Tomorrow we should finally see a resolution of much of the uncertainty that has been hanging over the Irish banking system. We are being told that the estimated prices for NAMA transfers will be announced, as well as the capital requirements set by the Central Bank and the new legal framework for the Central Bank and Financial Regulator.
With the news so soon to be released, there is little point in me speculating as to what is going to happen. What I would flag, however, is that there is something of a disconnect between two sets of statements doing the rounds in today’s media coverage.
First, there has clearly been widespread leaking that the NAMA loan transfers will see some banks taking considerably larger writedowns than had previously been expected. For instance, in the Irish Independent, Emmet Oliver writes that “AIB is set to be hit with a discount of up to 40pc”.
Second, much of the coverage mentions the idea of the state owning 70 percent of AIB and 40 percent of BoI. See, for instance, here and here. And note that Emmet Oliver’s full sentence is “AIB is set to be hit with a discount of up to 40pc, making majority State control all but inevitable” and he mentions the Minister’s “plan to take a 70pc stake in the lender.”
The disconnect is that these two sets of figures don’t seem to add up. There is nothing new about the idea of the state potentially owning 70 percent of AIB. Even based on previous expectations for NAMA discounts, this was always a possibility. For instance, I’m looking now at a Davy stockbrokers report from April of last year that projected a base case of the government owning 78% of AIB.
However, it is hard to reconcile the continuing circulation of the same ownership statistics as before with the new information (if such it is) on discounts and also on capital levels.
To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.) So that leaves €6 billion in private core equity capital. AIB is supposed to be transferring €24 billion in loans to NAMA. Forty percent of €24 billion is €9.6 billion.
So, do the math on this and you’d probably come to a different conclusion about ownership percentages than have been flagged by the media. One way or another, we’ll find out tomorrow, but today’s leaks are confusing, perhaps deliberately so.
Update: This post should have been clearer that AIB’s annual report already allows for €4.1 billion in provisions for losses on loans going into NAMA. So the calculations would involve an additional €5.5 billion in losses over and above that. With half a billion in equity capital and the need to get up to a core equity ratio of eight percent, the 70 percent state ownership doesn’t add up. Still, perhaps I’ll see tomorrow how it’s going to add up and still end up with the 70 percent outcome.