Sunday 25 February 2018

Emmet Oliver: McDonagh's words plant fresh doubts about the Irish banks

The Irish banks massively and catastrophically underestimated their own loans losses and capital requirements at the outset of the financial crisis in 2008.

They were publicly humiliated after they had to do a series of u-turns and accept the need for additional capital from the government. Heads rolled and everyone presumed lessons had been learned.

But comments this week from NAMA chief Brendan McDonagh once again raise the awful spectre that senior bank executives are still not very good at judging the quality of their own assets.

Only late last year AIB were telling the market they didn't expect the "haircut'' on their NAMA loans to fall "significantly outside'' the 30pc industry average.

However the first tranche came back with a haircut figure for AIB of 42pc, while the industry average came to 47pc.

Clearly AIB's loan assets are in a far worse condition than the bank itself perceives.

But the comments this week by McDonagh raise a far bigger problem, as it suggests that even after all the bloodletting at the top of the banks, there is a deep seated problem of getting senior management to be realistic about the value of their assets.

The 30pc notional figure remember, was based on information submitted by the bank themselves. It only went up after NAMA itself did detailed due diligence and found a horror show lying amid the loan documentation.

As McDonagh himself said this week: "Our own detailed due diligence on a loan by loan examination has revealed a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans''.

This is disturbing stuff in the context of future developments.

Remember we are currently relying on the banks to give us, the taxpaying shareholder, a reasonable sense of what could happen to the remaining parts of their balance sheets, their mortgage loan books, their SME loan books and their consumer loan books.

If as recently as January and February the banks were so unaware of the deep flaws in their commercial property loan books, can one really be confident about their future pronouncements about asset quality in other areas? Probably not.

Thankfully the financial regulator Matthew Elderfield is not relying on banks to be honest and upfront on asset quality and is instead planning on a worse case scenario basis and imposing an 8pc capital requirement on the sector.

This buffer will take account of bank's not appreciating how badly their balance sheets have declined.

Based on McDonagh's comments this week, it would seem to be a wise decision.

Germans are paying the price of profligacy on our behalf

How much more can the German taxpayer bear? After bailing out Greece over the weekend German bonds slumped and borrowing costs rose.

Admittedly the German treasury department can still borrow at some of the best rates in the world, but Germany's attractions as the ultimate European safe haven are fading fast. The cost to Germany of standing behind Greece, and yes Ireland, is going to be considerable.

Some argue it is the cost of European monetary union, but others believe Germany should leave the costs of bailouts to somebody else, ie the IMF.

Germany for now seems willing to pay the bill, but the problem is what size is the bill going to be?

Germany could end up in the worst of all worlds, providing assistance to Greece and still seeing the country default at some unspecified date in the future.

According to George Soros, Greece is in a 'death spiral' which is not going to be halted by Germany and France giving the country loans at a punitive rate of 5pc.

Bond market

The bond market up until the recent financial crisis was a sham. Countries were getting money far too cheaply considering the flaws in their economies and the hidden debts they were building up.

Now traders in credit have wised up. The bargain bonds of today are to be bought in India, Brazil and Canada, not Ireland. Ireland has started to cut its fiscal deficit, but nobody is yet convinced it can finish the job and get to 3pc of GDP by 2014.

Brazil, for example, has half the national debt (as a proportion of income) as Ireland. It is also growing faster and has no major problems with its banking system. It is an attractive credit.

For Ireland, things would be worse without Germany; for Germany, things would be better without Ireland (and Greece).

Being a member of the eurozone is no longer what it used to be. It is back to those annoying 'fundamentals' again, and if we get those right we too will become an attractive credit, with or without the Germans.

Quinn must be perplexed at the goings-on over at McInerney

Sean Quinn says he bitterly regrets his investment in Anglo Irish Bank, but the Cavan man must be stunned by what's happening over at McInerney, the housebuilder, where his insurance company has a stake of almost 5pc.

The score card of the current management team is pretty dismal and now a key member of that management team, chief executive Barry O'Connor, is stepping aside in an attempt to buy up its Spanish operations. Shareholders are understandably pretty upset at O'Connor already, but they will be even more upset if the Spanish assets are sold without getting the maximum possible value from the transaction.

The company's balance sheet is currently insolvent to the tune of €92.5m and the company is in breach of its bank covenants. The tale of woe doesn't stop there.

Writedowns in 2009 alone came to a crippling €127m and the company only has a market value of €26.2m. The decision of the company's management team to buy land banks in the run-up to the housing bust was a catastrophic error, although the company comments this week, presumably not ironically, that at least having access to land won't be a problem "when the market returns to growth''.

A more cautious battening down the hatches approach in the pre-credit crunch period would have saved the company's shareholders, including Mr Quinn, an awful lot of pain. Now the talk is of money being raised from existing shareholders, diluting the stakes of those hapless shareholders who don't want to incinerate any more of their cash. This presumably includes Mr Quinn?

Despite the appalling performance, the remuneration of directors actually rose last year to €3m as an executive director was compensated for loss of employment to the tune of €843,208. The Spanish deal with Mr O'Connor could make sense if the price is right, but after everything that has happened, shareholders are right to be deeply sceptical and also deeply annoyed.

Irish Independent

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