Business Irish

Friday 14 December 2018

Banks may see €22.5bn in loan losses

Ian Guider

THE government is preparing to buy €90bn of property loans in a bid to stave off nationalising its biggest lenders. It may still end up with majority control of the country’s banks.

Companies led by Allied Irish Banks Plc may get 25 percent less than the face value of their loans under the proposal from the National Asset Management Agency, according to the median estimate of seven analysts surveyed by Bloomberg News.

That implies losses of €22.5bn. Analyst estimates for the discount ranged from 15 percent to 30 percent.

“It’ll probably be 30 percent, but it should be 50 percent,” said Brian Lucey, associate professor of finance at Trinity College Dublin. “Either way, it’ll leave the banks in a terrible hole, needing extra capital and effectively nationalise them by the back door.”

Finance Minister Brian Lenihan, who said last week he’ll move to set up NAMA “speedily,” wants to cleanse the banks of loans to property developers that have crippled them as the country faces the worst recession in its history. Lenihan has to avoid overpaying for the loans, and at the same time doesn’t want to force the banks into insolvency by paying too little.

“They are going to have to find a figure that doesn’t hit the banks’ capital so much that they have to take them over fully,” said Oliver Gilvarry, head of research at Dolmen Securities in Dublin. “And they can’t do it at a level that bankrupts the state.”

Bank of Ireland Plc dropped as much as 7.6 percent in Dublin trading, while Allied Irish fell 1.6 percent to 84 cents at 10:31 a.m.

Ireland will spend 13.9 percent of gross domestic product on the bailout programme, more than any other country per head, the International Monetary Fund forecast in an April 21 report. Taoiseach Brian Cowen said the following day the IMF estimate “should not be relied on.” He didn’t give a figure.

Lenihan has said the State will pay “significantly less” than the loans’ face value given the slump in land values. Talks with banks on the pricing of the loans going into NAMA haven’t begun. Commercial property values slumped 37 percent in 2008, the most on record, according to Investment Property Databank Ltd. in London.

“The government decision to establish an agency to remove the distressed assets from the banks’ balance sheets means that, in fact, not alone the developers, but the banks, will have to take a hit -- and a very upfront hit -- so that they can become normal lenders into the economy,” Lenihan told RTE Radio yesterday.

The government, which already took over Anglo Irish Bank, says nationalising more banks is the last option. Alan Ahearne, adviser to the Dept of Finance, said there are “downsides” to bank nationalisation.

“Nationalisation is often viewed from wholesale markets as a sign that the banking systems have completely failed,” said Ahearne, a former Federal Reserve economist, on April 23. “That’s a message the government would not want to give out.”

Still, Lenihan has said he may provide extra capital to the banks if needed, paving the way for the government to take majority stakes. The State is already pumping €7bn into Allied Irish and Bank of Ireland.

Analysts at Citigroup estimate that the haircut at 25 percent will result in a pre-tax loss of €7.9bn at Allied Irish and €5bn at Bank of Ireland this year.

“A combination of losses on transfer, reduced operating profits as a result of selling these assets and continued risk in the rest of the loan book is likely to leave both banks with substantial further capital requirements,” Citigroup analysts including Rohith Chandra-Rajan and Tom Rayner wrote in the note. “And a high likelihood that the government becomes a majority shareholder.”

(Bloomberg News)

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