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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


Global Financial Crisis: Urgent need for more transparency from Irish banks
By Michael Hennigan, Founder and Editor of Finfacts
Oct 9, 2008 - 4:15:33 AM

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Bank of Ireland, College Green, Dublin 2.

Global Financial Crisis: As governments across the globe accelerate efforts to stem the financial turmoil, there is an urgent need for more transparency from Irish banks on capital needs and the status of their loan books.

The coordinated global cut in interest rates on Wednesday, was a welcome boost to the global economy, which the IMF effectively said on the same day, the world faced a recession in 2009. In Ireland, Construction Industry Federation Director General Tom Parlon stated “banks need to now start lending again to customers and the must immediately pass on the full benefit of these savings announced to their customers. Combined with the positive decision by the Irish government, last week, to put in place a stabilisation package for the banking sector, we now have a very changed economic environment here in Ireland.”

“New property prices have been reduced by up to 30%, with many builders selling at cost. It is vital for the economy that we get activity in the housing market. We need to get liquidity moving, which is what the government decision of last week was intended to do and we need to see the full benefit of these savings passed on to businesses and consumers. This decision is a positive signal to those who wish to buy a home of their own,"Parlon added.

There will be further interest rate cuts but these will not herald a new dawn in the near-term. We simply do not have "a very changed economic environment here in Ireland" and the fall in the ISEQ Index in Dublin by more than 7% on Wednesday and further double-digit losses by three of the four listed banks, confirm this.

The further interest rate cuts will be a response to what the IMF termed "a major global slowdown."

The ESRI said on Tuesday that Irish employment will fall by 47,000 in 2009, compared with 86,000 jobs that were added in 2006.Even with a deficit of 5.5% of GDP in 2009, next week's Budget would be the toughest in 25 years. The ESRI also showed that banking crises take up to 4 years to resolve.

So given the severity of the global financial crisis, it is likely that we will not see a significant recovery until 2012. Serious economic analysts at the IMF and elsewhere, see a gradual recovery in the US from 2010 but anyone who believes it will be like 2001, is deluding themselves.

Source: ESRI

From the 2006 Annual Report of Anglo Irish Bank
Simply, interest rate cuts will help the Irish housing market but against a backdrop of job insecurity in the private sector and reduced incomes overall, it would be foolish to expect a significant improvement. A similar scenario is in store for the UK commercial property market, where Irish investors and banks, have significant interests.

The UK economy is expected to contract in 2009 and on Jan 1, 2010, the sun will not suddenly shine.

Irish Banks

The Central Bank says that outstanding property lending in June amounted to almost two-thirds of Irish private sector lending.

A total of €145 billion is outstanding on residential mortgages and €112 billion on property and construction loans.

The banks have said that some developers are not in a position to make loan or interest repayments. It is hard to see such firms surviving as they need working capital at a time when the lender would surely insist on recouping the funds from disposals. Besides, there is intense competition for available work, which is pushing down margins.

There have been various estimates of potential bad debts - some up to €20 billion.

US government working on plan to recapitalise American banks in return for public stakes
The US government is working on a plan to recapitalise American banks in return for public stakes.

At a news conference on Wednesday, the US Treasury Secretary Hank Paulson named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.

“We will use all the tools we’ve been given to maximum effectiveness,” Paulson said,“including strengthening the capitalization of financial institutions of every size.”

"Specifically, the EESA (Emergency Economic Stabilization Act) empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability," Paulson added.

The New York Times says today,  the American recapitalization plan, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Analysts at US bank JP Morgan Chase, said on Tuesday that Ireland's three biggest banks may have to raise €7.6bn of capital over the next two years.

On the same day, the chief executives of Bank of Ireland, Allied Irish Banks and Anglo Irish Bank, were reported to have each told an investor conference in London, hosted by Merrill Lynch, that they remain well capitalised.

The reality of the current financial crisis is that whether true or not, assurances from bankers are taken with a pinch of salt.

Besides, the Irish Government is now the lender of first resort as the UK government is in its jurisdiction, which it confirmed with a rescue plan on Wednesday.

So as the Government is faced with expanding the national debt by 25% in 2009 in next week's Budget, it cannot have months more of uncertainty on its potential commitments to the banking system.

Even if the politicians give some leeway on the hopes or wishful thinking that the Irish and UK markets will return to normal in the near-term, auditors will have to anyway insist on adequate bad debt provisions. The value of the collateral on many of the loans, has inevitably fallen in recent times.

There is also the impact on lending that carrying of "zombie" loans would have on banking operations and the economy.

Besides, there is additionally, the pertinent issue that foreign residents are the majority owners of Irish banks and without clarity, the banks' share prices will remain under pressure.

In 2007, 63% of AIB's equity was held by non-Irish residents, down from 64% in 2006.

The Irish Stock Exchange told Finfacts in early 2007 that an estimated 60% of Irish shares were owned outside the Republic of Ireland.

In the good times, foreign investors are positive for a share price but the reverse is the case when news turns bad.

Investors outside the UK owned 40% of firms listed on the London Stock Exchange in 2006 - up from 36% in 2004 and 4% in 1981. Private equity firms and hedge funds also increased their presence, from 3% in 2001 to 10% at the end of 2006.

Even in Japan, foreigners held 28% of shares in March 2007, up from 4.7% in 1990, according to figures released by the Tokyo Stock Exchange and four smaller Japanese bourses.

Foreign holding of US stocks was 9.2% in June 2004 up from 4.7% in 1978, according to the Census Bureau, while US investment in foreign securities has been rising rapidly of late. In fact, foreign holdings now account for 17% of all US stock ownership.

Seven companies accounted for almost 75% of the market capitalisation of the Irish Stock Exchange in June 2007 and 64% today.

The four banks - AIB, Bank of Ireland, Anglo Irish Bank and Irish Life & Permanent, accounted for 44% of the market in June 2007 and 26% today. CRH now accounts for 21.6% of the Irish market compared with biggest bank AIB's 11.3% share.

In the current climate, the Irish banks would not be able to raise fresh capital from their shareholders. Given that the Irish Government is now directly involved in the banking system through its guarantee of liabilities, it will at some point have to insist on clarity on the banks' loan books. There is no point in delaying the inevitable, as the global economy isn't going to surprise with a spurt in growth that would in the next eighteen months lift many boats.

In the meantime, Irish business will need funding to meet new challenges in a harsher international climate.

Property-related activities accounted for almost two-thirds of outstanding private sector lending in June - - - - Chart from Central Bank's Quarterly Bulletin, published on Friday, Oct 3rd.

The Irish Times said on Friday, Oct 3rd, Irish banks had loaned €86.7 billion to the Republic’s property developers, by the end of June, to fund the construction of housing, offices, shopping centres and a range of other business premises.

Despite a falling market, the figure was around €17 billion, or 20%, more than a year earlier, and the calculation did not include the interest due on these amounts. The figure also did not include commercial property loans outside the State.

The most recent figures show that 80% of Anglo Irish Bank’s €68 billion loan book, just under €55 billion, is secured against Irish and British property. Anglo Irish is a particularly active lender to the commercial property sector.

Bank of Ireland’s loan book stands at €135 billion, 71% or €95 billion is secured against property. Of that figure, its Irish home loans come to €27 billion, while its British mortgages come to €34 million. This leaves it with an exposure of over €60 billion to other property loans in both the Republic and other markets.

AIB’s loan book tops €150 billion, and 60 per cent of this is secured against property. The most recent figures show that loans outstanding in the Republic were €71.7 billion, with mortgages accounting for €24.5 billion, leaving a balance of €47.2 billion secured against other properties in the State.

The Times says that commercial real-estate loans are made up of the money that banks advance to developers who are buying property, either land or buildings, from which they ultimately intend making a profit.

If the developers are building on the property, or adding value in some other way, that money is also borrowed. So any profits from land speculation are virtually always dependent on property values increasing.

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