Dan White: Taxpayer beware! Irish banks need another €30bn at least
Stress tests may reveal that the final cost of 'fixing' the Irish banks will be closer to €100bn.
LAST week's results from Dankse Bank clearly demonstrate that there is still much more bad news to come from all of the Irish banks, both domestic and foreign-owned.
This means that the Government will have to cough up at least another €30bn on top of the €64bn which the taxpayer has already spent on bailing out the banks.
The latest write-offs mean that Dankse will have written off almost €3.6bn, just over a third of a loan book which had a total peak value of just over €10.5bn.
If that isn't enough to give taxpayers a bad case of the heebie jeebies then nothing will.
For those of us who have followed the crisis from the beginning Dankse has been a useful pointer to future developments at the Irish-owned banks.
Unlike its domestic counterparts, who are still in denial about the full extent of their problems, Dankse has been upfront about its loan losses. Where Dankse goes today the Irish-owned banks look set to follow tomorrow.
So just how bad could things get? If the example of Dankse is any guide then very bad indeed.
In March 2011, stress tests conducted by US investment manager BlackRock calculated that, based on their likely future losses, the four continuing Irish banks, AIB, Bank of Ireland, Permanent TSB and EBS (which has since been subsumed into AIB) would require an extra €24bn of capital. This brought the total cost to the Irish taxpayer of the bank bust, including the money that had been poured into the two zombie banks – Anglo and Irish Nationwide – to a scarcely credible €64bn.
Now there are growing signs that even this enormous amount, the equivalent of almost half of our economic output as measured by GNP, will not be enough.
The BlackRock stress tests concluded that total loan losses at the continuing Irish-owned banks would amount to between €27.5bn and €40bn. The biggest single source of these losses would be residential mortgages with BlackRock forecasting losses of between €9.9bn and €16.9bn. The other big generators of losses were forecast to be commercial real estate lending (between €8.1bn and €10.3bn) and corporate lending, including SMEs (between €7bn and €9.5bn).
Even on the basis of the banks' own figures it is clear that these projected losses were hopelessly optimistic. According to the most recent AIB results, €8.1bn of its €39.5bn Irish mortgage book was more than 90 days in arrears at the end of December 2012.
Over at Bank of Ireland €3.6bn of its €27.5bn Irish mortgage book was more than 90 days in in arrears at the end of last year, while €5.5bn of Permanent TSB's €24.5bn Irish mortgage book was similarly suspect.
Unfortunately, with the possible exception of Permanent TSB, it is clear that the Irish-owned banks are being way too optimistic on mortgage arrears.
One has only to look at the Central Bank's latest mortgage arrears statistics to see why this might be the case.
At the end of December 2012 some €38bn of owner-occupier mortgages and €10.6bn of buy-to-let mortgages were in arrears, while a further €6.7bn of owner-occupier and €3.2bn of buy-to-let mortgages had been restructured but were not in arrears. By value that's the equivalent to over 41 per cent of the total €142bn stock of outstanding mortgages held by the domestic and foreign-owned banks.
Apply this pro rata to the €91.5bn of Irish mortgages held by the domestic banks and one is looking at over €37bn of compromised loans. With property prices having fallen by at least 50 per cent since 2007 it would seem reasonable to provide 50 per cent against these loans, say €18.5bn.
Some foreign-owned banks have offering to reduce loan balances by between 20% and 25% for tracker clients who agree to switch to a variable rate mortgage
In addition the Irish-owned banks have at least €50bn of loss-making tracker mortgages on their books. Some of the foreign-owned banks have been offering to reduce loan balances by between 20 and 25 per cent for tracker customers who are prepared to switch to a variable rate. Even a 20 per cent write-down on trackers would cost the Irish banks another €10bn.
Throw in a further 20 per cent provision for those mortgages not currently impaired, €11bn, and the Irish-owned banks are looking at mortgage losses of €39.5bn, €22.6bn more than forecast by BlackRock in its "worst case scenario".
And that's barely the half of it.
The Irish-owned banks have €27bn of SME lending on their books. Last month the Central Bank's director of credit institutions, Fiona Muldoon, revealed that 50 per cent of SME lending was in distress. On the basis of a 50 per cent write-down of the distressed loans and a 20 per cent precautionary write-down of the remainder that translates into a further €9.4bn of losses, €4.9bn greater than BlackRock's "worst case scenario".
The Irish-owned banks also still have almost €30bn of commercial property lending on their balance sheets. Once again one has to ask, just how realistic is BlackRock's "worst case scenario" of €10.38bn of losses.
By the time one adds losses on other lending, to large corporates, personal loans, credit cards etc. and it is hard to see how the cost of any fresh bank recapitalisation could come in at under €30bn. That would bring the total cost to the Irish taxpayer of "fixing" our bust banks to almost €100bn.
Clearly greater love hath no government than that which lays down its citizens for its banks!