Here are the estimates from Davy Research for the different types of property loans held by Irish banks. (Access, however, limited to customers of Davy.)
Their summary: “Gauging the appropriate haircut is a function not just of the asset value; rather, it also hinges on the original loan to value, the vintage of the loan and the provisions made. Our analysis suggests a range of mark to market haircuts: from as low as 5% for loans backed by UK commercial investment property to 44% in the case of loans backed solely by Irish development land.”
Bottom line in terms of state ownership: The base case delivers ownership by the state of 78 percent for AIB and 69 percent for Bank of Ireland.
11 replies on “Haircuts”
Interesting analysis, reflects the reality that all loan books, even within set categories, has a mixture of the good, the bad and the ugly. Hope we will see Nama tackle the bigger cases first, and that it can avoid being held hostage to some of the political commentary we have recently seen and heard.
It would be better if it was the market giving these banks a shave, not the government. Is there anything these proposals can achieve that doesn’t involve simply redistributing losses to the taxpayer and/or increasing the power of the State?
Bankrupt institutions should be liquidated.
Some pretty optimistic numbers, especially on UK loans, in this piece. They contend that “the UK commercial property market has been showing tentative signs of life”, not sure how they worked that one out.
Some sample numbers on haircuts:
Irish land banks: 44%
UK land banks: 24%
Irish residential development: 25%
UK residential development: 20%
Irish commercial development: 21%
UK commercial development: 19%
Irish residential investment: 8%
UK residential investment: 5%
Irish commercial investment: 9%
UK commercial investment: 5%
These obviously incorporate LTV, averages across the banks for each sector are 50%, 70%, 65%, 65%, 65%. A lot of which would seem be much lower than you would suspect in many cases.
If average write-downs increase by 5% for AIB and BoI, my (back of the envelope) calculations make the govt shareholding around 90% and 82% respectively.
Simply – I wouldn’t want to be long either of them!
Two other bottom lines!
1. Page 8: “If we were to apply the calculated mark to market haircuts of 20-25% (as opposed to our assumed ‘economic’ ones of 15-20%), it would have implications for the level of dilution, potentially raising government ownership to a level inconsistent with all the government rhetoric that nationalisation is a last resort. Therefore our presumption is that under that scenario the government’s additional equity would be provided at above the market price (as was the case with RBS) to minimise further dilution.”
2. They assume a level of re-cap that will leave the banks with a 6% core tier 1 ratio. I’m pretty sure that this is too low, in the sense that wholesale markets will no longer lend to companies with such a low core Tier 1 capital ratio — HSBC for instance have a ratio of 8.5%. But any more state capital takes the banks up to almost full state ownership. So this scenario would likely see the guarantee stay in place and the banks still looking to shrink risk-weighted assets (i.e. continuing not making loans) to get the capital ratio up to levels where they don’t need government support.
Presumably this report from Davy’s provides a lower bound to the likely discount factor. Given the wide range of estimates now in play, I am confirmed in my belief that it is important to have a better risk sharing mechanism than is produced by just buying assets for bonds.
@ Graham and Conor McKeating
Spot on! All spin. PR employment must be up. Oh I forgot, these are all economists…..
After the big guys leave the markets they sell to all the chumps. I saw that somewhere. Oh well, it is just other people’s money.
@ Conor McKeating
And the impact of Sterling competitive devaluation on the secured assets? Not positive…..
@ Pat Donnelly
Obviously if they have Sterling assets held against Sterling loans and being funded by Sterling income (rent), then this is not an issue. It’s obviously not the situation in all cases, but it would be in the majority of them.
@ Pat Donnelly (again)
…and actually in the example i made, any negative equity situation would actually now be better from the banks’ perspective than in a ‘strong Sterling’ situation (ie the outstanding liability is now less when rebased into EUR).
To my great shame, I don’t have access to this report. Does davy include the interest costs for the bonds used to purchase the bad loans? If the plan is to hold these assets for a number of years, then this cost needs to be factored in to the purchase price.
For non-clients, report is here: