Details of the much discussed recapitalization plan for the two main banks have finally been announced as approved by the Government.
In terms of financial restructuring the plan is modest enough. There is only modest dilution of shareholders; the government’s reluctance to take ownership is evident. And there is nothing yet on removing bad assets to be managed separately (though the government statement expresses interest in pursuing this line in light of international developments).
The bank’s books now imply that between them they will now have close to €20 billion in core Tier 1 capital. Out of the money options embedded in the scheme suggest that at least one side of the deal is anticipating a vigorous rebound in the banks’ ability to raise private capital.
Meanwhile Bank of Ireland have taken the opportunity to revise their estimates of prospective loan losses over the next two years by up to €2.2 billion — less than the injection of capital. Of course this is far less than the figures being bandied around by the more strident commentators, so we may look forward to seeing in due course who is right.
But negligible share price reactions so far this morning and over the past few days suggest that the market still assumes that the underlying value of the banks’ equity shareholders claims may not have moved out of the negative range.
An interesting feature is the way in which the Government is sourcing the funds. They could have just issued some new bonds and placed them in the banks’ portfolio, but they have gone for drawing on the NPRF. However, there’s a wrinkle: “€4 billion will come from the Fund’s current resources while €3 billion will be provided by means of a frontloading of the Exchequer contributions for 2009 and 2010.” I’m still trying to figure out what difference this wrinkle makes to the different measures of Government deficit/borrowing in 2009 and 2010.
16 replies on “Government buys some bank preference shares”
While waiting to see who is right and who is wrong, the markets this morning have given a thumbs down on the whole thing. At least, not a thumbs up which in this instance is the same thing.
There is an issue with the way the government has decided to recapitalise the banks, from the markets view. In a note on Jan 20th last Dresdner they gave this assessment of the Irish banks capital position.
“The announced nationalisation of Anglo leaves questions over what
happens to the other Irish banks. We do not count the government prefs
as core Tier 1 as they do not appear loss absorbing in the course of
normal business. This leaves us with up to €3-3.5bn of capital deficits and
a high risk of large dilution. We reiterate our Sell on both stocks. Allied
new TP 50c, BoI new TP 30c.”
I think the point they are making about the government capitalisation possibly not been tier 1 is a very important one.
Core tier 1 seems to be a concept in the eye of the beholder, so Dresdner will be fully entitled to its opinion.
Certainly these prefs do not create the same favourable incentives as equity.
The regulator is apparently treating them as Core Tier 1 presumably because the dividends are not fully cumulative—though, according to the announced terms, the banks cannot now pay dividends on equity without having either paid the pref dividends in cash, or in newly issued equities.
One of the reasons the markets have given a ‘thumbs down’ is due to the defeatist and negative rantings from so called independent experts such as Lucy and RTE’s George Lee. I wish they would just shut up and wait otherwise their barking becomes self fulfilling. I do not pay my licence fee to RTE to listen to this incesant one-sided commentary. The negatively from our so called professionals, experts, polititions is the only side of the storey being picked up by the international press and markets. Can we not just calm down, stop this self devouring attitude and wait and see and if does not work – if it doesnt work we either put more money in or we nationalise!
John – Really?
I’m not sure what it is you’d like to see on RTE, but a media-blackout around the risky investment of billions in taxpayers’ money is what it sounds like…
JohnD15, are you joking?!
These guys are actually telling the truth. Can you handle the truth?
As soon as the 7BN package was announced, BOI comes out saying they were revising their bad loans. So, if the 7Bn was supposed to cover the previous bad loans, what do you think it’s going to take for the new numbers?
Come on man, get a grip. You don’t need to do massives amounts of maths on this one. You don’t need to have a PhD in economics, just common sense.
If it wasn’t for the malpractice & avarice of every Irish bank, the intentional incompetence of the regulator and central bank, the disgustin manner in which politicians (in the main) conduct themselves, maybe, just maybe, we wouldn’t be in such a dire situation.
As I said, the international press in particular the UK media are picking up only the bad news from this country, they are portraying us all as monkeys – not just Cowen. I am not trying to justify the behaviour of our banks et al., but when we have embarked on a major project such as the recap of the banks can we please await the outcome before carrying out a post mortem. There are many vulnerable people watching the spectacle of our media, politicians etc and they feel terrified – this climate of fear is making matters immeasurably worse! At the very least I would like to see responsible and balanced reporting with a degree of caution and sensitivity.
By the way you are fooling yourself if you believe that by not standing behind OUR main banks the cost would be anything less than €7bn. Trust me the cost would be infinitely higher.
What I think your missing is the “Truth” element I mentioned earlier.
BOI lied about impairments and, as soon as they get recapitalisation, they revalue those impairments. This is dishonest and the markets will reflect that.
The govt has influenced the markets in a way that honest commentators could have.
If the govt had been swift and hard hitting with their actions, taking the heads of the financial regulator, central bank and the Irish banks while admitting there were major flaws in our lending model which would be addressed; the markets would have reflected this. Our CDS prices wouldn’t be in the 300bps region it is today.
A failure to admit, identify and tackle the problems head on has cost us dearly in international investors eyes, my eyes and, will take a long, long time to repair. If ever.
One word: Depression.
EDIT: The govt has influenced the markets in a way that honest commentators couldn’t have.
Keep listening! The crash gets crashier!
Oh, and if you are going to potshot at me, get the name right. Cheers
Perhaps you are missing my point. I am not defending the banks at all and in fact I would be very surprised if many international banks are not also culpable e.g. strange that one of the major London banks changed their ABS valuation approach when the old one no longer suited them.
I am simply saying that we should have at the very least balanced debate in the media and be refraining from sensationalist coverage from likes of McWilliams, Morgan Kelly and others. I also dont think it is unreasonable to ask that we allow some time to see if the tax payers efforts can pay off instead of killing them at birth!
Regarding Ireland’s CDS spread – you can be sure that this is driven up by the clear lack of any type of consensus in this country and the perception that we are talking ourselves down the toilet!
BTW the USA CDS is currently >70 bps – I wonder where you go to get payment if that bet pays off?
It’s hard to be a Pollyanna these days…
Brian I am very much aware of how deep this crises is and how much worse it is going to get. Can I suggest that we drop the politics and the ideologies and park the complaints over what has gone on in the past (for now). We should be thinking about ways to soften the blow for this country – not how to score points or look well informed.
For example we have done step 1 of our recap so lets see how that works despite our missgivings, BUT it is not too late to kill the suggestions being put forward about a “Bad Bank”.
This Toxic Bank idea is a non starter in my view. Local and international banks simply will not get rid of assets at current market values AND tax payers dont want to pay over the odds for these assets – many of which are impossible to accurately value anyway. One proposal which appears to have some merit is the idea that EU countries would contribute capital to a new multilateral bank which could for a premium insure the dodgy assets in member state banks for an annual premium for an initial period of 5 years. Although this too is full of potential problems, if successful, it would achieve two immediate objectives (1) show that EU can actually do something positive elevating local problems to an EU wide level and (2) allow the Irish, German, UK etc banks to spread their burden over time rather than taking an immediate capital hit – which today would based not only on bad debt expectations but also on above average funding costs. APOLOGIES FOR THE SPELLING OF YOUR NAME 🙂
I see where John D15 is coming from. Sometimes this “sensationalist coverage” is really not helpfull espescially when the people concerned dont have any solid solutions of their own.
Lorcan: Sometimes a little dose of Ms Porter is the right prescription.