Speculation over NAMA discount puts pressure on bank shares
Published 25/01/2010 | 05:00
Shares in Bank of Ireland and Allied Irish Banks (AIB) were expected to come under pressure this morning amid speculation over the weekend that loans being transferred by Irish financial institutions to the National Asset Management Agency (NAMA) would be subjected to deeper discounts than originally anticipated.
The Government has been preparing to issue as much as €54bn in bonds to Irish financial institutions as the banks remove about €80bn in toxic loans from their balance sheets and shift them to NAMA.
The loans are being acquired from the banks at a discount to their original value, and the discount to be applied had been touted as being in the region of 30pc.
The first tranche of loans, totalling about €17bn, is due to be transferred to NAMA by the middle of next month, while about half the institutions' bad loans should by transferred by the end of April.
Sources indicated yesterday that the Department of Finance was still tallying its own calculations based on the assumption of a 30pc discount and had not seen anything yet that would support the notion that the loans being transferred to NAMA would be worth, on average, even less than anticipated.
Earlier this month, NAMA chief executive Brendan McDonagh said he did not see any reason to change the 30pc discount forecast, adding that NAMA was "not surprised" by the valuations it was receiving.
While a discount deeper than 30pc would mean the Government would have to issue fewer bonds to acquire the loans, and ostensibly save the taxpayer money, the banks would in turn be left facing bigger-than-expected holes in their balance sheets that would have to be filled with more fresh capital than originally thought. The Government would likely be the source of such funds.
Already, the Government has ploughed €3.5bn each into AIB and Bank of Ireland, while it nationalised Anglo Irish Bank this time last year.
The European Commission is expected to respond soon to five-year restructuring plans submitted to it by recapitalised AIB and Bank of Ireland.
A spokesman for AIB yesterday declined to comment specifically on the weekend speculation, as did a spokesman for Bank of Ireland.
When Bank of Ireland's shareholders gave the green light, earlier this month, for the institution to engage in the NAMA process, they were told by the bank's chairman, Pat Molloy, that he believed the discount applied by NAMA to the institution's loans would not exceed €4.8bn, or 30pc of their value.
Most of the bad loans that NAMA will shoulder are coming from state-owned Anglo Irish Bank, which will send €28bn of loans to the agency.
Labour Party deputy leader and finance spokesperson Joan Burton claimed last night that it was "inevitable" that the loans being transferred to NAMA would have to be worth less than the Government hoped for.
She said that, if the loans hived off to NAMA were more deeply discounted, then the Government would be forced to inject even more money into the banks in order to shore up their balance sheets.
"In effect, it's nationalisation," she said, adding that the Government had essentially taken the "slow road" towards the move.
She said that the Government should have pencilled in a greater discount to the loans when it decided to adopt the NAMA plan.