More Comments on AIB’s Half-Yearly Report
This post was written by Karl Whelan
I surely have better things to do with my time but, yes, I spent the evening reading AIB’s half year report (with the Airtricity boys doing us proud in the background.) As John already noted, the report has a lot of pretty bad news in it, so I thought I’d point out some sort of positive news (before getting back to the bad stuff).
Liquidity Situation
The good news? Despite concerns that have been expressed about a looming “wall of cash” moment, AIB looks as though it’s in a position to get through to the end of the year paying back all its debts, though this may require ECB assistance.
Page 21 states “At 30 June 2010, the Group held €49 billion (including pledged assets) in qualifying liquid assets/contingent funding of which approximately €25 billion was pledged.” So, the bank has €24 billion in spare capacity to pledge to the ECB as collateral for loans. The bank only has €22.8 billion in financial assets available for sale, so the rest has most likely come from securitising parts of the loan book. There has been a big increase in such collateral. At the end of 2007, the bank had €31 billion in qualifying liquid assets, €21 billion of which was financial assets available for sale.
Now the report isn’t so helpful as to show us a table on liabilities by type and maturity. However, we already know from last year’s annual report that AIB had to repay €22 billion in “debt securities in issue” by the end of this year, €12 billion of which was of less than three months in maturity with the remaining €10 billion due by the end of the year (almost all most likely in and around September). Though not having a by-maturity page, the latest report does tell us on page 86 that commercial paper and CD programs are down from €10.4 billion to €5.1 billion, so the bank has probably used some of the funds from its ELG issuance earlier this year to reduce its short-term exposure.
So, what’s the good news? Well, the bank probably has a worst-case exposure of €17 billion to repay before September if long-term bond markets remain uninterested in it and shorter-term markets decided to follow suit. Since it has €24 billion in untapped ECB eligible collateral, it could pay off all of these liabilities using ECB funds. Hopefully, the fact that the bank can pay back will mean that short-term markets stay open and long-term markets re-open, and the bank doesn’t end up dramatically increasing its dependence on the ECB.
Loan Quality
Elsewhere, lots of bad stuff.
Loan quality, in particular, looks poor. From page 82, 14.5% of the Bank’s non-NAMA loans are past due or impaired. It’s hard to compare with previous results because the new results exclude the UK and Polish arms that are being sold. But, for what it’s worth, the December 2009 figure was 10.6%.
The mortgage portfolio (worth €27.1 billion) is rapidly worsening. Mortgages 90 plus days past due increased to 3.21% from 2.07% at 31 December 2009. Arrears on buy-to-let loans are currently 5.92%, up from 3.28% in December 2009.
Provisions on the €77 billion non-NAMA customer loan book look low at only €3 billion. Total provisions for losses on home mortgages are only €132 million.
NAMA Loss Provisions
Provisions for impairment of the remaining NAMA-bound loans are €4.4 billion. This means that AIB are allowing for an 18% provision for losses on the remaining tranches (see Jagdip’s calculations here) despite discounts of 42% and 48% on the first two tranches. With €17 billion still to go in, an additional provision of another €4.5 billion or so would probably have been more accurate which would have made for headlines of AIB loses €6 billion. (Increased provisions would also have allowed for an increased taxation credit, so the effect on post-tax losses isn’t one for one. Yes folks we are giving AIB money back because of their losses.)
Since the idea of an 18% discount is patently ridiculous, what’s going on here? Is it just AIB delaying the inevitable and smoothing out the big loss announcements? Partly, but there’s something deeper going on. AIB has total core equity capital of €4.3 billion. Admitting now that nearly all of that equity is disappearing with the NAMA transfers would be a little uncomfortable for the bank and the Regulator. So everyone plays along with the illusion for now.
Of course, AIB aren’t fooling anyone with their NAMA provisioning and the Central Bank’s PCAR exercise will have forced the bank to factor in the first tranche discount in their capital raising exercise. Whether the PCAR assumptions are keeping up with the ongoing reality of bad loans as shown in this report, it’s hard to know.
Mortgages and the Costs of Deposits
Finally, I wasn’t too impressed with AIB CEO, sorry, Managing Director, Colm Doherty’s comments that I heard on the RTE News at One as follows: “The position that we find ourselves is no different than any other financial institution. The price we’re having to pay for deposits means that we effectively are losing money on mortgages. It’s unsustainable”
This conjures up the image of the bank making ever bigger interest payments to customers and thus forced to raise lending rates. In truth, page 50 of the report shows that interest paid on customer accounts was down on last year. Interest received is also down but net interest income is still positive.
Doherty does have a point but it should be more honestly worded as “our marginal source of funds is expensive wholesale market borrowing and those rates are higher than most of our mortgage book, much of which is stuck on trackers. So we’re only going to do new mortgage business at very high rates.”
There is a problem but it’s nothing to do with paying for deposits. It’s to do with a business model in which lending outgrew deposits and which could only be sustained if your bank had an excellent credit outlook, which turned out to be inconsistent with giving away enormous amounts of money to speculative property developers.
Over the longer term, one has to wonder whether a mortgage market designed to allow AIB and BoI to gouge non-tracker customers at ever higher mortgage rates is sustainable. In time, one has to imagine an outside entity with a good credit rating coming in to undercut the high rates being charged in the Irish market.
August 5th, 2010 at 6:51 am
If I could make a brief NAMA-related observation. AIB have signalled that they are selling their UK subsidiary by September 2010. The UK subsidiary had €3.2bn of NAMA-bound loans which will no longer go to NAMA. Looking at the 2009 accounts the UK NAMA-bound loans had an impairment provision of 6% - the Irish NAMA-bound loans had a provision of 20%. The implication I take from this is that the good stuff is being sold by AIB and the trash continues its journey to NAMA.
Remember the EU acknowledged the cost of enforcement of bad loans was an industry average of 15% which NAMA reduced to an average 5% because of the low level of default it was predicting. If we continue to lose performing loans (like Paddy McKillen’s) then that 5% becomes inadequate. NAMA also gets a premium in acquiring all loans which means we take a double whammy when we’re deprived of performing loans.
Why is NAMA allowing AIB to dispose of what I assume to be largely performing loans? Why did NAMA place the transfer of Paddy McKillen’s loans on hold pending the outcome of the judicial review proceedings? What will these two decisions cost NAMA? I’d guess somewhere in the region of €400m net.
August 5th, 2010 at 7:14 am
@ Jagdip
Getting AIB into a marketable state is the imperative. The NAMA debacle, and the related sovereign crisis, is seen as someone else’s problem.
August 5th, 2010 at 9:58 am
@Jagdip
As previously referenced in K. Whelan’s post It Depends on What the Meaning of “Cashflow Generating” Is
http://www.irishtimes.com/newspaper/finance/2010/0709/1224274346854.html
“….The level of income-generating loans may also have fallen as a result of the sales of properties, according to banking sources.
Financial institutions have also taken advantage of an uplift in the UK property market and pressed borrowers to refinance or repay loans by selling the underlying properties in advance of the transfer of the loans to Nama.
For example, one institution said it had valued a property backing a Nama-bound loan for €70 million last November when loan values were assessed for the agency. The same property is now worth €110 million and the lender has said it is pushing for a sale before the loan moves to Nama.
Before the Nama loan transfers began last March, a large number of loans at Bank of Ireland earmarked for transfer were repaid, sold to third parties or refinanced to other lenders, many of which were investment property loans generating interest income.
Nama had initially planned to buy about €16 billion in loans from Bank of Ireland last September and this has since fallen to €12.2 billion. This would also have contributed to the lower level of income-generating loans being purchased than first estimated.
Some 30 per cent of the bank’s Nama loans are associated loans secured on investment properties, compared with 35 per cent under Nama’s draft plan last October…..”
August 5th, 2010 at 11:05 am
From their Press Release and the IT:
“Operating profit before provisions and NAMA loss was € 976 million, down 42%
Loss on transfer of first tranche of assets to NAMA was € 963 million”
In tranche one they transferred €3.29bn with a dsicount of @43%. This represents a €1.4bn loss on the first transfer.
So where is €963m coming from?
I am undoubtedly missing something.
August 5th, 2010 at 11:46 am
@Rob S
The €3.29bn is a nominal value. As far as I know the discount is on the carrying value of the loans so they had probably already taken writedowns.
August 5th, 2010 at 11:47 am
@ Rob S
provisions already taken against this loss, of c.437mio?
August 5th, 2010 at 12:13 pm
Ah is that what it is?
So they must have assumed an initial loss based on the haircut (an optimistic 13% by my calculations)? Or was it €437m assumed lost because the loans weren’t performing?
I’ll check out the 2009 results in a sec.
Thanks.
August 5th, 2010 at 12:26 pm
Found it on the 2009 results under “Provisions for impairment of loans and receivables”. (p58)
http://www.aib.ie/servlet/BlobServer/document.pdf?blobkey=id&blobwhere=1267454395528&blobcol=urlfile&blobtable=AIB_Download&blobheader=application/pdf&blobheadername1=Content-Disposition&blobheadervalue1=document.pdf
Amounts written off for Corporate / Commercial was €453m exactly.
No mention of NAMA in that entry though - they really could have made some effort there to link that write off with the Nama transfers.
August 5th, 2010 at 12:43 pm
@Karl
The accounting for these loans does indeed seem weird, though I don’t think it is chicanery on AIB’s part as the more accurate post NAMA position is well noted by analysts including yourself.
Most starkly they state that they made a loss of 517M on Tranche 2. That means that NAMA paid them 517M less in July than they were recording them on the books at end June.
Again the mystery of accounting dictates that even this 517M will not be reported until end year.
In short, blame the accountancy profession, not AIB.
August 5th, 2010 at 12:56 pm
@zhou
From the EU Decision in February, 2010 granting approval to NAMA
“The costs associated with a full legal enforcement process are
approximately 15.00%. It is however very difficult to predict ex-ante
the proportion of assets for which NAMA will have to go through a full
legal enforcement process. The Irish authorities propose to apply
enforcement costs of 5% to all the assets. This corresponds to over
50% of the non-cash flow producing loans incurring a 15%
enforcement costs. The Commission considers, on the basis of the
information available, that this is a reasonable and prudent assumption”
So if the number of non-performing loans reduces (or is allowed to reduce by NAMA) then that 5% should move back up towards 15%. NAMA is effectively giving even more state-aid than has been approved by allowing banks to sell off performing loans.
http://ec.europa.eu/community_law/state_aids/comp-2009/n725-09.pdf
August 5th, 2010 at 1:01 pm
@ KW
I note your term “gouging”. To my mind this means extracting an exhorbitant profit from any contract. Now consider this. According to the AIB website their SVR is 3%. Assuming they fund this with 50% retail deposits and 40% 5 year FRN @ Libor plus 380 and 10% capital yields an all in funding cost of 2% (0.50) + 4.6% (0.4) + 9% ( 0.1) = 3.7%.
Obviously, they could reduce this cost by less term funding, more ECB funding, more guaranteed paper. However, the economics of lending at SVR= 3% are not obvious. Bear in mind, I have not taken the cost of doing business into a/c.
August 5th, 2010 at 1:04 pm
@Jagdip
I think it is wrong to focus on NAMA “getting all the bad stuff and none of the good stuff”. NAMA is a bad bank, bad stuff is its stock in trade. The viablility of NAMA does not depend on profits from systematically underpricing good stuff subsidising overpricing of bad stuff. The pricing is LTEV and is meant to be neutral in terms of its long term validity; bad stuff will be written down stoutly ala INBS and good stuff will have less discounts ala BoI.
Of course NAMA cashflows could be distorted by changes in quality mix from those forecast in the business plan but this is of secondary importance.
What we do want to avoid is cherrypicking whereby the bank is allowed a choice on whether or not to accept the NAMA LTEVs as clearly the bank would be in a good position to win that game. I guess this is what is at stake in the McKillen case.
August 5th, 2010 at 1:11 pm
@Tull
The mortgage market is totally dysfunctional. The costs you allude to include:
The costs of admin
The costs of the ELG
The costs of bad debts.
One of the big scandals of this whole crisis is the way middle class mortgagees are being mollycoddled and subsidised by the whole system.
August 5th, 2010 at 1:28 pm
@ Tull
Gouging wasn’t a reference to the present — it was a reference to the plan for the future after they’ve imposed more increases (note the “ever higher rates” in the sentence). My point is that it may not be a workable plan.
Note also that AIB’s 3 percent would be relatively low right now. IL&P are currently charging 4.19% for the poor standard variable unfortunates and I’d guess AIB want to head in that direction.
http://www.irishlifepermanent.ie/ipm/media/pressreleases/permtsb/ptsb2010/2010-07-23/
August 5th, 2010 at 1:55 pm
@ tull. KW
in the cost of funds equation the ECB 1% funds do not appear to feature. If AIB has 24b of eligible collateral then whey don’t they use it now to keep funding costs down rather than screw the mortgage holders.
August 5th, 2010 at 1:57 pm
@BWII
One last contribution from me as there was far more in the AIB results than NAMA (and BTW isn’t Peter Mathews’ estimate of capital needs of €10bn rather than €7.4bn looking more and more credible?).
I think NAMA does need a mix of good and bad loans. If all the loans are bad then
(a) NAMA will have high enforcement costs (15% average apparently)
(b) NAMA will not be able to fund its operations and interest payable on bonds and subordinated debt without further “advances” (ie a bailout for NAMA) -
(c) NAMA will be completely dependent on a recovery in the property market to LEV levels and remember we’re about 10% off of market levels last November so even today we’d need a 25% improvement in property values to get back to LEVs that were 11% over market values (LEV 111, market value last Nov 100, Market value today 90). And most commentators are suggesting there are further falls in prospect. So we end up with a probability that NAMA makes a loss, possibly a very big loss.
August 5th, 2010 at 2:03 pm
@Jagdip
I don’t think it is illegal because the EU based its opinion on the estimates. However, the effect is as you have set it out.
The enforcement costs and the discount rate are the key to why banks are taking this action. Where a bank has ample security for a loan it still loses money on the transfer. Therefore it is better to liquidate that loan before it gets into NAMA.
For example, where a €5m loan is secured on a €50m asset NAMA will not pay the full €5m. It will discount it for cost of funds and enforcement.
NAMA loses out on the double.
Firstly, its enforcement costs levy is too small if there will be a higher proportion of non-performing loans.
Secondly it loses out on being able to use the excess value of the security as quasi cross-security for less secured loans which may have been taken out with a different bank.
However, it appears that NAMA is doing so much damage to bank balance sheets that the State is probably happy for the banks to make a bit extra if it reduces the level of State funds to be injected into the banks. Whilst I don’t like the private sector being subsidised, but we do not have a lot of cash to be throwing around so if they can get funds elsewhere perhaps we should let them at it.
August 5th, 2010 at 2:12 pm
@pod
“in the cost of funds equation the ECB 1% funds do not appear to feature. If AIB has 24b of eligible collateral then why don’t they use it now to keep funding costs down…”
Good question. There is obvioulsy more to this Repo thing than meets the eye. I presume that borrowing would be at a penal rate compared to 1% but still unlikely to be as high as the open market cost of funding. Clearly there must be rules to this game, ECB repo probably not allowed until you have shown all othere avenues explored. Anybody know the answer to pod’s question?
August 5th, 2010 at 2:15 pm
Have to say I am surprised to see a portfolio of US sub prime mortgages, CDO’s/CLO’s and other structured securities of over €1 billion. The charges to the income statement against this portfolio look light. I know it is not that important in the grand scheme of things but still……
August 5th, 2010 at 2:28 pm
@ BWII
its a perception issue (”we’re not reliant on ECB”) but also a term issue - they can only borrow short term from the ECB (at the moment out to 6mth), so it can’t replace long term funding with ECB funds, and the maturity profile of their funding base is also an important issue to show investors.
August 5th, 2010 at 2:30 pm
@BW II
You don’t have to have exhausted all avenues before being allowed repo with the ECB. It’s an open window. Repo’s are short term in nature i.e. <1 year. A bank has to manage the duration of it’s liabilities and that is why they would always to look to do longer term but more expensive funding through bond issuance. Also they don’t want to be seen to be using every last bit of collateral to obtain secured funding.
August 5th, 2010 at 2:31 pm
Sorry Eoin. Posts crossed.
August 5th, 2010 at 2:58 pm
I would also add that at some stage you are going to have to price your business on commercial terms and not rely on ECB hand outs
August 5th, 2010 at 4:02 pm
@Eoin & Gavin
That sort of explains it. All the same if rolling 6 month ECB funding at 1% is guaranteed to be available one wonders why fund at 5% and more irerspective of durational and perception issues.
Maybe Tull’s answer gives a bit of a clue - ECB funding is not after all guaranteed to be available in the future, at some stage one is required to show independence from the hand-outs.
August 5th, 2010 at 4:32 pm
@ BWII
its also a case of needing to return to normality, even if this runs at a loss short term. The basic idea would be that you issue 5yr at, say, 5% tomorrow, then try for 4.75% in a couple of weeks, then 4.5% and so on etc. If they just stuck to using the ECB everyone would know they were somewhat goosed and they’d find it very difficult to return to the markets again at a later date. They can also raise some funds on the private repo markets in the same way, but im not sure how or if that is accounted for on their books.
August 5th, 2010 at 4:47 pm
@ Eoin
Okay, I’ll accept that for one reason or another there is a stigma in going with begging bowl to the ECB. As a shareholder my own view would be don’t be proud, 1% is better than 5% no matter what the stigma.
Anyway, we are drifting a bit off topic. This accounting for bad debts is starting to bug me. If it is acceptable to set up a provision for 18% impairment on loans which you and everybody else knows you are going to sell in a few months at a 50% discount how can we place any credibility on non-NAMA provisions where we have far less transparency?
August 5th, 2010 at 5:54 pm
@BW11
Its farcical for AIB pretending all is well whilst engaging in funny accounting. If the explanations offered above (not to be seen to be relying on ECB) are correct, then believing the markets will buy bonds (unguaranteed) from them while not recognizing losses coming down the line seems far fetched. I presume that is the reason for the call for the extension of the guarantee.
The lack of disposals is intriguing - M&T could have been sold long ago. It would appear that there is another agenda.
August 5th, 2010 at 6:02 pm
There’s a further problem with repo as fund-raising. In the firstplace repo with the ECB may attract a haircut of 12.5% for ABS. So the interest rate would be 2%, no? In the second, the repo counterparty gets the income from the assets while they hold them, I believe (though I have been vastly wrong on repo before and expect I will be this time again
). So AIB may not be able to afford to pledge these assets as repo, as they may earn more on the balance sheet.
Note, I believe that repo is different to the interbank borrowing the banks were funding themselves with before the crunch. While interbank borrowing may have been secured on assets, there was no transfer of ownership. So using repo from the ECB is not the same as going back to interbank borrowing. Trust in the Irish banks (and in the value of their assets) remains low, so interbank lending rates remain high for any significant term, one supposes.
August 5th, 2010 at 6:11 pm
@Hog You taught me all I know about repo but now you got me in real confusion. I thought the pledged asset was merely collateral security and that the repo interest was not dependent on this collateral and certainly wasn’t in addition to foregoing income on the asset.
August 5th, 2010 at 6:58 pm
For me, what makes the AIB H2 results a total crock is the comparison between AIB and Lloyds H2 Irish reports (the link to Lloyds is at the bottom - page 85 is the page that gives the best overview of Irish operations) Here is the comparison as at 31 June 2010
Lloyds (Ireland)
Total loans - GBP 26 682m
Impaired loans - GBP 11 689m
Provision for Impaired loans - GBP 4 857m
Provision as a % of total loans - 18.2%
AIB
Total loans - €126 697m
Criticised loans - €42 190m
Impaired loans - <€42 190m
Provision for Impaired loans (note 23, p78) €8 609m
Provision as a % of total loans 6.8%
It seems to me that the foreigners (Lloyds) who are no longer in the intensive care unit are prepared to realistically recognise the condition of their loans.
Or are we seriously to believe that Lloyds will have losses on their Irish loan book at a level three times (!) the level of AIB in total. (18.2% v 6.8%).
http://www.lloydsbankinggroup.com/investors/financial_performance/company_results.asp
August 5th, 2010 at 8:18 pm
@Jagdip
Obviously it depends on the make up of the loan book. Resi mortgages would be low on impairment, development/construction high. What was Halifax/BoS main lending activity?
August 5th, 2010 at 9:02 pm
@BWII
It will of course depend on a number of factors Lloyds H2 (which as you correctly say will relate to group cos Halifax and BOS as far as Ireland is concerned) don’t publish H2 information to the same level of detail as AIB but they do say “Commercial Real Estate made up 42 per cent of loans and advances to customers in Ireland at 30 June 2010 (and 40 per cent at 31 December 2009).” That’s about as good a breakdown as you’ll get for Ireland.
By the way the impaired loans for AIB (page 10+11) total €19,793m. AIB say on page 72 that mortgages are €28 129m.
On the face of it I’d expect more impairments on commercial than residential which would imply that AIB should be well north of 18.2%.
We know the NAMA provisions are ridiculous on light of the actual haircuts on T1 & T2. What on earth is our Financial Regulator doing - he was visible at the start of this year with his permanent supercilious scowl - now he’s disappeared - is the challenge too great for him?
August 5th, 2010 at 9:16 pm
Jagdip,
There is a process going on here. AIB has yet to fess up toits loan losses because if it did it would be insolvent. It is also negotiating with NAMA on the haircuts of subsequent tranches, so do not expect it to come out an provide at 50% as you would imagine. Simultaneously it is trying to sell assets without appering to be a distressed seller, even though we all know that this is the case.
Frankly, it is in all our interest that it gets the best possible price for these assets, including selling the UK. This lessens the residual quantum of capital to be raised.
The regulator has given them to the Autumn to come up with a plan. After that, I expect your wishes to be granted and AIB will be nationalised either de jure or de facto.
August 5th, 2010 at 9:40 pm
C’mon Tull, the only way that buyers of AIB’s non-cores are going to pay anything like the net loan values shown in AIB’s H1 is if they’re staffed with the illuminati of our banks that were kicked out. I am just confused as to why our *independent* Financial Regulator is not stepping in - surely his future career prospects will only be enhanced by blowing the whistle because as soon as FG/Labour get their hands on the reins they’re not going to be kind to a Financial Regulator that sat back and allowed AIB to sleepwalk into nationalisation.
August 5th, 2010 at 10:07 pm
@jagdip
I don’t understand your point. The FR has stated that AIB must get 7.4bn capital by year end. H1 results are irrelevant to that demand.
August 5th, 2010 at 10:12 pm
@ Hogan/BWII
if haircut is 12.5%, then the interest rate is still 1%, but you’re only getting 87.5% of nominal collateral in liquidity, so the interest rate on the liquidity would be 1/87.5 = 1.14%?
secondly, BWII is right, as far as im aware, the original owner of the bond (ie AIB) continues to earn the coupons/interest on the underlying security.
Also, re previous funding of Irish banks, in a covered bond, the buyer of the bond still had full recourse to the originating bank, but in a securitisation the bond buyer only has recourse to the underlying cashflows. AS such, only a securitisation really got things properly off the balance sheet, while covered bonds were more a liquidity tool (though may be some off-balance sheet advantages in terms of accounting?). Think it’ll be a good while before we see securitisations occurring in a meaningful way again, but covered bonds will probably start being issued again by good names at some stage later this year hopefully.
August 5th, 2010 at 10:20 pm
Jagdip,
I really do not understand what you are saying. Please enlighten me. AIbhas to raise 7.4 bn in equity. He has given them until Sept, I think. After that, it is most likely that the state converts its prefs to ordinaries and owns the majority of the bank.
August 5th, 2010 at 11:01 pm
@Eoin
‘Fail’ (me, that is!)
http://www.credfinrisk.com/repos.html
“During the transaction, any coupon payments that come due belong to the legal owner, the “borrower.” However, when this happens, a cash amount equal to the coupon is paid to the original owner, this is called “manufactured payment.” In order to avoid the tax payment on the coupon, some institutions will repo the security to a tax exempt entity and receive the manufactured payment and avoid the tax (”coupon washing”)”
On the interest rate - yes, I always get the sums wrong - it is just not that easy for a history graduate! What I mean, though, is that you are getting an eighth less cash in the repo than the book value of the assets. Does this not increase your cost of finance? (As you have an eighth less liquidity to play with).
@BWII You are really stuck if you are learning from me! Let us learn together, though!
The difference between repo and interbank lending is that in repo the borrower sells assets with an agreement to buy them back at an agreed later date. Usually at a slightly lower price (the interest rate). In interbank lending, the borrower may make a promise of collateral (secured borrowing) or may not (unsecured), but the collateral stays on the borrowers balance sheet.
I’m a bit stumped as to why AIB aren’t repo’ing with the ECB. Surely they can turn their 24bn of sows’ ears into a silk purse for that purpose? What other reason would they have to keep it on their balance sheet for? Risk weighted assets? As derivative collateral? (I would have thought cash would be the only acceptable).
August 5th, 2010 at 11:10 pm
@ Hogan
yes, the haircut does raise the ‘effective’ rate of funding, but i suppose its not a killer in terms of the ECB haircuts, or if you have half decent collateral to use on private markets. Try repo-ing a Greek govt bond privately however and you’re probably getting pretty close to the 2% ‘real’ cost!
Why not repo with the ECB? (a) perception, (b) cant get long term funding via ECB and (c) you can probably repo the good stuff privately well below the ECB rate anyway (you’d repo an italian govt bond at around 65-70bps for 3mths with a minimal haircut) and (d) the collateral is the de facto ‘buffer’ if the interbank markets freeze up (either for AIB or for the whole market) again, so they want to get alternative funding elsewhere to keep this intact, even if it is more expensive. Obviously they cant continue with this situation forever.
August 6th, 2010 at 7:48 am
@TM/BWII
What I mean is that if AIB were to recognise its provision for impairment at a realistic level (the NAMA provision is bats, the other provisions look very low when comparing with Lloyds’ Irish operations), then that increased provision will eat into (possibly erase) AIB’s capital base. As I understood it the €7.4bn capital injection was predicated on a certain level of loss but if that loss grows then the need for new capital grows. That’s what I mean.
As regards sleepwalking into nationalisation. If AIB don’t recognise now that they need raise more than €7.4bn from selling of assets, private capital raising then one morning, when a NAMA tranche is transferred at more than a 18% haircut then AIB or a more ballsy Financial Regulator forces AIB to be more realistic with its provisions then AIB will have no choice but to seek government aid which given the existing shareholding will see AIB nationalised.
August 6th, 2010 at 10:31 am
@Jagdip
It’s an accountancy thing and it cuts both ways. M&T and BZK are also in the H1 Balance Sheet at considerably below their fair value and these have stockmarket valuations so that is nearly as transparent as the fact that we know NAMA destined loans are likely to be worth only 50%.
It is disturbing, I admit, that accounts seem to be meaningless but I don’t think you can blame the FR. It is not his job to get embroiled in accountancy semantics. It is his job to insist on adequate capitalisation and he has done that - he has given AIB till year end to stomp up 7.4bn.
August 6th, 2010 at 11:52 am
Of course, one possibility could be that the 24bn of assets available for repo aren’t acceptible to the ECB? Anglo had a similar problem with 12.somthing billion of assets, hence the Irish NCH master loan agreement. So while the assets are available to repo with some counterparty, they may not be ECB eligible? In which case, there may be no cheap market for them…
PS I can’t find the original quote in the half-year report? It doesn’t seem to be on P.21
I do see this in the conference call transcript, though:
“The stock that we hold of qualifying liquid assets, or collateral, as at June 30 amounted to EUR49 billion, and it is growing. It currently stands at EUR51 billion as we stand here today, of which EUR26 billion is unencumbered or unpledged.
We have extremely low balances drawn from the ECB, it’s currently a single digit billion number, and as I’ve said, we have a very good stock of unpledged assets available to us in the event that there’s any further liquidity stress.”
August 6th, 2010 at 12:31 pm
“acceptible”?!
What was I thinking…
August 6th, 2010 at 12:44 pm
@ Hogan
“qualifying liquid assets” would i assume mean ECB-qualifying? (what else does it need to qualify for?)
August 6th, 2010 at 2:46 pm
@Eoin
Dunno, I guess so.
Does it not seem weird that they are claiming their cost of funding is high (hence the SVR increases), but also claiming that they have plenty of collateral available for cheap funding?
Unless, of course, you aren’t doing any new lending…
August 7th, 2010 at 8:14 am
@BWII
Perhaps we have different views on the role of the FR - having perused the Lloyds and RBS H2 statements (see below for RBS which of course operates in the State with Ulster Bank), it seems that we are here back in mindset to 2006/7 before the whole financial edifice came crashing down and when we knew there were big problems but refused to recognise them. Ireland Inc is still producing (or allowing to be produced) fantasy financial statements.
Seriously how can we hope to restore confidence in our banks and wider economy if we tolerate AIB’s H2 statement (I am talking specifically about the forward looking 18% haircut provision for NAMA-bound loans when T1 & T2 had 42% and 48% haircuts. Though comparing the other loans with Lloyds and even RBS’s Ulster Bank indicates we’re probably light on provisions with non-NAMA stuff as well).
http://files.shareholder.com/downloads/RBS/982127649×0x394144/a434d4bf-3edf-4458-b632-9a3383fe1d5f/RBS_Q2_2010_Announcement.pdf
August 7th, 2010 at 11:19 am
@Jagdip
I don’t know the answer. I am left guessing between two alternatives. Either some silly accountancy dogma is preventing the correct value being put on the assets and liabilities OR this is a very crude cover up (fraud?) which has the blessing of our bright new shiny FR.
Given that the FR has set a deadline and a target for 7.4bn my inclination is that he is not part of a conspiracy to cover up the true state of AIB’s finances.
August 8th, 2010 at 7:43 am
@BWII
This piece from the Post below tries to explain the accounting aspect. Speaking with a dormant accounting qualification, “true and fair view” and a few other principles would trump this “non adjusting event” technicality. I still believe the FR has a role in this, though I recall that he has used a 45% haircut for NAMA loans when calculating the capital requirments. What impairment did he assume for non-NAMA? And where is he with his role of instilling confidence in Irish financial institutions - does this include minimising reported losses even if the underlying impairment provisions are bats?
“The bank said that the sale of these loans after the reporting date was a so-called ‘‘non adjusting event’’ under accounting rules.
Non-adjusting events are classified as those that occur ‘‘after the reporting period [but which are] indicative of a condition that arose after the end of the reporting period’’, accounting rules state.
The move did not require sign-off from the bank’s auditors, KPMG, as quoted companies are not obliged to publish audited accounts at the half-year stage. An AIB spokesman declined to comment.
The bank’s 2009 annual report, however, states that in determining the carrying value of an asset, ‘‘impairment losses are incurred if, and only if, there is objective evidence of impairment’’ and if events had taken place that meant ‘‘the estimated present value of future cash flows is less than the current carrying value’’.
http://www.thepost.ie/story/?jp=ojausnmhmh
August 16th, 2010 at 9:00 pm
Going back to the unencumbered assets. I saw this today:
http://ftalphaville.ft.com/blog/2010/08/16/315556/euribor-has-been-vaporised/
“The other detectable trend, meanwhile, is just how fussy banks continue to be about the type of collateral they accept for repo deals on an interbank level. According to Comotto, the Lehman crisis pushed the proportion of government securities being demanded in repo transactions to 83.6 per cent versus 81 per cent in June 2008.
That might not sound like a lot, but according to Comotto it is a substantial sum in absolute terms, especially when you consider that the number already started at a high base. What’s more, the figures reverse what was previously a downward trend.
The remainder of the collateral, meanwhile, is now exclusively focused on good quality alternatives like covered bonds, supranational bonds or equity. ABS-backed transactions, though, have almost completely vanished.
All of the above hence points to no real improvement in interbank borrowing costs and what’s worse a potential quality-collateral run in Europe, much like that seen in the US post the Lehman crisis. As Comotto states (our emphasis):
The concern now is there may not be good govts, to supply demand. ”
Could it be that the AIB collateral is acceptable to the ECB, but not to anyone else? Given the ECB are reducing their repo provisions (in duration, if not in scope), that would keep AIB on a hand-to-mouth existence?
August 30th, 2010 at 7:13 pm
Can overall capital kartels stifling unemployment credible kudos > euro regulator BE accountable ?