|President Barack Obama and President Nicolas Sarkozy of France have a discussion in the Blue Room of the White House before their joint "press availability," March 30, 2010.
Irish Financials; The Irish banking plan - NAMA haircuts and capital plans: Goodbody analyst, Eamonn Hughes, comments - - "Yesterday was a big day for the financial sector. We were provided with the initial NAMA transfer haircuts (47%), new capital targets from the Regulator (7% equity tier 1 and 8% core tier 1 by end 2010) and the Minister for Finance’s broad assessment of the capital plans of the banks.
NAMA Haircuts: The initial NAMA transfer haircuts were broadly as flagged by recent media commentary. The overall 47% haircut incorporated a 43% figure for AIB and 35% for BOI. Elsewhere, Anglo Irish was circa 50%, EBS was 37% and Irish Nationwide was 58%.
Capital Targets: The 7% equity Tier 1 target outlined by the Financial Regulator (incorporated within an 8% core tier 1 target and 4% core tier 1 stress test) drives a €7.4bn equity requirement for AIB and €2.7bn for BOI. These estimates incorporate the use of the initial NAMA haircut for the rest of each bank’s NAMA eligible loans and a capital buffer of €1.1bn in the case of AIB. The capital requirements can be reduced by asset sales, with the banks having until year end to effect transactions. IL&P was not included in the first wave of assessment, though the company indicates its initial discussions with the Regulator suggest it has sufficient capital.
Government involvement: Recent market speculation has centred on the State moving to immediately convert an element of its preference shares in the banks. The government provided comfort that it will fill any gaps on the year end target capital requirements with its preference shares, if needed, but is giving the banks time to address their capital deficits. This less immediate approach means the worst fears in recent days will have been averted, possibly providing an initial share price fillip.
Valuations: Our base case scenario in AIB is that it sells its UK subsidiary (1x P/NAV) and US & Poland stakes (market cap valuations) for a combined €4.5bn capital gain, bringing its €7.4bn requirement down to €2.9bn. We raise 1x its market cap and solve for the preference shares at the current market price (State shareholding at c60%), generating 7% upside. Factoring in a circa 10% better realisation on asset sales offers 16% upside, whilst incorporating some additional upside in the capital buffer and possible adjustments to the NAMA haircut drives a bullish scenario of 76% upside. Our base case on BOI sees a market capitalisation sized rights issue, raising €500m from a further capital exchange and conversion of €0.6bn of the government’s preference shares, equating to 1.0x of the TERP adjusted market cap. This would see the State with a circa 42% stake by our estimates. However, its comments this morning that it is considering buying back the government’s warrants has the potential to generate upside for the share price."
Economic View; A line in the sand drawn on the banking crisis; Goodbody chief economist, Dermot O’Leary, comments - - "The once-and-for-all announcements on the Irish banking system yesterday provided a mixed bag for the Irish economy and the Irish taxpayer: (i) The higher than initially anticipated haircut of 47% on the initial tranche of loans being purchased from the banks reduces the risk to the taxpayer as well as reducing the overall amount of bonds to be issued in return for the assets transferring to NAMA. While the final valuations are not yet available, based on the haircut on the initial tranche, a total of €43bn in NAMA debt will be issued, with c.€2bn in the form of subordinated debt as a risk-sharing mechanism. This is less than the €54bn total initially suspected (€3bn subordinated); (ii) the cost of the banking crisis in Ireland looks to be substantially higher than we previously estimated, mainly due to the black hole that is Anglo Irish Bank.
The announcement by the Minister for Finance yesterday suggested that the total required funds for this bank may amount to €22bn. Combining this with required capital for the building societies, Irish Nationwide and EBS, along with the preference shares in AIB and Bank of Ireland, the total gross cost may come to €33bn. This is equivalent to 20% of Irish GDP (for 2010), well above the “average cost” of banking crises in developed economies since the 1970s, which we estimate at 11%; (iii) While the government will have an increased presence in the banking sector, which is likely to become bigger by the end of the year, a better capitalised banking system has to be considered a positive for Ireland Inc. as it increases the chances of the banks being able to fund themselves in the future as well as being able to extend credit to the wider economy to fund a recovery.
Tough decisions have been made in Ireland over the last twelve months, with last night’s announcements representing the culmination of a total overhaul of how the financial system operates and the amount of capital that the banks are required to hold. This comes after resolute action has been taken to restore stability to the public finances, while, in the background, costs are being reduced in a bid to engineer a real devaluation. All of these were necessary for Ireland to experience an economic recovery and while the costs incurred on Ireland over the course of the past two years have been enormous, the groundwork has now been laid for a recovery."