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News : International Last Updated: Mar 30, 2010 - 9:12:20 AM


Markets News Monday: Tuesday is D-Day for Irish banks; State to seize control of AIB, EBS and Irish Nationwide; Stake in Bank of Ireland to be increased
By Finfacts Team
Mar 29, 2010 - 8:16:38 AM

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President Barack Obama greets US troops at a mess hall at Bagram Air Field in Afghanistan, Sunday, March 28, 2010.

Markets news on stocks, currencies and commodities; In a stark illustration of the steep fall of the Irish economy from the dizzy heights of the bubble years, Tuesday is D-Day for Irish banks, when after the markets close, the Minister for Finance Brain Lenihan is expected to outline recapitalisation plans for the five Irish institutions  - - AIB, Bank of Ireland, Anglo Irish Bank, and the building societies: EBS and Irish Nationwide - - to Dáil Éireann.

In a stark illustration of the steep fall of the Irish economy from the dizzy heights of the bubble years, Tuesday is D-Day for Irish banks, when after the markets close, the Minister for Finance Brain Lenihan is expected to outline recapitalisation plans for the five Irish institutions  - - AIB, Bank of Ireland, Anglo Irish Bank, and the building societies: EBS and Irish Nationwide, to Dáil Éireann. 

The toxic loans agency NAMA, will make a statement on the "haircuts" or discounts which are being applied to the property loans transferred from the lenders; the Financial Regulator will also make a statement on related stress tests and the need for the core equity/capital ratio to be 7%  and the Minister will detail the capital injections of about €16bn, in addition to the €11bn that was provided in 2009. The State's stake in AIB may rise to 70% and to 40% in Bank of Ireland.

Historians John Paul McCarthy and Tomás O'Riordan have written that in the early year of the State's existence that contacts between the  Irish Banks Standing Committee and the Department of Finance were abrasive. At a meeting in 1923, members of the committee questioned the ability of Bandon native and Cambridge graduate Joseph Brennan, Department Secretary and his Assistant Secretary, James J. McElligott, a native of Tralee, wondering "if the two young gentlemen who waited on them spoke with authority." The banks initially hesitated underwriting government loans without a British Treasury guarantee, a politically insensitive demand they later stopped insisting upon. The Free State Government had managed to raise the first national loan of £10 million without much assistance from the banks.

How times change!

Allied Irish Banks (AIB) was formed in 1966, through a merger of the Provincial Bank of Ireland, Royal Bank of Ireland, and Munster & Leinster Bank.

Bank of Ireland was founded in 1783 and the former premises of the defunct Irish Parliamentat College Green, Dublin, were purchased for £40,000 in 1803.

The bank was officially appointed official banker to the Irish Government in 1922 and in 1969, the National Bank of Ireland, Hibernian and Bank of Ireland merged to form the Bank of Ireland Group.

Speculation reaches fever pitch: Davy analyst, Emer Lang comments - - "The Minister for Finance's comprehensive address to Parliament on banking is scheduled for Tuesday March 30th some time after 16.30. This is expected to coincide with statements from the Regulator detailing required capital targets and from NAMA in relation to haircuts on loans transferring. Speculation that haircuts will be severe and that the Regulator will opt for stringent capital requirements has reached fever pitch, with reports this morning suggesting that Allied Irish Banks (ALBK) will inevitably end up majority owned by the government.

This would clearly be an unwelcome development for existing shareholders and stands in stark contrast to management's preferred self-help strategy aimed at avoiding government control, communicated at the recent results stage. As we outline in our Weekly Market Comment ('Irish banks: A busy week ahead'), we reckon ALBK would need up to €5bn equity at a haircut of 35% and to hit a core equity ratio of 7% at the trough. Asset disposals could in theory satisfy much of this with a strategic investor and/or existing shareholders providing the rest, but today's reports suggest that ALBK may not be given the time to pursue this option. According to the Irish Times, 'AIB is fighting a rearguard action in last-ditch discussions with the Government, the regulator and the NTMA, seeking time to raise capital on its own through private means and avoid greater State ownership'.

In the case of Bank of Ireland (BKIR), we estimate that it needs up to €2.7bn at a haircut of 27% (on €16bn, effectively a higher percentage – 36% – if loans are as low as €12bn) to hit 7% at the trough. Our model implies government ownership of less than 30%, but press reports of around 40% imply a bit more comes from government but that private capital is also forthcoming. Following a change in its year-end to December from end-March, BKIR is due to publish nine-month results to end December on Wednesday March 31st. The key components of our now redundant March 2010 forecasts were operating profits of €1.3bn and impairment losses of €4.2bn, with both reflecting the impact (on income/provisions) of initial anticipated NAMA transfers. Stripping out the NAMA effect and based on interim figures to end-September last, we reckon operating profits for the nine months are likely to be in the region of €1.1bn. It is difficult to predict where impairment provisions will stand at the year-end. NAMA-related provisions stood at €1.4bn at end-September and are likely to have been boosted further by December. We reckon impairment provisions could be as much as €3bn in the nine-month period. Overall, building in associates, we estimate pre-exceptional nine-month losses come in at around €1.9bn."

Irish Financials; This is it – the choreography begins!: Goodbody analyst, Eamonn Hughes, comments - - "This is the big one, when we find out about NAMA haircuts, target capital levels and levels of state ownership. According to extensive media reporting over the weekend and this morning, it appears that the government is going to choreograph a number of steps for the banks tomorrow.

First up will be the NAMA haircuts, which will come tomorrow after the market close. We are forecasting a 30% haircut at BOI on its €12bn of NAMA bound loans, but it looks like c35% on its first €2bn tranche. Given these are the most distressed borrowers, the initial haircut was always going to be the highest, as we mentioned a number of times last week. We are forecasting a 35% haircut at AIB on its full NAMA portfolio, with commentary around a possible 40%+ level on its initial €3bn tranche.

The second stage will see the regulator announce his capital targets after the NAMA haircut announcement. It has appeared a number of times in commentary last week and over the weekend, so the 7% core equity ratio target up front looks written in stone, with the target to be in place by year end. On a base case, based on our 35% NAMA haircut for AIB and our non-NAMA loan loss assumptions, it is going to need c€4.7-4.8bn of equity (gross, though we think an M&T disposal could be a given, taking this down to €3.8bn), whilst BOI is going to need €3.0bn to get to 7% (assuming 30% haircut on €12bn of loan transfers to NAMA). Our estimates see this rise to 9% by 2014, moving through 8% by 2012.

The final stage of the show will be the Minister’s presentation tomorrow, after the close, in which he will describe the steps by the State to address the capital shortfall. Much of the commentary over the weekend has centred on the government taking a tough line and giving very little time to deal with the capital shortfalls and concern around the timing on disposals. Much of the commentary has focused on the State moving to a 40%+ stake or so in BOI and a 70%+ stake in AIB, with discussions still ongoing. These shareholding levels are very similar to the figures at Lloyds and RBS in the UK. Our valuation models show downside to both banks in the base case scenarios, given the above mentioned capital requirements, with AIB only offering some upside in a Sell Poland or Sell the UK & Poland scenario (taking M&T as a given).

However, much of the commentary over the weekend and this morning doesn’t appear to offer the banks much time and our estimates show that backing out any disposals or further hybrid exchanges wouldn’t get the implied shareholdings too wide of the mark from the figures mentioned in the media. However, we note that the capital targets are by year end, so in effect, this may afford the banks some time to sell assets and raise capital from disposals/investors and run down the State shareholding levels from the aforementioned figures. However, all will be revealed tomorrow evening and note that BOI has now pushed out its results (for the 9 months to end December) by 24 hours to Wednesday morning."

Economic View; Banking the only game in town this week: Goodbody chief economist, Dermot O’Leary, comments - -
"Efforts to restore the Irish banking system to full health will finally come to a head over the next few days. A big bang approach is to be used in relation to: (1) the announcement of the haircut on the first tranche of loans to be shifted across to NAMA; (2) the assessment by the regulator on the likely loan losses on non-NAMA loans and; (3) the minimum capital ratios that the banks must hold by the end of the year (see the financials piece for more detail on these issues).

The state has already stumped up €11bn to help the banking system in the past twelve months and it is now becoming clear that significant further injections will be needed when the announcements above are made this week. There are indications that capital requirements for the banking system will amount to at least €16bn, with €9bn going into the nationalised Anglo Irish Bank and over €2bn into Irish Nationwide and EBS. The debate over the past twelve months has revolved around the costs and benefits of increased state involvement in the banks and the cost of such action versus the damage that may be done to the economy without an adequately capitalised banking system in terms of credit provision. It now appears that the state will indeed take the cost upfront, but where will it come from? In terms of AIB and Bank of Ireland, it is likely that the funds may come from the National Pensions Reserve Fund, which has €15bn of assets outside of the investments already made in the two banks, AIB and Bank of Ireland.

For Anglo, Irish Nationwide and EBS, the cash may have to directly come from the Exchequer, which will increase the funding requirement for the state significantly. It was planned that €20bn would be raised in the markets in 2010. Over half of this has already been completed after a series of successful auctions already. This requirement may now increase up to €30bn, depending on the timing of any capital injections by the state. This may come as somewhat of a surprise to the market, but the state is receiving significant, and in some cases full or majority, stakeholdings in these banks in return for their cash. It is hoped that at some stage in the future that these stakes can be sold to the open market. Furthermore, credit is likely to be more available in an adequately capitalised banking system than an under-capitalised one, which should have positive implications for economic growth over the coming years."

Discussing the US Administration's plan to modify loans as well as financial regulation and health care legislation, with Glenn Hubbard, Columbia Business School dean:

China's Geely acquires Volvo:  Zhejiang Geely Holding Co. agreed to buy Volvo Cars from Ford Motor Co. for $1.8 billion in the biggest overseas takeover by a Chinese carmaker more than one-and-half-years after the two companies first entered discussions.

The price includes a $200 million note and the remainder to be paid in cash, Ford Chief Financial Officer Lewis Booth said Sunday in Gothenburg, Sweden. The transaction is expected to complete in the third quarter, Geely Chairman Li Shufu said.

The ceremony was witnessed by Li Yizhong, China's minister of industry and information technology, and Maud Olofsson, Swedish deputy prime minister and minister for enterprise and energy.

The agreement provides a solid foundation for Volvo to continue to build its business under Geely's ownership, said Booth at the ceremony.

"China, the largest car market in the world, will become Volvo's second home market. Volvo will be uniquely-positioned as a world-leading premium brand, tapping into the opportunities in the fast-growing China market," said Li.

CNBC's Tyler Mathisen looks ahead to what are likely to be next week's top business and financial stories:

Asia

The MSCI Asia Pacific rose 0.3% Monday.

The Nikkei 225 slipped 0.09%; the Shanghai Composite gained 2.01%; Australia’s S&P/ASX 200 Index advanced 0.01% and India's Sensex Index climbed 0.38%.

A Shanghai court  today found an Australian national working for mining giant Rio Tinto guilty of accepting bribes and steeling commercial secrets and sentenced him to a combined 10 years in prison.

The Shanghai No. 1 Intermediate People’s Court also sentenced three Chinese nationals working for  Rio Tinto, between seven and 14 years each.

Toyota: Despite serious quality problems in recent times, Toyota reported today that global sales rose 13% year on year in February.

The group, including Daihatsu and Hino trucks, sold 613,845 vehicles worldwide last month, up from 543,435 a year earlier.

Global production in the same period surged 69.2% to 734,631 units, with 655,180 Toyota badged units.

Asia benchmarks

Finfacts Reports

Is China ready to become the next economic superpower?
Dr. Peter Morici: Breakthrough US jobs report expected on Friday
Economic recovery takes firm hold worldwide; Confidence among manufacturers in Ireland at highest level since January 2007
Gordon Gekko returns to a Wall Street that has brought misery to millions
Overseas visits to Ireland down 13% in Q4 2009
Irish merchandise exports in 2009 fell 3% compared with 2008

In Europe, the Dow Jones Stoxx 600 has risen 0.34% Monday.

The ISEQ has slipped 0.83% in Dublin.

Elan has slid 2.34% and AIB has fallen 14.79% while BoI had dipped 9.14%..

Bank of Ireland has postponed the publication of its results for the nine months to the end of December from tomorrow until Wednesday, because of the official banking announcements on Tuesday..

European Benchmarks

Irish Share Prices

Irish Stock Market Capitalisation by Company

Key Index Performance Statistics

Euribor Rates

AIB Daily Report

Bank of Ireland Daily Report

Currencies

The euro is trading at $1.3454 and at £0.8992.

For live currency updates, check the right-hand column of the Finfacts home page.

The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.

Commodities

The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - -  close to a 1986 low.

The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.

On Monday last week, the BDI fell 42 points or 1.24% to 3,337; on Tuesday, the BDI dipped 57 points or 1.71% to 3,280; on Wednesday, the BDI dipped 37 points or 1.13% to 3,243; the index dropped 66 points or 2.03% to 3,177 on Thursday.; on Friday, the BDI dipped 79 points or 2.49% to  3,098.

In the Financial Times on Wednesday, Feb 17th, Javier Blas wrote that the weakness in the Baltic Dry Index, long seen as an indicator of global economic activity, does not reflect a downturn in global trade. Instead, the measure of freight costs is showing a strong supply of new vessels that helps explain the 40% drop in three months. “New supply is astonishingly high and it is overwhelming the otherwise robust demand for bulk commodities from China,” he wrote. “On the other hand, bullish investors should be cautious of any near-term turnround. Rather than a sign of stronger economic activity and commodities demand, it is likely to reflect cancelled orders, scrappage and port congestion.”

Crude oil for May 2010 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $80.62 per barrel up 62 cents from Friday's close. In London, Brent for May delivery is trading on the International Commodities Exchange at $79.95.

Gold spot price

Gold is trading at $1109.10 up $2.40 from Friday's spot price close in New York.

Finfacts Gold Page

Packed week of data ahead: Davy chief economist, Rossa White, comments -- "After the relative data lull recently, the next week is packed with key releases. A holiday for the market on Friday doesn't mean a shift in the salient US non-farm payroll report. It could well be a watershed release as market expectations are for a big gain (almost 200,000) in payroll employment. That would be the biggest rise since early 2007. Also due out in the US this week is consumer spending today, consumer confidence tomorrow and the ISM on Thursday. The main Irish data release on a week set to be dominated by banking is the Live Register for March.

Somewhat hidden by all the talk of Greece, the US bond market enjoyed an eventful week. Three key auctions took place, where demand was a little weaker than previous renewals. As a result, yields nudged up all along the curve. Most notable perhaps is that two-year yields are almost 30 basis points higher than at the start of March. The futures market is starting to price in greater probability of a Fed hike this year (the more the data improve, the more that probability will rise). Ten-year treasuries also sold off as the yield breached 3.9% intra-day at one point. The equity market certainly wouldn't want yields to break above 4%.

As for Ireland, we commented extensively on the national accounts and employment data for Q4. Both showed that sectors exposed to the global recovery were beginning to stabilise, whereas construction and anything related to it remains deep in the mire. The numbers didn't change our view that slight quarter-on-quarter GNP volume growth is more likely than not as early as Q2. It will be interesting to see if the Live Register continues to stabilise following the biggest drop in claimants in three years in February. Irish consumer confidence for March (due this week) will also be notable: the average for the quarter so far is the best in two years."

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