Banking Expert Peter Mathews on fixing Ireland's Banking Crisis

Lady S. Not at all; but, you know, there’s none so blind as they that won’t see.
Jonathan Swift (1667-1745, Dublin) A Tale of a Tub and Other Satires (1704)

For those of you who watched RTE’s Prime Time last night you will have seen what happens when a politician meets a banker. If you’d like to hear what happens when a banker meets a banker listen here. I’m reminded of Fiona Looney’s reply to Vincent Browne on his TV3 show last month when asked what she thought of NAMA: “Oh it’s all very honours, isn’t it?”

Deputy McGrath claimed to have carefully studied Peter Mathew’s analysis of our banking crisis and alternative solution to NAMA (Pre-privatisation) which he hand delivered to the Dáil last week.

[23:47] “Peter, you’ve made a number of very significantly flawed assumptions in your own analysis, first of all, you are assuming that all of the non cash-flow generating loans are non-performing, that is not the case…

[24:21] “You have made an assumption that 60% of the loans are not performing and will never perform to any extent over the lifetime of NAMA, and in addition to that, you are assuming that of the loans that are currently performing, you are assuming that only 65% of them will continue to perform.”

[24:40] “I read your article in great detail and I’ve read your analysis. You’re saying 65% of the performing loans will remain performing, you’ve just written off the other 35%.”

The initial indication that 40% of the loans are performing came from NAMA’s Chief Executive. It was later stated in the Minister for Finance’s NAMA speech that “the estimate is that 40% of these loans are cash-flow producing”. The NAMA Business Plan on page 30 states it thus:

“Of the €77 billion to be acquired by NAMA, it is estimated that €31 billion is cashflow-generating (€28 billion in commercial loans and €3 billion in land and development loans). This means that loans totalling €46 billion will not be producing cash flows but may be regarded as performing as they are on interest rollup (as per their contractual terms).”

I humbly suggest, to say that a loan is performing because it is rolling up its interest per its contractual obligation is symptomatic of the kind of thinking that got us into this mess in the first place: buy now, sell later at a higher price, and don’t worry about it in the meantime.

And while I’m at it, on the following page, entitled ‘KEY RISKS FACING NAMA’:

Valuations outside expected range

The risk that the bank asset valuation and acquisition process produces an outcome which is significantly different from current expectations with respect to the major parameters and assumptions set out below and used in the analysis to date:

• The market value of the underlying property assets (€47 billion)

• Interest rollup (estimated €9 billion)

• Actual aggregate average LTVs (average of 77%) [NOTE:LTV=Loan to Value ratio (77% of €88bn is €68bn + €9bn interest = €77bn]

• The proportion of acquired assets which are cashflow-producing (40%)

• Margins on income-producing assets (2%)

• Default rate (20% assumed) [stress tested to 31%]

From Deputy McGrath’s statements above he understands that Peter is saying that only 65 of 100 loans will be collected and the banks will forget about the other 35. This is a misunderstanding. Peter is saying that 65% of the value of the loans will, on average, be collected from all the performing loans. Not the same thing at all.

If the deputy had read Peter’s analysis ‘in great detail’ he would be aware that Peter has prepared several different scenarios of possible outcomes of loans collections based on a range of assumptions for both the performing and non-performing loans:

The break-even scenario is 100% and 50%, which would mean a 9% annual growth in the value of the non-performing loans over ten years to get from 25% to 50%. Considerably higher than the 1% per annum mantra. And to be somewhat pedantic about it (it’s only €54 billion after all), in order to get €47bn to €54bn (+15%) in ten years, it’s got to grow at a compound rate of 1.4% per annum, not 1%.

What appears to be commonly misunderstood is that a loan is different to the underlying asset against which it has been underwritten. The job of NAMA is to collect loans. One must therefore make a judgement on how much of the loans it will successfully collect, and you can’t collect more than 100%. What has motivated Peter Mathews to sound the alarm bell to the extent that he has is his 20 years of experience doing just that, collecting bad property loans. Experience that no one in the NTMA has.

In the case of a non-performing loan, of which we are told they are 60% of the NAMA portfolio, should NAMA deem it cannot collect the loan, it plans to repossess the underlying asset and dispose of it to realise some of the value of the loan. If I understand Deputy McGrath’s argument, the value of the underlying assets will rise over the next ten years to at least 70% of the value of the loan they’re underwriting. An example of that would be the Irish Glass Bottle site, bought for €413m, recently sold for €60m. If this were a NAMA loan, using a LTV of 77% per the business plan, it would be a loan for €318m. NAMA would buy it at a 30% discount, €223m. To cover the cost of the loan the site would have to be sold for €223m at some point in the future, it’s long term economic value. To achieve that, the €60m needs to grow by 14% per annum for 10 years, or 370% in total. And that’s excluding interest payments.

What does that look like?

“Oh it’s all very honours, isn’t it?”