Monday 24 October 2016

The really stressful issue for our banks is non-performing loans

Published 02/08/2016 | 02:30

Finance Minister Michael Noonan. Photo: Frank McGrath
Finance Minister Michael Noonan. Photo: Frank McGrath

European stress tests that rated AIB and Bank of Ireland among the weakest financial institutions in the region have served at least one useful function - they've started a renewed debate about the huge levels of non-performing loans on the banks' balance sheets.

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The tests found that AIB and Bank of Ireland achieved the distinction of being rated just above Italian bank Monte dei Paschi di Siena in their inability to withstand an economic shock.

Using 2015 figures, the European Banking Authority (EBA) appraised 51 banks - and found that Irish ones would struggle to weather another recession. The test was not a forensic examination of the banks' balance sheets, but the results are alarming nonetheless.

Not that anyone in the banks or the Department of Finance was letting on that they were remotely concerned at the reappearance of global headlines traducing Irish financial institutions.

AIB said the tests were no more than "point-in-time projections based on prescribed stress assumptions and should not be treated as indicative of the future financial performance of AIB".

This cheery analysis rather ignores the fact that the other 51 banks all underwent the same "point-in-time projections" with most emerging in a much healthier position.

Meanwhile, the Department of Finance has insisted the tests will have no bearing on the State's plans to sell part of its 99.8pc stake in AIB - even as the share prices of Irish banks tumbled in the wake of the report. I suppose the State could still move ahead with its plan to sell part of its stake in AIB, but doing so and receiving a pittance relative to the €21bn pumped into the bank doesn't seem to make much sense.

The Department also used the results to sabre-rattle about Fianna Fáil's proposed Bill to impose a maximum cap on variable rate mortgages, saying the banks' profitability could be jeopardised by such a move. This is merely a tacit acknowledgement of an endemic problem ignored by this Government and the last - that variable rate mortgage holders are being gouged to prop up the banks.

Currently, such mortgage holders pay on average 2pc more than their EU counterparts - equivalent to an additional €2,500 per annum. Compared to those on trackers, they pay on average €6,000 more a year on a €200,000 mortgage.

Whenever the plight of these 300,000 households is raised in the Dáil, Finance Minister Michael Noonan wrings his hands and points to historic problems that continue to beset the banks and militate against decisive State intervention.

Speaking recently, he said a 2015 Central Bank report concluded that "the mispricing of risks in historical lending continues to be a significant contributor to weak profitability, as evidenced by the continued high level of non-performing loans (23pc as at December 31, 2015), the prevalence of very low-yielding tracker mortgages (50pc of the value of all outstanding mortgage loans in Ireland), and low net interest margins."

These are all reasons, apparently, that banks must be allowed to set exorbitant standard variable mortgage rates - the question of why the banks' balance sheets are still in such a dire condition nearly a decade after the crisis that almost wiped them out is never answered.

Although the banks and the Department have reacted with a kind of indignant shock to the EBA's stress tests, the results should not have come as any huge surprise.

In June, the Central Bank's new head of credit institutions supervision, Ed Sibley, described Irish banks as "weak and vulnerable" and said they continue to face "high levels of scrutiny and challenge".

"The high level of non-performing loans is a continued symptom of the crisis and the tip of a very large iceberg - the even higher level of restructured commercial and mortgage debt is the rest of the iceberg sitting below the surface," he said.

Given that the tip of this iceberg amounts to non-performing loans of nearly €28bn, one shudders to think what the overall value of restructured debt amounts to.

The question for the Government must now be - how long more will it take the banks to deal comprehensively with the mountain of non-performing loans on their books, or will they be allowed to limp along indefinitely by an administration desperately hoping the problem just goes away?

The question of how to deal with this debt, much of it related to residential mortgages, is a difficult one. Writing off debt would leave people in their homes but could lead to a further bailout, whereas repossessing homes and evicting families would only worsen an already catastrophic housing crisis.

Earlier this year, Bank of Ireland chairman Archie Kane said the bank had repossessed 176 homes in mostly voluntary surrenders in 2015 - a drop in the ocean when one considers there are 6,554 non-performing loans, with nothing paid for more than 90 days, on its books and 23,833 loans that have been restructured for those in, or about to go into, arrears.

To underscore the problem faced by the bank, nearly 50pc of those with non-performing loans are in negative equity, with loan-to-value ratios of 100pc or more. Is the bank simply waiting for the housing market to improve before it will swoop and institute repossession proceedings or does it have some alternate plan to deal with this level of bad debt?

More importantly, does the Government have any interest in finding out? Asked to defend the continued mauling of those with variable rate mortgages, Mr Noonan said he had dealt with the matter in an "effective" manner - by inviting the heads of banks to a meeting last year in which he implored them to reduce rates, an appeal that was largely ignored.

In reality, the best way to help these people is to ensure the banks return to health so that they are not used as convenient whipping boys to inflate profits. Regrettably, nobody in the banks or the Government seems to have the first clue how to do this.

Irish Independent

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