Misleading Reporting and Mounting Loan Losses at the Irish Banks
This article originally appeared in Friday August 20th Irish Examiner on page 13 (Analysis) under the headline “Time to rethink bank rescue plan“.
In the last fortnight AIB and Bank of Ireland (BoI) respectively reported their half year results. Both sets of accounts were untruthful. In the case of AIB, their reported loan losses were under-stated by €500m (€.5bn). In the case of BoI their reported loan losses were under-stated by €300m (€.3bn). This is not acceptable.
Also in recent days we were informed that Anglo’s loan losses had risen from the €22bn admitted to an Oireachtas Committee on 16th June 2010, to a revised figure of €24.35bn. Again, this is misleading and unacceptable.
It would be far more honest and truthful of the Minister to acknowledge that embedded irrecoverable loan losses in Anglo are at least €32bn (not the admitted €24.35bn) and will rise to not less than €36bn. Embedded irrecoverable loan losses in Irish Nationwide Building Society (INBS) are at least €4bn (not the admitted €3.2bn) and will rise to not less than €6bn. Fundamentally, that’s why both Anglo and INBS should be closed down. Further details in relation to close-down consequences (they have been considered and presented to an Oireachtas Committee) are not discussed here.
In relation to the 3 viable banks, AIB, BoI and EBS,…. AIB needs €10bn (not the stated €7.4bn before year-end) re-capitalisation now, to cover its Property Development and Investment loan losses. BoI needs €6.5bn (not the stated €3.65bn) re-capitalisation now, to cover its Property Development and Investment loan losses. EBS needs €1bn in re-cap. That’s a total immediate re-cap requirement of €17.5bn for the 3 viable banks.
These 3 banks should be re-capped at this level without delay and temporarily nationalised…. for the sake of the country. The absurd situation at present is that these 3 banks couldn’t even open for business without the State’s Blanket Liabilities guarantee. And yet the State has had negligible influence on these 3 institutions since September 2008! Astonishing!
What should, of course, now happen (it should have happened soon after the Blanket guarantee was put in place) is that Bondholders in the 3 institutions should be directed by the State to contribute to this re-cap at a level of say €6.5bn in appropriate proportions. [As part of this restructuring, the State might offer bondholders a small (token) debt for equity swap]. The State would invest the balance of €11bn by way of a State Banks Re-Cap Bond issue (zero coupon).
The State’s earlier investments (€3.5bn each to AIB and BoI) plus the “fresh” €11bn, making a total of €18bn, would be more than recovered with a profit / gain in 5 years time by sale of the investments in the 3 institutions. An undemanding €3.5bn – €4bn level of normal maintainable annual profits for the combined 3 institutions multiplied by a 6.5 times Price / Earnings (P/E) multiple gives a valuation range of €22.75bn – €26bn. All three viable banks would thus be transparently and successfully nationalised temporarily (5 years) for the purposes of their full rehabilitation / re-booting.
NAMA loans transfers should be reversed (fundamentally this is merely accounting book entries). Recoveries Divisions in the Banks would be tasked with loans recoveries / restructurings / work-outs etc, at the re-cap fully written-down amounts. This Banking Sector Re-Capitalisation Action Plan would, of course, entail full clean-outs of the bank boards and major senior management changes plus some infusions of new management with excellent leadership temperaments. Perhaps senior NAMA personnel can be re-deployed into the Banks Recoveries Divisions to provide fresh operational leadership.
All of this could be put in place very speedily (weeks). This type of robust, transparent re-capitalisation of the Banking Sector is what is needed for the hugely necessary asset price and rental levels corrections to continue in order to repair our economy. Unless this happens there will be no recovery in the overall real economy, the economy that produces, distributes and exports goods and services and supports jobs and employment.
Peter Mathews
19th August 2010
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