actually would be ‘high risk junk’ as one Russian fund manager once described to me his own bonds (I ran away as fast as I could).
How junk? Take a load of honesty from S&P (with my emphasis added):
“We have lowered the ratings on Allied Irish Banks PLC (A-/Negative/A-2) by a notch. This reflects our view that the environment will remain challenging over the medium term, leading to high credit losses, and a weakened revenue base. We consider AIB to be of high systemic importance and the Irish government to have made a strong statement of support, as a result of which we have incorporated five notches of support into the ratings. The negative outlook reflects our view that AIB's anticipated recapitalization may not fully occur in 2010, and may be of an insufficient size to support an 'A-' rating, as well downside risk to our earnings expectations arising from the weak environment.”
Absent state support, AIB should be BB/Negative/C+. Errr, that is squarely in the junk bonds category.
“We have also lowered the ratings on Bank of Ireland (A-/Stable/A-2) by a notch. This reflects our view that the environment will remain challenging over the medium term and BOI's financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and BOI continuing to make losses through 2011. We consider BOI to be of high systemic importance and the Irish government to have made a strong statement of support, as a result of which we have incorporated four notches of support into the ratings. The stable outlook reflects our expectation that the government will remain highly supportive of BOI, BOI's core Irish banking franchise will remain materially intact, and it will raise significant equity capital in 2010, from the market or the government or both.”
So absent support, BofI would be at BB+/Negative/BB-. Junk status as well.
“The ratings on Irish Life & Permanent PLC (ILP; BBB+/Stable/A-2) are unchanged. In our view, ILP faces continuing uncertainty around its strategic direction and desired business profile, in addition to the near-term pressure on the banking operations from weak earnings prospects and difficult wholesale funding conditions. Nevertheless, the ratings continue to benefit from the relative strength of the ILP group's life assurance operations. They also incorporate two notches of government support, reflecting our view of ILP's high systemic importance and our expectation that the Irish government would provide further support if required. The expectation of government support also underpins the stable outlook."
Absent state aid IL&P would be, then, at BBB-/Negative/B. Barely above water line.
Please, be mindful – S&P expects (and prices in) that the Irish state will be likely to buy equity in the banks. So we all can become investors in junk bonds-issuing institutions.
Very good, although bland, outlook statement:
“We consider the current operating conditions for the Irish banking industry to be weak, and expect that any recovery in earnings prospects will prove to be sluggish. In the coming year, we anticipate that many of the Irish banks may undergo operational and financial restructuring, which will likely lead to consolidation in the sector. Our overall assessment of the sector incorporates our opinions reflected in the following key points:
- The recovery in Irish economic performance appears likely to be gradual, with growth only consistently established in late 2010 at the earliest;
- Loan losses will likely be elevated between 2009-2011 and will likely peak in 2010; Wholesale funding conditions appear likely to remain pressurized, with strong competition for retail deposits...
In country rankings analysis, S&P highlights that they expect the need for significant deleveraging by the banks in the future, reflective, presumably, of the lack thereof so far in the crisis – a risk I warned about consistently over time.
“The impact of the continuing challenging economic environment, which we view as weakening asset quality and earnings prospects” – presumably the S&P is on the same note as the rest of sane analysts: poor economy will drag banks down. Which means that Government logic – restore banks and see economy recover – is out of the window.
Next – a gem: “We have additionally revised our assessment of Gross Problematic Assets (GPAs) in the system to 15%-30% from 10%-20%. GPAs are our estimation of a country's potential problem loans to the private sector and nonfinancial public enterprises in a severe economic downturn, such as that being experienced in Ireland, and includes restructured and foreclosed assets, as well as overdue loans, and nonperforming loans sold to special-purpose vehicles.”
Oh yes – up to 30% GPA means that we can expect 45-50% of the loans to be stressed one way or the other at some point in time – some defaulting, some skipping couple of payments, some restructuring with various haircuts. That is, potentially, up to €200 billion in loans in various forms of distress for the 6 guaranteed banks alone.
With this sort of an outlook, not surprisingly, AIB's CDSs are now at around 650bps, BofI's at 250bps and virtually no action is taking place in bonds. Which, of course, does hint at the market reading Irish banks' bonds as being in effect a purely speculative bet on one probability - that of survival...
The share prices are yet to follow the same path of logic.
Sunday, January 10, 2010
Economics 10/01/2010: A desperate state of economic analysis
This week has been marked by some remarkable statements on the prospects for Irish economy in 2010 that simply cannot be ignored.
Firstly, yesterday, Irish Times (here) decided to devote substantial space to the musing of one of the stock brokerage houses. Bloxham's chief came out to tell us that things are going to be brilliant in 2010: 10% growth in house prices and commercial real estate valuation, and ca 100% increase in banks shares prices to €3 per share for BofI and AIB. So:
All in, Mr Ghose thinks that the banks shares might reach €3 per share sometime in 2010. He might be wrong, he might be right. I have no prediction on a specific price target. But here is a thought:
The two banks need some €5-6 billion in capital post Nama. At €3 per share two banks market cap will be around €4.5 billion. So with recapitalization - whether by the state or by the international dupes (oh, sorry - investors) - the market value of the two banks will be €9.5-10.5 billion or close to their 2006-2007 valuations. What sort of expectations curve does Mr Ghose have to get there?
A glimpse into his thinking can be provided by his July 22, 2008 note reproduced below:
You judge the merits of this prediction for yourself, but here are the facts
85-142% wrong?
Oh, and do note that in his July 2008 note, Mr Ghose doesn't do any better in historical analysis either. He completely failed to take into the account real (as in inflation-adjusted) returns to equities. If that little inconvenient fact is considered, the '2/3rds of the 1996 price offer' paid on Mr Ghose's family house 8 years after the crisis would represent just 33-40% of the 1996 offer real price. Markets did come back for Thailand, but once inflation (see IMF) is factored in, Mr Ghose's analysis yields a real loss on the 1996 offer of 50%! Ouch...
Mr Ghose's Chief Economist seems to have little time for Mr Ghose's optimism for 2010. Writing an intro to Daft Report this week he states (here): "in overall terms, I would expect house prices to drop another 10-15% on average this year, with Dublin again seeing the biggest decline [now, Mr Ghose thinks prime real estate will lead in growth, which means Dublin]. ...Looking further ahead, I expect house prices to be higher on average in 2011 than in 2010, and should rise on a five-year view as the labour market returns to normal. That said, the level of any increase in house prices over the next few years is likely to be only in single digits, with three factors - the banks' adoption of a more cautious stance to lending than in the 'Celtic Tiger' era, the return of interest rates to 'normal' and the possible introduction of a property tax for 'principal' homes of residence - all weighing negatively on the market."
The second comment, courtesy of today's Sunday Tribune (page 1, Business), comes from Prof John Fitzgerald of ESRI. After largely staying off the topic of Nama and banks recapitalization for the entire duration of the public debate, Prof Fitzgerald decided to offer an opinion on Ireland's 'financial rescue'.
Now that the stakes in the game are low, credit must be claimed for the future 'I too was critical' position, should things go spectacularly wrong on the Nama side.
Prof Fitzgerald thinks that state-injected funds into INBS and Anglo are totally worthless and will be lost. Who could have thought such a radical thingy!?
Some 4 months ago I provided my estimates showing the demand for recapitalization post-Nama totaling €9.7-12.4 billion (here and here). Having spent the entire 2009-long debate on Nama on the sidelines, Ireland's ESRI macroeconomics chief is now telling us that €10-12 billion will be required to complete recapitalization of the banks. This, according to the Tribune is news!
I am delighted to know that Prof Fitzgerald belatedly decided to agree with myself, Brian Lucey, Karl Whelan, Peter Mathews and Ronan Lyons. One only wishes that next time a matter of economic urgency, like Nama, comes up for a public discussion, he joins the debate when it matters - not four months after the fact.
Firstly, yesterday, Irish Times (here) decided to devote substantial space to the musing of one of the stock brokerage houses. Bloxham's chief came out to tell us that things are going to be brilliant in 2010: 10% growth in house prices and commercial real estate valuation, and ca 100% increase in banks shares prices to €3 per share for BofI and AIB. So:
- Pramit Ghose thinks that there is little to Irish economy other than demand for property and banks shares. The implication of this is that the only way that prosperity and growth will be achieved once again in Ireland is through another construction and lending boom. Have our stockbrokers learned anything new from the crisis? Doesn't look like it.
- Mr Ghose also seem to have little time for the fundamentals of Irish consumers and domestic economy. Massively heavy debts loaded onto Ireland Inc don't matter for growth to him. Neither are sky-high marginal taxation and the prospect for more tax hikes in Budget 2011, nor even high unemployment mar his optimism.
All in, Mr Ghose thinks that the banks shares might reach €3 per share sometime in 2010. He might be wrong, he might be right. I have no prediction on a specific price target. But here is a thought:
The two banks need some €5-6 billion in capital post Nama. At €3 per share two banks market cap will be around €4.5 billion. So with recapitalization - whether by the state or by the international dupes (oh, sorry - investors) - the market value of the two banks will be €9.5-10.5 billion or close to their 2006-2007 valuations. What sort of expectations curve does Mr Ghose have to get there?
A glimpse into his thinking can be provided by his July 22, 2008 note reproduced below:
You judge the merits of this prediction for yourself, but here are the facts
85-142% wrong?Oh, and do note that in his July 2008 note, Mr Ghose doesn't do any better in historical analysis either. He completely failed to take into the account real (as in inflation-adjusted) returns to equities. If that little inconvenient fact is considered, the '2/3rds of the 1996 price offer' paid on Mr Ghose's family house 8 years after the crisis would represent just 33-40% of the 1996 offer real price. Markets did come back for Thailand, but once inflation (see IMF) is factored in, Mr Ghose's analysis yields a real loss on the 1996 offer of 50%! Ouch...
Mr Ghose's Chief Economist seems to have little time for Mr Ghose's optimism for 2010. Writing an intro to Daft Report this week he states (here): "in overall terms, I would expect house prices to drop another 10-15% on average this year, with Dublin again seeing the biggest decline [now, Mr Ghose thinks prime real estate will lead in growth, which means Dublin]. ...Looking further ahead, I expect house prices to be higher on average in 2011 than in 2010, and should rise on a five-year view as the labour market returns to normal. That said, the level of any increase in house prices over the next few years is likely to be only in single digits, with three factors - the banks' adoption of a more cautious stance to lending than in the 'Celtic Tiger' era, the return of interest rates to 'normal' and the possible introduction of a property tax for 'principal' homes of residence - all weighing negatively on the market."
The second comment, courtesy of today's Sunday Tribune (page 1, Business), comes from Prof John Fitzgerald of ESRI. After largely staying off the topic of Nama and banks recapitalization for the entire duration of the public debate, Prof Fitzgerald decided to offer an opinion on Ireland's 'financial rescue'.
Now that the stakes in the game are low, credit must be claimed for the future 'I too was critical' position, should things go spectacularly wrong on the Nama side.
Prof Fitzgerald thinks that state-injected funds into INBS and Anglo are totally worthless and will be lost. Who could have thought such a radical thingy!?
Some 4 months ago I provided my estimates showing the demand for recapitalization post-Nama totaling €9.7-12.4 billion (here and here). Having spent the entire 2009-long debate on Nama on the sidelines, Ireland's ESRI macroeconomics chief is now telling us that €10-12 billion will be required to complete recapitalization of the banks. This, according to the Tribune is news!
I am delighted to know that Prof Fitzgerald belatedly decided to agree with myself, Brian Lucey, Karl Whelan, Peter Mathews and Ronan Lyons. One only wishes that next time a matter of economic urgency, like Nama, comes up for a public discussion, he joins the debate when it matters - not four months after the fact.
Thursday, January 7, 2010
Economics 07/01/2010: NTMA's end of year results
Ok, one would say that ‘investing’ in AIB and BofI is a sensible undertaking as the banks are market-determining entities for ISE. Nope, wrong. Page 4 of release states: “As a result, the Investment Portfolio had an elevated level of quoted equity investment of 80 per cent following completion of the recapitalisation in May compared with 57 per cent before the preference share investments were made. The Fund took advantage of the strong equity market rally to reduce its absolute risk and exposure to the equity markets through phased equity sales of €2.7 billion through the remainder of the year. The Investment Portfolio’s exposure to the quoted equity markets had been reduced to 63 per cent by year end.”
- 2009 thus saw a direct transfer of €3 billion to NPRF from the economy that has contracted by 10.5% (GNP). Since NPRF is a de facto piggy bank for public sector pensions only, this type of fiscal management, of course, has no precedent. It is equivalent to taking from the strained middle classes (taxpayers) to award future pay for public employees.
- This reminds us as to just how outrageously overpriced the preference shares we bought were. AIB and BofI preference shares yielding 8%? Remember – these two banks have balancesheets weaker than those of the main
Lastly, Appendix 1 lists bond issues for 2009. This is a nice summary of the fine work being done by the NTMA in placing our debt (although most of it has gone to the banks to be rolled into ECB). But the worrying thing is the time profile of these bonds. €14.53 billion of the bonds issued this year will mature (and will be rolled over) during or before 2014 - the deadline for our compliance with the Stability & Growth Pact ceilings on deficit and debt. Such a large amount, coming already on top of the billions in short/medium-term debt issued in 2008 doesn't do much to support markets confidence in Ireland actually delivering on 2014 commitment...
Monday, November 30, 2009
Economics 01/12/2009: Irish Banks - something stirring in the dark
An interesting, but at this stage purely theoretical conjecture that can play out in the next couple of days.
I will posit it after I go over the facts that led me to this conjecture:
Watch tomorrow's ticker.
I will posit it after I go over the facts that led me to this conjecture:
- Today's reporting on BofI and the banks in general has been focusing on the possible conversion of preference shares into ordinary shares to plug in capital holes. Considering that (a) such a conversion will de facto spell near nationalization of the banks; (b) it will destroy Government's case (supported by the stockbrokers and the banks) that preference shares represent significant cash flow positive back to the taxpayers in exchange for recapitalizations to date; and (c) such a conversion will amount to a swap of a guaranteed asset (preference share dividend) in exchange for of a falling asset (as ordinary shares are tanking and are bound to continue to tank if conversion takes place), the statement is alarming. In fact, the statement is extraordinary in nature, similar to the Banks Guarantee Scheme announcement back in September 2008;
- The RTE has completely failed to explore the very core idea of what effect the conversion will have on both capital reserves at the banks and the value of taxpayers' shareholdings in the banks. This might suggest that the story was potentially heavily 'managed' as a staged release as RTE business editors and correspondents should have been aware of such consequences;
- The extent of demand for capital post-Nama has been approximately estimable from the sheer size of impairments faced by the banks against banks balancesheets (loans to deposits ratios) and did not come as surprise for, say Anglo earlier this month. Why such a hype then all of a sudden? Did Nama haircut change dramatically? Not, Bloxham note today in the morning explicitly worked its estimates from the assumed Nama-signalled haircut of 30%. No change spotted here, then.
- Core tier 1 capital already includes preference shares, so conversion will only aid the banks balancesheets if and only if it will allow the banks to keep the preference shares dividend. This means that taxpayers get nothing from these shares. And it also means that things are getting so desperate in the banks that they are having trouble (potentially?) repaying these dividends to the state. What can the impetus for such deterioration be, given both banks already guided recently on expected impairments? Why did RTE reporters never bothered to ask about this issue.
- The whole mess of demand for post-Nama recapitalizations was predicted by some, and publicly aired in the media. In fact, my estimates from one month ago (here) accurately predicted the numbers involved. While some 'experts' from stock brokerages interviewed today by RTE's flagship News at Nine programme might have been unaware of such estimates back then, their arriving at the same numbers one month later is not really that much of a market-making news. So, again, why the hype today?
- RTE stated tonight that the markets anticipated 20% haircut (here). This is simply not true:
- Per today's Davy note: "This has been reviewed by NAMA and the Department of Finance and on the basis of interaction with both and the minister's estimate of €16bn of eligible bank assets, 'the directors believe that the average discount on disposal applicable to these assets should not be greater than the estimated average discount for all participating institutions of 30%'."
- Bloxham are working off 30% assumption.
- Goodbody's note was a bit more volatile on assumptions: "As per BOI’s recent interim results and a November’s IMS from AIB, both banks highlight that a number of uncertainties exist as to the specific quantum and timing of loans which may transfer, the price, the fees due and the “fair value” of the consideration. In its statement, AIB refers to the previously highlighted industry average discount of 30% to the gross value of the loans and indicates - as it did at the time of its IMS - that the board’s view is that “there is no reason to believe that the average discount applicable to AIB’s NAMA assets will fall significantly outside of this guidance”. When we wrote on this at the IMS stage, we highlighted that the language here was more vague than previous utterances and note our haircut applied is 28%. Similarly, in the case of BOI, the references in the release today are all based off the generic 30% industry figure referred to be the Minister, though that the discount will vary by institution, with the Court believing this industry figure to be the “maximum loss likely to be incurred on the sale of loans to NAMA”. We are of the view though that BOI’s haircut will be closer to 18%." I'll explain in human language: AIB itself believed that average Nama discount (30%) or something close will apply, while Goody believed 28% will do. For BofI, the management believed before that 30% will apply. But Goody's believed 18% will do (why, beats me). So no evidence on 20% market consensus anywhere here, then.
- NCB applied 30% model to both BofI and AIB in today's note. And so on.
- Taken over all brokers and banks themselves, AIB assumed discount averages at 29.5%, not 20%, BofI assumed discount averages at 27%. Now, forgive me, but where is RTE taking its 20% market expectation from?
- Banks announcement today was out of line with ordinary business;
- Banks announcement was never probed or challenged by the official media;
- Banks announcements were not queried by the the brokers to the full extent of conversion implications to the balance sheets;
- Three components can have a dramatic fast impact on bank core tier 1 capital - equity collapse (not the case - banks shares are down by less than 5% today, plus the statements were released in the morning before market prices were revealed); loans collapse on a massive scale (unlikely, given that both banks guided very recently on new impairments and also unlikely given that both banks appear to be impacted simultaneously); or deposits falling off dramatically (there is no way of confirming this unless banks publish their data, but do recall September-December 2008 when deposits flight exposed Anglo to nationalization).
Watch tomorrow's ticker.
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