Tag: AIB

Super Tuesday turned out not to be so super at giving us a better picture of what’s going to happen to AIB. Indeed, I’ve been puzzling over some aspects of the announcements and coming up with a decent picture of what’s likely to happen requires a fair few calculations and assumptions. But here goes. I’ll break this up into two bits. Capital requirements and NAMA transfers first and then asset disposals second.

Today’s media have lots of what appear to be leaks about what AIB’s capital requirements are going to be. I say “appear to be” because reliable leaks tend to lead to all the journalists singing off the same hymn sheet and reporting the same figures. In this case, Business and Finance are reporting a capital requirement of €7.5 billion, the Irish Independent reported a requirement of “up to” €7 billion and the Irish Times are reporting “some €6 billion to €7 billion”. So I’d take these with a pinch of salt for now.

What isn’t being reported, however, is quite how bad that news (if such it is) would be for AIB’s current shareholders. AIB’s 2009 annual report showed that the bank had risk-weighted assets of €120 billion at the end of last year. If €20 billion in property loans are transferred to NAMA and replaced with NAMA bonds (formerly known as free money from Europe) then (assuming a risk weight of one for the property loans) this would reduce risk weighted assets to €100 billion.

It has been heavily flagged that the Regulator will be looking for a core equity capital requirement of 8 percent, so this would require the bank to have €8 billion in core equity capital and I’d assume that the preference shares would not count towards this total.

The annual report tells us that at the end of last year, the bank had what it called “core equity capital” of €9.5 billion, but this included €3.5 billion in government shares.

Now consider what a capital requirement of even €6 billion would imply. If the bank needs to have core equity of €8 billion, then a requirement of €6 billion means that after the transfers and writedowns, AIB would have equity capital of €2 billion. This would mean losses of €7.5 billion on the transfers and writedowns. As far as I can see, this would mean the transfers wiping out the private equity in the bank.

Perhaps I’ve done these calculations wrong: Commenters feel free to tell me what’s wrong with the above. There certainly seem to be shareholders out there who don’t agree with it. In any case, we won’t have long to wait.

AIB’s preliminary results for 2009 are here. There’s some new NAMA-related information but not much. The bank is transferring loans with previous book value of €23.2 billion to NAMA, down from earlier estimates of €24.1 billion. The provisions of €4.2 billion against these loans, corresponding to an 18 percent writedown, are presumably a holding operation until the actual transfer involving a larger writedown.

In relation to stories about AIB shrinking credit, I heard references on the radio this morning to the bank shrinking its loans to customers from €129.5 billion in 2008 to €103 billion in 2009. This is only correct if one accepts the accounting treatment of the €19 billion the banks expect to receive from NAMA as “financial assets held for sale to NAMA” rather than “dodgy property-related loans that have been written down a bit.” I’m sure the bank is restricting lending but it’s not as easy to get loan books down as fast as the “loans to customers” line suggests.