एउरोपेँ बैंक्स - Irish bad bank faces potential pitfalls

Irish bad bank faces potential pitfalls

By John Murray Brown

Published: May 17 2009 16:39 | Last updated: May 17 2009 16:39

Michael Somers is refreshingly candid about the potential pitfalls of creating a bad bank to sort out Ireland’s financial crisis.

Ireland could see its credit rating cut, says the head of the National Treasury Management Agency, the body in charge of bond issuance, which is helping set up the National Asset Management Agency (Nama).
EDITOR’S CHOICE
Ireland treads a fine line on bad banks - Apr-19
Moody’s review for Ireland hurts banks - Apr-18
Fingleton to quit as Irisjavascript:void(0)
Publish Posth Nationwide chief - Apr-02
Financials look at Dublin’s plans for risky assets - Mar-29
Investors lash out at Bank of Ireland - Mar-27
Desmond attacks Boucher move - Mar-07

In evidence to the Dáil, the Irish parliament, he suggested the only beneficiaries in the short term would be the legal profession.

“I hear people down the courts are delighted because they see a huge bonanza,” Mr Somers said, referring to the prospect of litigation between the banks, property developers and the state.

If mistakes were made drafting the legislation for setting up Nama, the Dáil would be “eating and drinking” on the resulting controversy for decades to come, he added.

His comments are probably not what Brian Lenihan, the finance minister, wanted to hear as he embarks on a tour of European capitals to explain the initiative.

Mr Somers said the NTMA had “no expertise in bank restructuring” and faced a “very long learning curve”.

Even advocates of the plan are worried that it puts the Irish taxpayer on the hook for billions of euros at a time when the public finances are stretched to breaking point.

On paper, Nama will be the state’s third-biggest bank with a €90bn (£80bn) loan portfolio. If the loans are written off and the agency has to take over the underlying assets – the land and buildings on which the loans are secured – it could end up as the country’s largest landlord, in effect “socialising” a huge chunk of the domestic economy.

Higher BoI provisions expected

Richie Boucher will tomorrow present his first annual results since taking over as Bank of Ireland chief executive, writes John Murray Brown.

His appointment was attacked by one leading investor as “sending completely and utterly the wrong message”.

Attention will be on the bank’s forecasts for loan losses on its €38bn property loan book, as the government’s “bad bank” agency plans to take over up to €90bn of bad assets from Irish banks in a bid to free up lending to businesses.

Bank of Ireland has a smaller exposure to property development than Allied Irish Banks.

But Mr Boucher is likely to face questions about his role running the bank’s Irish retail division in a period when its loan book grew from €68bn in March 2004 to €145bn in September 2008.

Brian Goggin, his predecessor, admitted that the bank had “got carried away with the euphoria”.

But after the criticisms of Mr Boucher’s appointment by Dermot Desmond, the Irish financier, investors will be looking for reassurance the bank can weather the worsening recession, and avoid the fate of Anglo Irish Bank, the scandal-ridden specialist property lender which the government was forced to nationalise in January.

In February, Bank of Ireland said it expected to write off €4.5bn of loans in the three years to March 2011, which under a stressed scenario would rise to €6bn.

But with AIB increasing its bad debt estimates and warning that the problems of asset quality were not just confined to the property sector, Bank of Ireland is widely expected to increase its forecasts for provisions.

Ciaran Callaghan, analyst with NCB stockbrokers, is forecasting impairments to reach €7.3bn over the three-year period. Davy, the Dublin broker, is forecasting losses for the next three years.

The plan is that bank loans will be exchanged for government bonds, which the banks will then be able to repo (sell and repurchase) with the Irish Central Bank to meet their liquidity needs. The loans will be transferred at a discount to book value to reflect the deterioration in property values.

If the loans are bought at 50 per cent of book, it will almost double Ireland’s national debt, which at the end of March was €54.2bn. Moody’s last month said it was placing Ireland’s AAA rating on review for possible downgrade. Mr Somers told the committee: “We would be lucky to hold on to it.”

Agreeing what that transfer price should be is Nama’s first big challenge – a price that reflects the fact that the risk, but also all the valuation upside, is transferred to the taxpayer.

The banks will argue for a less severe hit. Critics of the plan fear the state will pay too much for the assets and say Peter Bacon, the government’s adviser on the project, is compromised, having been a board director of one of Ireland’s largest property companies, Ballymore Properties.

In an interview with the Financial Times, Mr Bacon would not be drawn on the mechanism for calculating the level of the writedown, which, he said, was “market sensitive, and sensitive to the dialogue that has to occur between the government and the individual banks”.

But he said it was wrong to suggest there was no market price, even though there were few transactions. “The peak-to-trough valuations in Dublin, Fermoy or Longford are not hugely different – somewhere in the range of 50 to 80 per cent. If you use 50 per cent and assume certain loan-to-value ratios, and that everything wasn’t done at the peak . . . you come back with a ballpark figure.”

The bigger the writedown, the fewer bonds would have to be issued, and thus the smaller the addition to the national debt. On the other hand the bigger the hit for the banks, the larger the subsequent equity injection the government would have to provide to recapitalise the balance sheets.

“You are better confronting the losses,” Mr Bacon said. “You’ve made loans, secured those loans on assets and now those assets no longer exist.”

The legislation would have powers to compel the banks to co-operate, but he did not think that would be necessary.

He said Ireland’s problem was not so-called toxic assets – the hard-to-value complex financial products that other countries are grappling with – but “property loans, highly concentrated both in the number of financial institutions and the number of borrowers”.

But it is partly because of this concentration that Mr Bacon maintained that the banks had to be taken out of the loop.

“The guy who made the loan to the developer is not the guy to bring the bad news up the line . . . because it means charging the balance sheet,” he said. And that is the case “even if, up the line, they want to hear the bad news, which in many instances they don’t”.

The other reason the government had to step in was the profile of Irish developers, typically privately incorporated entities run by entrepreneurs, with no tradition of accessing capital markets for finance.

“Contrast that with the UK, where Land Securities [and] British Land are doing large rights issues for the purpose of putting themselves right as regards their banking covenants and loan-to-value ratios. That avenue doesn’t exist [for Irish companies].”

Once the decision had been made, the NTMA was the only Irish institution that had “the credibility dealing with capital markets and attracting long-term equity for continuing finance and development to allow a work-out of these assets”.

How long this whole “cleansing” process will take is anyone’s guess. Mr Lenihan talks about 10 years. But, as Eugene Sheehy, chief executive of Allied Irish Banks, acknowledged last week, some sites the banks lent for will never be developed and will revert to farm land.

Mr Bacon said those loans could be called in and the assets sold today. “There are some situations where the return to the taxpayer will be as good today as it will ever be.”