INBS has reported a €2.49bn loss for FY 2009 on the loan book just under €11bn, with roughly €8.5bn of this attributable to development and investment in property markets. Provisions amounted to €2.8bn, so in other words, the Kingdom of Irish Local Finance has managed to pile up an impressive 25.5% impairment charge on the book that has already taken a hit in 2008. Between 2008 and 2009, INBS has managed to post impairments of 30%.
Actually, here is a better view: 96% of all losses are on commercial development books, which means INBS has been lending money to folks whose default rates are currently running at more than 33% yoy! These are recognized default rates, which conceal the fact that many of the INBS' loans (just as in the case of other banks) would really be deep in red, were they not re-negotiated and switched into 'interest holiday' loans back in 2008-2009. Now, remember the numbers released by Nama? 2/3rds of the loans not paying interest. Apply that to the INBS books - the expected impairment charge for 2010-2012 will be around €5.7bn. And that's only for the non-householders' loans...
The numbers are truly outstanding by all possible measures.
INBS's administration expenses rose to €46mln from €45mln in 2008, and the bank has managed to accumulate €7 million in professional fees as one-off expenses, presumably relating to the management efforts to shore up the hull of a sinking boat.
Per Irish Times report, CEO Gerry McGinn said the greatest management challenges were in relation to the commercial loan portfolio. "The society has manifestly been seriously under-resourced in many areas of its business activities and support functions, but most especially in commercial lending," he siad.
Under-resourced? As if throwing more cash at staff and consultants would have prevented them from issuing so absurdly poorly priced and analyzed loans?
At this stage, especially given Mr McGinn's denial of the reality (that the INBS is a burnt-out force with not a modicum of decorum to pretend that it can act as a functional lender) any more taxpayers cash directed to the INBS would be a pure and gratuitous waste!
Showing posts with label recapitalization. Show all posts
Showing posts with label recapitalization. Show all posts
Monday, April 19, 2010
Tuesday, April 21, 2009
Daily Economics 21/04/09: AIB and getting reality right
AIB is getting reality, courtesy of the Government...
You'd think it was a joke (here), but the Government that can't balance its own books and that prices risk as my two-and-a-half year old prices candies is now pushing an unwilling, reluctant, downright denial-bound AIB into re-considering its capital adequacy. What a fitting beginning of an end to the sorry saga of Irish banking.
CBFSAI or rather the more competent PWC hired to assist them, carried out a stress testing exercise on AIB and then the bank 'concluded' that €1.5bn more capital will be needed to keep the bank capitalized. And not just any capital - Tier 1 stuff, the caviar of the capital world.
The key word here is 'concluded' for it shows that, most likely, some back and forth bargaining between the bank and the Minister for Finance have taken place before arriving at the final figure. Which, of course, leaves me wonder - was the original stress test capital shortfall even bigger than that? We won't know unless PWC report is leaked.
AIB had core equity of €7.7bn (5.8%) and core Tier 1 of €9.9bn (7.4%) in January 2009 before getting €3.5bn in your and my money. Then, government preference shares hiked capital T1 to €13.4bn (10%) while equity remained intact at 5.8%.
Another transfer of wealth from us... to them
To plug the existent hole, AIB is hoping to sell its stakes in the US-based M&T and BZWBK (Poland). The book-value of these assets is questionable, with estimates of €2.2bn being on the higher end (Credit Suisse estimate) with €1.9bn estimated by AIB. But it is largely irrelevant, as sale of M&T will require a goodwill write-back yielding about €480mln in net T1 addition. Sale of BZWBK will require an RWA reduction, implying a net gain of €320mln. From €2.2bn of assets sold, AIB will get 75bps on Tier 1 - €800mln. Should the sale reduce the value of both assets by a modest 20%, you get €640mln boost to tier 1 (+60bps). In other words, someone (you and me) will have to cough up the remaining €700-860bn-odd cash injection for the bank.
There are reports of other accounting acrobatics - e.g repurchasing of various termed debts (tier 2) into perpetual paper (tier 1), but at the very least, the Government will end up putting enough cash into AIB coffers to own 30-50% of the bank outright. Another transfer of wealth will be in the works. From you and me to... ultimately - the public sector. Why? Because even if the Exchequer gets 10cents on a Euro, the Government will never rebate the money back to us. The Government will waste this cash on paying off the unionized public sector workers for 'industrial peace' achieved.
In the long run, the sale of both or either of the assets is going to be also a problem for the bank shareholders. Why? Because apart from having exposure to the US market (first to recover and to benefit from stronger trend growth in years ahead) and Poland (likely to show much stronger rebound than Ireland in years to come), AIB has no strategy as to how it will be making money into the future.
So to summarize: the recapitalization-Redux will be a raw deal for the taxpayers and shareholders, a sweetheart deal for the bank management and a modest payoff to the public sector unions and employees in the longer term.
Exposing NAMA scam
And it is back to NAMA. Recall the €80-90bn in loans that Lenihan is keen on shifting off the banks and into our taxpayer-financed vehicle? Remember the haircut to the loans value that the Davy etc were calling for? 15% that is, or a hit on the taxpayer of €68-76.5bn. Well, this is now getting bigger. If AIB needs €1.5bn in capital, before NAMAzation of its book, the two main banks will be going into NAMA with €22.4bn estimated core equity base and will inevitably lead to the Government as the majority shareholder in both banks even under a minor discount.
Now, consider the signals indicating the state of the loan books that the AIB stress-test conclusions suggest.
We do not have an exact split on LTVs for loans held by the banks. Bank of Ireland in November 2008 was reporting low-50% range for probably the most toxic of all loans - development land, but high-70% range for its overall property investment book. AIB reported in summer 2008 residential development book at 77% LTV (65% allocated to undeveloped land), total development book was evaluated at LTV in excess 70%.
So it is safe to assume that LTV on entire 2-banks loans book is averaging around 72-75%, while for development land - at ca 50%. The total development book to be bought up by NAMA will likely reflect a similar split to 35-65% in AIB, which out of €90bn can be ca €60bn (Davy, for example, have a similar number under their assumption). Since last reports, LTVs have gone up, as values dropped faster than loans write-downs reduced the 'L' part of the ratio, so these assumptions are relatively conservative.
For land, 55% LTV is likely to rise even further, as land markets all but ceased to function. How dangerous is this stuff?
Well, take BofI: land loans of €5.4bn, non-land development loans of €7.9bn. If LTV was 55% in November for land, the bank holds loans on the land with initial value of €5.4bn/0.55=€9.82bn. By many accounts, land is now largely valued at agricultural prices, plus a mark-up of say 50% for better locations. This would imply a 'Value' part fall-off of ca 70% for land. Let's be generous and allow for a 65% fall-off, reducing the BofI's land bank valuation to €9.82bn*0.35=€3.44bn. Under this scenario, assuming BofI takes an impressively honest impairment charge on land of 10%, the LTV has risen from 55% to €5.4*0.9/€3.44bn=141%. BofI will have to cover €1.96bn in lost value before NAMA discounts.
AIB's land bank valuation is €7bn*0.35/0.55=€4.45bn on currently-held €7bn in loans, with effective current LTV up from 55% to €7bn*0.9/€4.45bn=142%. AIB will have to cover €2.55bn in lost value before NAMA discounts. Assuming that this loss is taken at 40% knock-back on RWA, with 10% Tier 1 provision against RWA, we have a capital base hit of an odd €425mln due to land banks out of €1.5bn stress-test implied capital requirement.
But wait, this was just land.
Outside land, there is some roughly €48bn in other development stuff to be picked up by NAMA, with current LTVs at over 70% and values falling by over 40% by the time this recession will be over, implying book value adjusted for risk of €25.6bn - a shortfall of €22bn, approximately, which with 30% RWA impact and Tier 1 ratio of 10% assumptions will require €2.8bn in fresh capitalization.
So combined land and ordinary development stuff on the AIB book is roughly adding up to 1/2 of €2.8bn (non-land), plus ca €425mln (land) = €1.8bn in capital... Pretty close to the €1.5bn figure we got from the PWC's stress-testing after AIB 'agreed' with Mr Lenihan...
And the conclusions are:
Now get into the entire development books that NAMA is aiming to buy: at, say, 70% LTV, the €60bn in loans that NAMA will buy originally underwrote €86bn in 'value'. This will be down ca 45-50% by the end of the crisis (a relatively conservative assumption on housing and commercial development values declines), and assuming write-downs on loans at 5%, we have an implied bottom-of-crisis LTV ratios of €60*0.95/(€86*0.55)=121%.
Applying 15% cut on these loans, as Davy suggests, the taxpayers will be paying €51bn on risk-adjusted assets valued at €47bn, financing the purchase at, optimistically, 5.1-5.5% pa. That is equivalent to taking 121% mortgage on a house that has a closing cost of ca 8.5% upfront and is financed at an interest rate that is more than 2.5 times the rate of my current ordinary mortgage. This Government will turn us all into subprime borrowers.
So now we suspect two things:
You'd think it was a joke (here), but the Government that can't balance its own books and that prices risk as my two-and-a-half year old prices candies is now pushing an unwilling, reluctant, downright denial-bound AIB into re-considering its capital adequacy. What a fitting beginning of an end to the sorry saga of Irish banking.
CBFSAI or rather the more competent PWC hired to assist them, carried out a stress testing exercise on AIB and then the bank 'concluded' that €1.5bn more capital will be needed to keep the bank capitalized. And not just any capital - Tier 1 stuff, the caviar of the capital world.
The key word here is 'concluded' for it shows that, most likely, some back and forth bargaining between the bank and the Minister for Finance have taken place before arriving at the final figure. Which, of course, leaves me wonder - was the original stress test capital shortfall even bigger than that? We won't know unless PWC report is leaked.
AIB had core equity of €7.7bn (5.8%) and core Tier 1 of €9.9bn (7.4%) in January 2009 before getting €3.5bn in your and my money. Then, government preference shares hiked capital T1 to €13.4bn (10%) while equity remained intact at 5.8%.
Another transfer of wealth from us... to them
To plug the existent hole, AIB is hoping to sell its stakes in the US-based M&T and BZWBK (Poland). The book-value of these assets is questionable, with estimates of €2.2bn being on the higher end (Credit Suisse estimate) with €1.9bn estimated by AIB. But it is largely irrelevant, as sale of M&T will require a goodwill write-back yielding about €480mln in net T1 addition. Sale of BZWBK will require an RWA reduction, implying a net gain of €320mln. From €2.2bn of assets sold, AIB will get 75bps on Tier 1 - €800mln. Should the sale reduce the value of both assets by a modest 20%, you get €640mln boost to tier 1 (+60bps). In other words, someone (you and me) will have to cough up the remaining €700-860bn-odd cash injection for the bank.
There are reports of other accounting acrobatics - e.g repurchasing of various termed debts (tier 2) into perpetual paper (tier 1), but at the very least, the Government will end up putting enough cash into AIB coffers to own 30-50% of the bank outright. Another transfer of wealth will be in the works. From you and me to... ultimately - the public sector. Why? Because even if the Exchequer gets 10cents on a Euro, the Government will never rebate the money back to us. The Government will waste this cash on paying off the unionized public sector workers for 'industrial peace' achieved.
In the long run, the sale of both or either of the assets is going to be also a problem for the bank shareholders. Why? Because apart from having exposure to the US market (first to recover and to benefit from stronger trend growth in years ahead) and Poland (likely to show much stronger rebound than Ireland in years to come), AIB has no strategy as to how it will be making money into the future.
So to summarize: the recapitalization-Redux will be a raw deal for the taxpayers and shareholders, a sweetheart deal for the bank management and a modest payoff to the public sector unions and employees in the longer term.
Exposing NAMA scam
And it is back to NAMA. Recall the €80-90bn in loans that Lenihan is keen on shifting off the banks and into our taxpayer-financed vehicle? Remember the haircut to the loans value that the Davy etc were calling for? 15% that is, or a hit on the taxpayer of €68-76.5bn. Well, this is now getting bigger. If AIB needs €1.5bn in capital, before NAMAzation of its book, the two main banks will be going into NAMA with €22.4bn estimated core equity base and will inevitably lead to the Government as the majority shareholder in both banks even under a minor discount.
Now, consider the signals indicating the state of the loan books that the AIB stress-test conclusions suggest.
We do not have an exact split on LTVs for loans held by the banks. Bank of Ireland in November 2008 was reporting low-50% range for probably the most toxic of all loans - development land, but high-70% range for its overall property investment book. AIB reported in summer 2008 residential development book at 77% LTV (65% allocated to undeveloped land), total development book was evaluated at LTV in excess 70%.
So it is safe to assume that LTV on entire 2-banks loans book is averaging around 72-75%, while for development land - at ca 50%. The total development book to be bought up by NAMA will likely reflect a similar split to 35-65% in AIB, which out of €90bn can be ca €60bn (Davy, for example, have a similar number under their assumption). Since last reports, LTVs have gone up, as values dropped faster than loans write-downs reduced the 'L' part of the ratio, so these assumptions are relatively conservative.
For land, 55% LTV is likely to rise even further, as land markets all but ceased to function. How dangerous is this stuff?
Well, take BofI: land loans of €5.4bn, non-land development loans of €7.9bn. If LTV was 55% in November for land, the bank holds loans on the land with initial value of €5.4bn/0.55=€9.82bn. By many accounts, land is now largely valued at agricultural prices, plus a mark-up of say 50% for better locations. This would imply a 'Value' part fall-off of ca 70% for land. Let's be generous and allow for a 65% fall-off, reducing the BofI's land bank valuation to €9.82bn*0.35=€3.44bn. Under this scenario, assuming BofI takes an impressively honest impairment charge on land of 10%, the LTV has risen from 55% to €5.4*0.9/€3.44bn=141%. BofI will have to cover €1.96bn in lost value before NAMA discounts.
AIB's land bank valuation is €7bn*0.35/0.55=€4.45bn on currently-held €7bn in loans, with effective current LTV up from 55% to €7bn*0.9/€4.45bn=142%. AIB will have to cover €2.55bn in lost value before NAMA discounts. Assuming that this loss is taken at 40% knock-back on RWA, with 10% Tier 1 provision against RWA, we have a capital base hit of an odd €425mln due to land banks out of €1.5bn stress-test implied capital requirement.
But wait, this was just land.
Outside land, there is some roughly €48bn in other development stuff to be picked up by NAMA, with current LTVs at over 70% and values falling by over 40% by the time this recession will be over, implying book value adjusted for risk of €25.6bn - a shortfall of €22bn, approximately, which with 30% RWA impact and Tier 1 ratio of 10% assumptions will require €2.8bn in fresh capitalization.
So combined land and ordinary development stuff on the AIB book is roughly adding up to 1/2 of €2.8bn (non-land), plus ca €425mln (land) = €1.8bn in capital... Pretty close to the €1.5bn figure we got from the PWC's stress-testing after AIB 'agreed' with Mr Lenihan...
And the conclusions are:
Now get into the entire development books that NAMA is aiming to buy: at, say, 70% LTV, the €60bn in loans that NAMA will buy originally underwrote €86bn in 'value'. This will be down ca 45-50% by the end of the crisis (a relatively conservative assumption on housing and commercial development values declines), and assuming write-downs on loans at 5%, we have an implied bottom-of-crisis LTV ratios of €60*0.95/(€86*0.55)=121%.
Applying 15% cut on these loans, as Davy suggests, the taxpayers will be paying €51bn on risk-adjusted assets valued at €47bn, financing the purchase at, optimistically, 5.1-5.5% pa. That is equivalent to taking 121% mortgage on a house that has a closing cost of ca 8.5% upfront and is financed at an interest rate that is more than 2.5 times the rate of my current ordinary mortgage. This Government will turn us all into subprime borrowers.
So now we suspect two things:
- Just on land alone, the pre-NAMA liability for two banks is ca €4.5bn - this the cash they will need to find before we level the NAMAzing discount of 15% (Davy), 25% (Merrrion) and so on.
- The latest PWC/CBFSAI stress-test was most likely not stressful enough, as it barely covers the expected land & development loans-related capital losses alone.
Thursday, December 18, 2008
A train wreck of Irish economic policy
In managing the ongoing economic crisis, observing Irish Government policy can only be compared to watching a train wreck in slow motion. The banks re-capitalization scheme announced this week is just another example. By ignoring Ireland's impoverished and debt-overloaded consumers and companies, the latest plan will not deliver any real benefits to growth, credit flows or consumer/producer confidence.
One frame…
First, the rails buckle underneath as the Exchequer balance snaps under the weight of reckless public spending. Pop, pop – the fastenings fly off as tax line after tax line comes short. “No worries, we have a plan”, calls out the engineer. Enter the emergency budget – empty of any ideas as to how to mend the path or to lighten the load.
Then, the engine slumps oil-less. Banks hit the friction of bad corporate and household loans. The sparks of private unemployment fly. “All’s fine,” shouts the engineer, “we have insurance”. Emergency banks guarantee follows, but panic engulfs the carriages.
For what seems like an eternity the train pushes on. Dust, gravel and engine parts are shooting in all directions. Business insolvencies double year on year under the weight of the heaviest corporate debt load in the EU. Consumers crumble under the largest debt mountain in the OECD. Homes repossessions are on the rise and retail sales crash. The policy engine spins out of control: income, savings and consumption taxes go up and business rates increase. “The fundamentals are sound,” shout engineers. The rest of the world is selling off Irish shares and assets.
By the end of last week, the index of Irish financial companies shares has fallen 67% relative to the Black Monday of September 29th – the point that triggered the banks guarantee. “This will all end happily,” chirp engineers, “We’ll commission new reports, appoint new committees and issue more emergency responses.”
… to another
Enter this Sunday’s desperate ‘capitalization’ package. This promises to deliver some €10 billion to the banks in a swap for equity. The details, predictably, are sparse. Everyone expects the capital injections to be a copy-cat of those instituted by Germany and the UK – the countries hardly facing the same problems as Ireland. This implies a mixture of private and public funds to be made available to the banks with some token conditions, e.g dividends and management bonuses caps.
In a statement the Department of Finance said the plan will underpin the availability of loans to individuals and businesses.
Ooops. By-passing Ireland’s impoverished consumers and companies, the plan will not deliver any such benefits.
Elsewhere in Europe and the US, similar capitalization schemes have failed to reduce the cost of corporate borrowing or to restart lending to the households. In the UK, a £43 billion capital injection scheme has been in place for almost two months and the supply of consumer and business credit continues to fall - whether due to demand slowdown, lenders withdrawal from the market or both. In the US, massive banks’ capital supports have lowered the mortgage rates, but there is no meaningful increase in new mortgages uptake.
Three reasons for State-to-Banks recapitalization in-effectiveness
First, heavily indebted households are unlikely to take up new credit regardless of the cost. Short of the Government scheme to reduce the household debt or to increase after-tax incomes, no policy will shift consumers out of precautionary savings and into credit markets. So the retail sales will continue falling, businesses will suffer and consumers will keep on heading North for shopping. Our engineers, who two months ago raised VAT and now stubbornly refuse to back-down will see even less VAT revenue in 2009.
Second, heavily indebted Irish businesses can use new credit to either roll-over existent debts, or to finance short-term operational expenses, e.g export transactions. With exception of export credits, any new lending will simply re-arrange the deck chairs on the sinking Titanic of corporate Ireland. None of the new loans will go into capital acquisition, investment or hiring. These activities have stopped not because credit got dear, but because economic demand for goods and services has collapsed.
Third, for the banks, turning recapitalization proceeds into business loans will defeat the entire purpose of the scheme. Assuming re-capitalization is needed because bank’s capital is running too low relative to the size of the impaired or threatened loans, recapitalization must drive up the capital-to-loans ratio. Taking the money and using it to issue more loans will do exactly the opposite.
And this brings us to the issue of costs. The scheme will use the last of the remaining taxpayers’ money – the National Pensions Reserve Fund – to increase capital reserves of the banks. This means the state will no longer have any remaining capacity to inject a meaningful stimulus into the real economy. The consumers will go on cutting spending, business will go on laying off workers and the Exchequer will go on issuing new emergency responses. The more things change…
One frame…
First, the rails buckle underneath as the Exchequer balance snaps under the weight of reckless public spending. Pop, pop – the fastenings fly off as tax line after tax line comes short. “No worries, we have a plan”, calls out the engineer. Enter the emergency budget – empty of any ideas as to how to mend the path or to lighten the load.
Then, the engine slumps oil-less. Banks hit the friction of bad corporate and household loans. The sparks of private unemployment fly. “All’s fine,” shouts the engineer, “we have insurance”. Emergency banks guarantee follows, but panic engulfs the carriages.
For what seems like an eternity the train pushes on. Dust, gravel and engine parts are shooting in all directions. Business insolvencies double year on year under the weight of the heaviest corporate debt load in the EU. Consumers crumble under the largest debt mountain in the OECD. Homes repossessions are on the rise and retail sales crash. The policy engine spins out of control: income, savings and consumption taxes go up and business rates increase. “The fundamentals are sound,” shout engineers. The rest of the world is selling off Irish shares and assets.
By the end of last week, the index of Irish financial companies shares has fallen 67% relative to the Black Monday of September 29th – the point that triggered the banks guarantee. “This will all end happily,” chirp engineers, “We’ll commission new reports, appoint new committees and issue more emergency responses.”
… to another
Enter this Sunday’s desperate ‘capitalization’ package. This promises to deliver some €10 billion to the banks in a swap for equity. The details, predictably, are sparse. Everyone expects the capital injections to be a copy-cat of those instituted by Germany and the UK – the countries hardly facing the same problems as Ireland. This implies a mixture of private and public funds to be made available to the banks with some token conditions, e.g dividends and management bonuses caps.
In a statement the Department of Finance said the plan will underpin the availability of loans to individuals and businesses.
Ooops. By-passing Ireland’s impoverished consumers and companies, the plan will not deliver any such benefits.
Elsewhere in Europe and the US, similar capitalization schemes have failed to reduce the cost of corporate borrowing or to restart lending to the households. In the UK, a £43 billion capital injection scheme has been in place for almost two months and the supply of consumer and business credit continues to fall - whether due to demand slowdown, lenders withdrawal from the market or both. In the US, massive banks’ capital supports have lowered the mortgage rates, but there is no meaningful increase in new mortgages uptake.
Three reasons for State-to-Banks recapitalization in-effectiveness
First, heavily indebted households are unlikely to take up new credit regardless of the cost. Short of the Government scheme to reduce the household debt or to increase after-tax incomes, no policy will shift consumers out of precautionary savings and into credit markets. So the retail sales will continue falling, businesses will suffer and consumers will keep on heading North for shopping. Our engineers, who two months ago raised VAT and now stubbornly refuse to back-down will see even less VAT revenue in 2009.
Second, heavily indebted Irish businesses can use new credit to either roll-over existent debts, or to finance short-term operational expenses, e.g export transactions. With exception of export credits, any new lending will simply re-arrange the deck chairs on the sinking Titanic of corporate Ireland. None of the new loans will go into capital acquisition, investment or hiring. These activities have stopped not because credit got dear, but because economic demand for goods and services has collapsed.
Third, for the banks, turning recapitalization proceeds into business loans will defeat the entire purpose of the scheme. Assuming re-capitalization is needed because bank’s capital is running too low relative to the size of the impaired or threatened loans, recapitalization must drive up the capital-to-loans ratio. Taking the money and using it to issue more loans will do exactly the opposite.
And this brings us to the issue of costs. The scheme will use the last of the remaining taxpayers’ money – the National Pensions Reserve Fund – to increase capital reserves of the banks. This means the state will no longer have any remaining capacity to inject a meaningful stimulus into the real economy. The consumers will go on cutting spending, business will go on laying off workers and the Exchequer will go on issuing new emergency responses. The more things change…
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