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Markets News Thursday: Post-NAMA Irish banks Loan to Deposit ratio drops but remains at high level of 130%; AIB surges to double-digit rise on "bad bank" plan
By Finfacts Team
Sep 17, 2009 - 9:24:28 AM
From Department of Finance report on the bad bank NAMA - published Sept 16, 2009
The Minister for Finance Brian Lenihan on Wednesday announced in the Dáil the valuation for the property loans with a nominal value of €77 billion that will be transferred to theIrish "bad bank" NAMA (National Assets Management Agency) will be €54 billion - - a 30% discount. Goodbody says post-NAMA, the Loan to Deposit ratio for the financial system drops from an estimated 164% to 130% - - still too high, in its view.
The UK's Northern Rock, which collapsed in 2008, had a loan-to-deposit ratio of over 300%.
Lex in the FT said on Wednesday, that as loans were written, largely to fund house purchases or property development, banks’ balance sheets expanded. Between 2002 and 2006 Spanish bank assets grew by 86% and Irish by 120%. The rise across the Eurozone as a whole was just 41%. The expansion of assets necessitated the shift to wholesale funding. In Spain and Ireland, respectively, only 63% and 37% of asset growth over the period was funded by deposit growth. Spain’s four mid-sized quoted banks and Ireland’s three big banks all have loan-to-deposit ratios above the European median, according to Citigroup. So do UK banks Bradford & Bingley and Alliance & Leicester.
British bank HBOS had a ratio of 177% when it had to be rescued by the UK government in late 2008.
According to a UBS survey of bank balance sheets, Ireland's average loan-to-deposit ratio was 163.1% in September 2008 with Irish Life & Permanent (IL&P), recording a ratio of 277.4%, one of the highest of any western financial institution.
Banks have to plug the gap between loans and deposits with wholesale funding provided by other banks.
The average ratio of loans to deposits at US regional banks was 113% in 2008, with the large bank Wells Fargo having a a ratio of 118.6%.
Davy chief economist Rossa White comments: NAMA to sort out liquidity problem that has constrained viable businesses - - "The first question that is asked about NAMA's impact on the real economy is: will it get credit flowing? There are two issues here: first, what happens to existing credit lines to viable businesses (and households); second, what about new credit. The immediate benefit of NAMA is that it solves banks' liquidity problems at a stroke. There is no reason to tighten the screws any longer on credit-worthy borrowers. But new credit provision will take much longer.
We first flagged Ireland's worrying money supply dynamics 18 months ago. Ireland's M3 is some 18% lower than at the peak. M2 - perhaps a better guide to the domestic money supply - is 5% or €10bn down from the high. Clearly, the level of credit outstanding will be cut significantly (by over €20bn) if NAMA is implemented, although that all relates to construction. The level of personal loans outstanding has already been paid down. That is part of necessary de-leveraging, but the cutting of existing credit lines or overdrafts to viable businesses is not. The money supply figures suggest that has been happening.
NAMA will help change that dynamic thanks to the near-€50bn of liquidity available to the banks. The funding squeeze on banks means that they have hurt creditworthy businesses in turn. Where credit lines were cut, there is no excuse for them not to be restored. Those developments will stop credit reduction in areas where it does not need to happen. But raising the level of credit is a separate issue. For a start, demand is low, although it will pick up as the economy bottoms. But households are constrained by high existing debt levels. We would not bet that the level of credit will be higher a year from now (de-leveraging in construction and unsecured personal debt will be ongoing); that it flows to the right borrowers is what matters."
Goodbody chief economist Dermot O’Leary commented: Economic View; NAMA implications for Ireland Inc. - -"So now we know. Ireland’s newly formed bad bank will pay five Irish banks an estimated €54bn for the majority of their property and construction loans, which have a book value of €77bn, implying a discount of 30%. It has still not been officially decided whether this debt will be included in the official calculation of General Government Debt; this is awaiting a ruling from Eurostat. However, if this debt were to be included in the national debt calculations this year, we estimate that the general government debt level will increase from 55% of GDP to 88% of GDP. However, it is important to point out that assets are being transferred to a Government agency that are expected to yield a return over time and thus reduce this upfront cost to zero on disposal. The main risks to the taxpayer revolve around pricing of the assets.
On this front, there is disappointingly little information on the underlying assumptions implied in the calculation of the haircut for the banks. The only detail we get is that the overall market value of the portfolio is estimated to have fallen by 47% to €47bn, implying that NAMA will pay €7bn over market value for the assets (this part is referred to as Long Term Economic Value). To reduce the risk somewhat though, the Government has introduced a risk-sharing mechanism which means that €2.7bn of the overall payment will be in the form of subordinated debt that will only be repaid in the event that NAMA realises its full value over its lifetime. The primary goal of NAMA is to restore credit flow to the Irish economy.
While there was speculation that credit supply targets would be announced yesterday, there was only an update on previous commitments that were made at the time of the recapitalisations of the two major banks, with the commitment that further measures are continuing to be examined by the Government. NAMA will provide a significant liquidity boost to the banks though, given that a total of c.€51bn of bonds will become eligible collateral with the ECB. After that, the ability of the Irish banking system will depend on the degree of recapitalisation of the two main banks and the continuing negotiations around the “third banking force” made up of the smaller lenders."
Paul Moore, the former head of risk at HBOS, repeatedly warned the UK bank about the excessive risk its was undertaking, before being fired. Moore told CNBC’s Geoff Cutmore that he wasn't surprised by the Lehman Brothers collapse because of its high level of subprime mortgage exposure:
Goodbody's Eamonn Hughes commented: NAMA Day post mortem - - "The Minister for Finance - after much delay - presented his NAMA plans yesterday in parliament. The Irish State is to take in €77bn of loans from across the financial system into the National Asset Management Agency (NAMA) with a 30% average haircut. Both figures are gross and prior to provisions taken to date. Among the two main quoted banks, AIB will input €24bn of loans into NAMA and BOI circa €16bn. Across the system, about two thirds of the loans are on domestic properties, about one-quarter is UK based and the balance elsewhere, mainly in the US and Europe. Land & development loans account for two-thirds of the total, with associated loans (mainly investment property) taking up the balance. The State is paying €54bn for these loans, which it estimates represents a current market value of €47bn and a long term economic value of increment of €7bn. The Minister indicated that the valuations incorporate a 50% decline from peak in collateral values and in terms of the risk sharing mechanism, around 5% of the value of the consideration paid will be in the form of subordinated bonds. Post NAMA, the Loan to Deposit ratio for the financial system drops from an estimated 164% to 130%, which is welcome, but probably still too high, in our view.
Fears around a higher haircut probably ensures a reasonably favourable reaction in the short term for the shares and overnight the ADRs of AIB and BOI in the US market have popped by 15-25%. However, post the NAMA speech, our estimate of the gross haircuts taken on the NAMA designated assets (28% in AIB & 24% in BOI) is higher than we had previously estimated (20% in AIB & 17% in BOI), though the amount of loans going into NAMA is also lower. However, the government’s estimate of long term economic value signals that we must also raise our loan loss estimate of our non-NAMA property loans. This sees us raise our over-the-cycle credit charge for AIB by 120bps to 11.5%, though just 50bps at BOI to 8.8%. Our TNAVs at the banks will be lowered as a result, with AIB drifting back from €3.6 to €2.7 and BOI from €1.5 to €1.2. Also, on a PE basis our estimate of franchise worth, less capital to be raised in the future approximates our AIB TNAV estimate, though is higher at BOI. The sentiment is going to be one of relief in the short term and a perception that State involvement is being kept to a minimum, which is welcome and is going to be supportive into the likely capital issues in the months ahead from the banks. However, our models show that valuations are starting to look stretched when the market comes around to recognising the substantial capital requirements of the Irish banks over the medium term.
From Department of Finance report on the bad bank NAMA - published Sept 16, 2009
AIB has published a statement overnight indicating its plans to raise “in the region of €2bn of capital” in the coming 12-18 months. Our post NAMA calculations also estimate a capital requirement of €2.1bn in order to ensure the core equity ratio doesn’t breach 4% at the trough of the cycle (2011). We would be of the view that M&T now has to be sold, which generates circa €600m in equity (though earnings foregone in subsequent years), though the bank will probably seek to retain BZ WBK. This leaves a likely €1.7bn equity requirement to be raised from existing or new shareholders, with a reference from the bank to the recent interest from a third party about taking a minority stake. Raising the capital from these sources will minimise demands on the State, which the market will regard favourably. We also note that BOI has indicated it will be releasing an RNS at 12 noon updating its position post-NAMA and publishing a trading update for the first half to end September."
The Wall Street Journal says today, that after facilitating the economy's downfall, the housing sector will soon start helping its recovery, though probably not by much.
Census Bureau data on August housing starts are due Thursday morning. Economists think starts rose 3.3% from June to an annualized rate of 600,000 units, the fastest pace since November 2008.
A tentative recovery in home construction might be enough to boost annualized gross-domestic-product growth by as much as 0.5 percentage point, according to some estimates, perhaps as soon as this quarter.
That would be an impressive turn of events. Collapsing residential construction slashed nearly one percentage point, on average, from GDP growth for the past 3½ years in a row.
That starts are gaining ground might seem quizzical, as there is still an oversupply of housing on the market, including a large "shadow" inventory of homes that will eventually enter foreclosure or that are being held off the market while their owners wait for prices to recover.
Senate Finance Committee Chairman Max Baucus unveils the committee's health care reform bill:
The Dow Jones Industrial Average rose 108.30 points, or 1.1%, to 9791.71 on Wednesday, led by a 6.3% jump in General Electric.
The Nasdaq Composite Index and S&P 500 both gained 1.5%
After the closing bell, Oracle, the world’s second- largest software maker, fell as much as 4.9% in extended trading after first-quarter sales missed analysts’ estimates, hit by slowing demand for databases.
Sales of database and so-called middleware programs plunged 22% to $711 million in the period ended Aug. 31st, the company said in a statement.
Discussing the challenges the Japan's new government faces, with Simon Wong, regional economist at Standard Chartered Bank and CNBC's Oriel Morrison:
The Bank of Japan today kept the benchmark overnight lending rate at 0.1% and maintained their emergency lending programs to banks and companies. While describing the economy as “showing signs of recovery,” an upgrade from the “stopped worsening” assessment last month, the bank said in a statement that it still sees “downside” risks to growth.
On private consumption, while there are some signs of a pick-up mainly attributable to the effects of various policy measures, it remains generally weak amid the worsening employment and income situation, the central bank said.
The MSCI Asia Pacific Index rose 1.2% Thursday - - the highest since Sept. 8, 2008.
Japan’s Nikkei 225 Stock Average added 1.7% as a survey showed the nation’s manufacturers turned optimistic for the first time in almost two years. Australia’s S&P/ASX 200 Index gained 1.4% and China's Shanghai Composite climbed 2.02%.
The BDI fell by 16 points Wednesday to 2,415, bringing the monthly loss to over 13.0%.
Bloomberg reports the rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50% from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7% lower.