Bank of Ireland headquarters, Baggot Street, Dublin

Both AIB (Allied Irish Banks) and Bank of Ireland announced today that EGMs (extraordinary general meeting of shareholders), will be held in coming weeks, to approve participation in the State's "bad bank," NAMA (National Assets Management Agency). Both banks signalled they expected that property loans will transfer at a discount of about 30%.

AIB is to hold an EGM on December 23rd and Bank of Ireland will follow in early 2010.

BoI said failing to approve NAMA would increase the risk of further state investment in the bank and could lead to nationalisation. It said it expects that the discount applied on up to €16bn in loans it will transfer to NAMA, will not be above the expected 30% average.

A discount of 30% would provide €11.2bn for the bank and result in a pre-tax loss of about €3.4bn.

AIB said that NAMA will buy loans worth about €24.2bn on a gross loan basis.

The bank said there is no reason to believe that the average discount applicable to the transferred loans will fall significantly outside of the 30% discount guided by the Minister for Finance.

AIB has estimated that participation in NAMA will reduce its core tier 1 capital ratio from 8.5% to 6.3%, its tier 1 capital ratio from 7.8% to 6.1% and its total capital ratio from 10.7% to 9.5%.

AIB statement

BoI statement

Goodbody analyst Eamonn Hughes commented: "With the President having signed the NAMA legislation, we are just awaiting the issuing of a commencement order from the Minister for Finance to enact the legislation (and final EU approval). It then moves to the banks who have 60 days to apply to join the scheme and both this morning announced their planned participation in the scheme, subject to shareholder approval. This process was expected, so there really should be very little new information here for investors.

In the case of AIB, it is convening an EGM for December 23 next and is publishing a circular later today. BOI will be convening an EGC(ourt) in early January and will publish its circular sometime in December. In the case of AIB, the NAMA approval will be passed as an ordinary resolution, but in the case of BOI, it will require 75% approval from shareholders at its EGC.

Both banks highlight the approximate level of eligible assets for NAMA - - €24.2bn in the case of AIB and c€16bn in the case of BOI. As per BOI’s recent interim results and a November’s IMS from AIB, both banks highlight that a number of uncertainties exist as to the specific quantum and timing of loans which may transfer, the price, the fees due and the “fair value” of the consideration. In its statement, AIB refers to the previously highlighted industry average discount of 30% to the gross value of the loans and indicates - as it did at the time of its IMS - that the board’s view is that “there is no reason to believe that the average discount applicable to AIB’s NAMA assets will fall significantly outside of this guidance”.

When we wrote on this at the IMS (Interim Management Statement) stage, we highlighted that the language here was more vague than previous utterances and note our haircut applied is 28%. Similarly, in the case of BOI, the references in the release today are all based off the generic 30% industry figure referred to be the Minister, though that the discount will vary by institution, with the Court believing this industry figure to be the “maximum loss likely to be incurred on the sale of loans to NAMA”. We are of the view though that BOI’s haircut will be closer to 18%. The first loans are anticipated to transfer in January, with the completion of the process by July next.

Both banks recommend approval by shareholders and we think it is likely they will get this. In addition to providing greater certainty over asset values, it also improves liquidity directly in the banks and drives de-leveraging of the balance sheets, an important metric. Both banks also highlight the risks if not approved. AIB indicates that its board believes that “it would not be possible to put in place the necessary levels of capital that would be expected by the market or funding commitments in an acceptable time period”. BOI indicated that it evaluated alternatives to NAMA, including non-participation, though as we would have anticipated, the Government has indicated that it would not by supportive of any alternative proposals by the Bank requiring Government support. So, shareholders will get their say soon, but we would anticipate that both banks will be part of NAMA when it is up and running. BOI will be hosting a conference call at noon today."