Second, core profits (excluding legacy loan losses) are likely to be substantially higher than normal due to the margin enhancing decisions currently being taken, general risk averseness, and more favourable competitive environment.

“due to the margin enhancing decisions currently being taken”

I’ll take it that margin enhancement can’t really occur in the absence of competition.

That would be something along the lines of the government has done such a good job in providing competition in financial services there is no competition left?

Oops.

You’ve covered that already.

“and more favourable competitive environment.”

I look forward to the competitive free flow of funds to small and medium sized enterprises.

And of course credit for everyone who wants to buy a 46 Inch Plasma TV from China.

Happy Days.

“general risk averseness”

Let me see if I get this.

The bank is risk averse and has no competition?

Happy Days Are Here Again.

Sunday Monday Happy Days Tuesday Wednesday Happy Days Thursday Friday Happy Days

These days are all happy and free

Cumman on home to you.

http://www.youtube.com/watch?v=bjJZudJ3xos

“First, the biggest uncertainty is the amount of losses remaining in the loan book. Management needs to restore trust as a matter of urgency. Further dilution of shareholders may be needed if further losses emerge.”

The “biggest uncertainty”?

The unknown unknown?

“Management needs to restore trust as a matter of urgency.”

Management?

Do you mean the boards of directors of the banks or do you mean the department of finance, or do you mean Brian Lenihan?

Trust & Urgency Brendan?

Which of those two do you think is more important for a bank to have as a “core” value?

Lads,

I am not Lad. I am a Citizen.

Are you the nice Christian Brothers?

“Ah now lads stop that we’ll all get in trouble”

Or are you the firm Christian Brothers? The ones that don’t believe in “lads”

“Stop that now or I’ll give you trouble”

Or are you the ruling “Lads”.

“If you don’t stop now I will destroy you and your family”

What kind of “lads” are you?

On my central case, AIB end up being 70-75% state owned and probably has enough capital to get through hte next two years. On this basis the state makes a handsome profit on disposal. However, theis is predicated on selling the assets for a reasonable number and full conversion of the prefs. However failure to sell & a return to the conditions of 2009 will end in full nationalisation..it wont be possible to avoid. So in placing your bets you have to think of zero as a remote possibility

BofI is more straightforward. It requires lesscapital , does not require asset sales & its loan book is in marginally better condition. The odds on zero or full nationalisation are more remote than AIB.

“It could be bigger, in which case AIB will be nationalised”
I don’t think AIB or BoI will be nationalised. We will see the state dilute its own shareholding with waves of recapitalisation, each one for a different problem, but the 85% (or at least 90%) ‘line in the sand’ that has been set will not be breached.

In a sense, the state will already do this by sating they will convert the preference shares. They have proved costly as the coupons being issued as equity was missed from the stroke. This could just carry on, but it is safer to convert them and prevent the creeping upward percentage that the preference shares mean.

The state will be diluting itself with any equity recap of BoI, for instance.

I would not be as optimistic as you.
AIB will end up writing off about 12-15% of its pre crisis loan book-probably taken 10% plus to date-say another 3-4bn to go. This would include a 3% plus hit on the domestic mortgage book. This is an unknown. It could be bigger, in which case AIB will be nationalised

I do not think the loan book will reprice to the extent that you think-bear in mind up to half the mortgages are trackers which will roll off very slowly and will never reprice. In addition, Irish banks are woefully short of term funding. There might be some repricing on the deposit side as they use the NAMA bonds to pay off dearer funding. However, I would not run a repricing story.

I have no doubt we are at or close to the bottom in terms of credit costs-you are not going to write off 9bn plus every year before provisions!!!!

2 euros in 2014 does not seem unreasonable. Put it another way the state either has to put another 3bn to recap AIB post nationalising it due to the collapse in mortgage asset quality or it gets back about 3bn from its sale of its stake in 2014. “Head or Harps”

Taking the figures arrived at by Karl, these show core equity post disposals of c2.2bn. If the risk-weighted loan book is 80bn or thereabouts, allowing for some growth, a 7% capital ratio requires 5.6bn of capital. If we make an allowance for a further loss next year prior to return to profit, 6bn is a reasonable target. This requires new equity of 3.8 bn. By an elegant co-incidence, this closely matches the government prefs plus the accrued dividend (totalling 3.75bn).

Now, if this is converted at the current share price of 1.25 per share, 3 bn new shares will be added to the existing total of 918m leaves the state with 77% or thereabouts of the enlarged equity.

If, as suggested reasonably by Tull, a profit after tax figure of 800m-900m is achievable once the rot is cleansed out, and a value of 8-9bn is achieved in the market, this translates into a share price of 2.04 - 2.30 at that time.

However, there are several issues, both positive and negative, to consider also in looking to such a future performance.

First, the biggest uncertainty is the amount of losses remaining in the loan book. Management needs to restore trust as a matter of urgency. Further dilution of shareholders may be needed if further losses emerge.

Second, core profits (excluding legacy loan losses) are likely to be substantially higher than normal due to the margin enhancing decisions currently being taken, general risk averseness, and more favourable competitive environment.

Thirdly, people generally underestimate trends that are against the prevailing one. People underestimated the severity of the recession, likewise the recovery will take us by surprise. Responsible decisions are being taken, capacity is available in the economy and competitiveness has improved greatly. We are well positioned to benefit from a global recovery.

I predict that bank profits will recover faster than expected. AIB could be a €10-15bn bank again within 5 years. However even this value, if achieved, would not bring the share price above €4.

The depression is world wide, except for the BRICs. If they hold onto their own capital for once, not losing it to the developed world as usual, then they may escape the asset deflation that is a consequence of the capital destruction in the first world.

Many more jobs will be lost and incomes will fall. I mean the FIRE sector. Across the first world. New jobs will take a decade or so. We simply have no needs. Infrastructure will blossom, but job losses will dominate.

*NAMA willimporve the liquidity situation at the banks

Whit the discounts being applied?

What is the roll-over of debt for AIB & BofI?

Even if they have no problem raising funds at what price?

*international lead indicators are also looking up & we are the most open economy going

If the global economy picks up are we looking at 50,000 jobs based on Irish exports being created over the next five years?

I don’t see it. The world has changed. We have a lot more competition in that space now.

*forward looking indicators such as the NCB PMI for industry are looking up

Was there in the past ocassion on which “forward looking indicators” were wrong?

Can NCB provide outcomes against forcast for the last five years in one simple graph?

“*employment/liquidations etc are lagging or coincident at best.”

This is not a manufacturing recession. It is a credit deflation recession if not depression.

Sold to you for 275 Zlotys per share.

The current market value of the stake is known. The value of that stake to the Irish taxpayer is known - it is the cost of substituting government borrowing, at 4.5% currently, for the funds which would otherwise be generated by a sale.

If any posters wish to publish their estimates for, say, the performance of 1) the Polish economy, 2) the performance within that of Zachodni, 3) the performance of the Polish stockmarket (in valuing Zachodni) and, finally, the likelihood of AIB managing it properly, all of these over a 10-year period, please feel free.

Personally, I think the State here has quite enough domestic banking exposure and uncertainty without adding Poland to the mix.

Incidentally, KW, Bloomberg carried a story last week that a bidding war is breaking out for BZWBK, linked below.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar0Pm1MiVwok

Fair enough, but which consensus should we bet against ?

1 The Washington (Globalisation and Free Markets) Consensus, as analysed by Stiglitz and others
2 The local ( angry) consensus. Get me outta here.

A genuine conundrum with no easy solution methinks. Luckily we have the Irish Economy.ie

I dislike consensus. It is generally ignorant and wrong.

So whether the consensus is bullish or bearish is of no concern to me.

What concerns me is the manufacturing of consensus by propaganda.

The Minister is now playing the last card of the gombeen.

“Jaysus it was bad. But I’ll tell ya one thing boys. Now is the time to buy.”

It may have escaped your notice but it did not mine.

I can see no authority for the Minister of Finance given under the Constitution to behave as a small town cattle auctioneer.

I would prefer that the Minister concern himself with ensuring that the Citizens have sufficient information to be in a position to judge the behaviour of the government and the bankers.

Most particularly I would like to think that the Minister is not behaving as a rally monkey for the property market and would instead release the advice given to Alan Dukes on why Anglo Irish Bank should continue.

I’ll get back to you on the rest.

I’ve seen financial and banking crises first hand in other countries. The bounce-back is uneven and deeply scarring. Many people end up just scrapped. Many of the rest live and work in a state of frenzied fear. Social consequences lag for a long time.

Don’t stop the responses, though. So far there’s nothing glass-half full about what you’ve said, it is, as far as my amateur eyes can see, a reasonably view of where we might go.

Eventually we’ll hit a green light, there has to be a green light!

3 years ago the consensus was bulllish & wrong. Now you are now allowed be constructive without “witch” being shouted (yourselves not included) Always look for the consenus & look to bet against it.
To defend my less bearish view let me put forward the following
*employment/liquidations etc are lagging or coincident at best.
*forward looking indicators such as the NCB PMI for industry are looking up
*international lead indicators are also looking up & we are the most open economy going
*Sterling may have troughed-who knows. A strong $ is positive for us
*NAMA willimporve the liquidity situation at the banks
*there is a roadmap to recapitalisation
*I believe QE will lead to a pick up in inflation which will inflate some of the debt away

I would be even more bullish but for the deadweight of debt. I still think, I have made some allowance in my guess for normal earnings (50ps of loss). There is a risk that your collective view is broadly right but it is now the overwhelming consensus. you never know the economy might actually be more resiliant than people think.

The one serious danger I see is price and quality competition. There seem to be two markets in Ireland of debt, roughly speaking the prudent and the bubble. The prudent are currently on trackers, have sold up, or have not bought yet. The Irish banks will have to charge a peg-up over euribor for variable rates, will be scared of trackers, will have higher loan losses (for the bubble loans) etc. In short, they will be expensive for the prudent.

The state probably won’t let them distinguish much by loan quality for a good while, so even their discount rates for low LTV will not be great. So there will be an opportunity for net savings banks to build a new loan book, with solid borrowers at low LTV, in a market that is, historically, at least reasonable value.

Without these borrowers, the Irish banks won’t be able to build in the lower LTV requirements to help with a AAA rating on new issues of covered bonds. At least, not without a crippling level of over-collateralisation. This will severely crimp their ability to lend going forward.

Add to that, a pox-ridden loan book as they end up lending out riskier loans just to meet their targets.

No?

Your erudite and technically informed contributions are appreciated. You say, however:

‘I know is it sacrilege to say that in 3 -4 years time when economy recovers (more heresy), the stock market will value AIB at a premium to its equity’

That is not heresy, but it is in the face of increasingly adverse trends in company liquidations, employment and credit supply, among other indicators.

Can you outline very briefly the form your postulated recovery might take ?
Which sectors in our economy have, in your view, the potential to drive it ?
What do you see as the prospects for growth outside the FDI sector ?
Do you expect a recovery process to impact significantly on employment ?
Do you have reason to anticipate a loosening of consumer credit provision, or a recovery in consumer confidence ?

It seems likely that the value of AIB will hang on the answers to questions of that sort.

“Bethca management would think its half that.”

Quite. My difficulty is (and I don’t want to right about this) the only way we get a return on the investment in AIB, now that it looks as if the prefs @ 8% will disappear, is if the bank returns to “normal” post NAMA even if loan loss provisions are in the upper range for normal.

As you say net lending growth might be 2%-3% per annum. So because there will be little new business the book will age more rapidly. Yes?

There are then two impacts on loan loss provision which I think would push the number outside your range.

One. Healthy new business growth has the effect of diluting the percentage provision required. In normal times loans would not be expected to become impaired for (what) a period of 4 to 5 years.

Two. The post NAMA book is already impaired beyond normal but management have made no effort to recognise the impairment. How can they?

As I say I don’t want to be right but I think “normal” profits, taking your 1% return on assets, will be under severe pressure, for perhaps four to five years, while the ageing book offers up its dead so to speak.

There will be every incentive for the bank to invest in short and medium term government securities and indeed every incentive for the government to allow this.

Let’s hope your right and we can look forward to selling a 75% stake for €6bn.

Given our experience of the behaviour of banks and government to date I do not share your optimism.

Bethca management would think its half that. This would be the book post NAMA. I don’t think there will be much net new lending…say 2-3% growht per annum normal. It ain’t gonna be much fun for a banker in the new normal. It will not pay as well either. Your average loan officer is goin back froma 320 to a Passat.

So if I understand you correctly here. At 0.5% (top of normal range) loan loss provision on a book off €80bn we get €400m loan loss provision? (not a matter of fact accepted).

Would this be the book remaining after NAMA transfers and before any new lending?

yogan is right, in a normal economy a normal bank should have annual loan losses of 0.2-0.5% of loans. I went to the top of the range for here give the deleveraging you speak of. It’s a forecast too, not a matter of fact.

@yogan

I am assuming a utility banks makes a ROA of about 1% on an asset base of 80bn-maybe you would reduce that by a quarter. This seems to be the level internationally, although there is a wide dispersion. Quite frankly, if they make less than 0.5% ROA they are mismanaged.

I agree. One would normally expect loss provision to be expressed as a % of the loan book.

However, if tull mcadoo’s suggestion (and I’m not saying he has stated some matter of fact) is correct, given the sensitivity of post tax profits to loan loss provisions the profits could be virtually wiped out by (say a doubling) of “normal” provisions. No?

Are we heading for “normal” conditions over the next five to ten years?

There’s still an awful lot of deleveraging to come.

Maybe I’m reading this incorrectly.

“…loan loss charge falls to normal levels of about 300-400m per year. After tax profits should be around 800m-900m plus per year….”

Are you saying the loan loss provisions normally represent 37.5% to 44.4% of post tax profits?

Yes, I agree that it is the case, in fact, I’d go further to say that banks will revert to their higher 12x profit multiple for price.

I’m not sure that the slimmed down utility banking systems will make the same level of profits. In 1997, AIB made 600 mn euro, the most an Irish company had ever made. By 2006 it was making 2.6 bn. It’d require an analysis of where the company made its profits and whether those were likely to continue, going forward, like! Or is this what you are basing 8-900 mn on?

read post again…line 1. I know is it sacrilage to say that in 3 -4 years time when economy recovers (more heresy), the stock market will value AIB at a premium to its equity.