Emmet Oliver: For all its work, agency will still need an upturn

Emmet Oliver

October 01 2010 04:46 AM

DESCRIBED as a bailout for banks and developers and a toxic skip, NAMA is starting to have the opposite effect on the Irish banking system.

By adopting a tougher-than-expected stance on loan values, the agency is punching huge gaping holes in the balance sheets of the main banks and forcing them to seek emergency capital injections from the government.

NAMA's critics feared it would be a rather tame creation, unwilling to truly discount the loans and hit the banks where it hurts -- at the balance sheet level. These critics were expecting NAMA to impose a 30pc discount on loans, with some even lower discounts.

But the actual discounting has been far more aggressive than anyone expected, including bank executives themselves. For example not a single Irish bank has been able to get away with just a 30pc discount on any of the tranches moved over to the agency to date.

Bank of Ireland was the only bank able to move loans over to NAMA at a discount of 35pc or less and that was only in the first tranche. Of course, NAMA's critics will respond that this is how it should be, with NAMA simply discounting more because the quality of the loans is continuing to deteriorate.

But nevertheless bank executives in private hold the view that NAMA is taking an unnecessarily harsh view on the value of the loans.

NAMA for its part can live with this criticism. The bigger the discount, the better its chance of making a profit when it finally winds itself up. Not only has NAMA been more aggressive with the banks than anyone thought, it is also getting more aggressive.

In the first tranche, NAMA was prepared to pay 11pc above current market values for loans, but by the second tranche, as it moved on to smaller time developers, the percentage paid above market values dropped to 9.8pc.

This is understandable because the loans taken over in the first tranche tended to be secured upon prime property, with less valuable development property more heavily represented in the second tranche.

Of course NAMA's critics fundamentally disagree with the agency paying any premium above market value -- and that is where NAMA's vulnerability arises. The agency still needs a large uplift from today's property prices to make a reasonable profit upon wind-down.

Nobody ultimately knows where Irish commercial property prices will be in a decade. This is because the current downturn is without precedent.

Yes the concern is that NAMA has paid quite a premium for loans from Irish Nationwide and Anglo Irish, the banks with the worst loans. This is where NAMA's attempt to break even will face its sternest test.

The other problem for NAMA is that while it is allowed to hoard property until prices improve, it still needs income and outside forces, like the ratings agencies, are likely to take a dim view of its activities if sales do not happen early on and in reasonable sized lots.

While US and UK assets are being sold first, the fateful day where it sells large amounts of development land in Ireland cannot be put off forever. It is only then that we all learn whether it has been overpaying for assets and by how much.

Still, the rigour of the agency has been far more impressive than any thought. Its chief executive Brendan McDonagh has impressed so far, not shying away from taking enforcement action against some developers. The agency has also delivered unpalatable messages to the banks at crucial moments.

NAMA for example has given a zero value to hundreds of millions of euros of loans at Anglo Irish Bank and Irish Nationwide, citing inadequate security. This approach has undermined the catch-cry that all assets are worth something.