Bank lobbied to limit scope of Nama 2

AIB EXPRESSED serious reservations with the Department of Finance about the scope of what is known as Nama 2 – the transfer of loans below €20 million from the bank and its rival, Bank of Ireland, to the State’s so-called “bad bank”.

A letter from the bank’s executive chairman David Hodgkinson last month to department secretary Kevin Cardiff reveals the full extent of the bank’s concerns over the effect of Nama 2 on AIB, the wider banking sector and the State.

Hodgkinson warned the department that Nama 2 was “much more expansive in its scope” than the €71 billion in loans moved from the banks under Nama 1.

It is still not clear how much will be transferred in the next wave of smaller developer loans to be moved – a condition set under the EU-IMF bailout of the State. The department says it will be less than the €16 billion originally thought.

The difficulty with this tranche is that the transfers relate to many borrowers where property is only part of their business.

Hodgkinson told the department that the first transfers to Nama brought in 381 AIB “connections” (borrowers) but he estimated that more than 4,200 connections were involved in Nama 2. “We are of the view that Nama 2, if not carefully constructed and the consequences fully thought through, may not be in the best interests of the banking sector or the State as a whole,” he said.

Further loan transfers could lead to AIB requiring further capital, he said. It has already received €7.2 billion from the State, which is likely to provide a further €4.7 billion by the end of the month.

Hodgkinson said in the letter, dated January 25th, 2011, that Nama 2 could further threaten the viability of the core franchise of AIB as these were core SME loans. The loss of these borrowers and income could affect AIB’s ability to establish “a viable core business, requiring further redundancies and possible branch closures”.

He also warned of “very many material logistical issues”. Managing the loan transfers earmarked in Nama 2 could require “in excess of a thousand staff”. “This is at a time when the bank is undertaking a root and branch restructuring and seeking to focus on its future,” said Hodgkinson.

He argued that “servicing fees” under Nama 1 were “insufficient” to meet the costs of servicing those debtor relationships and this will be compounded under Nama 2. AIB would “likely require an increase in servicing fees” and this, in turn, would affect the profitability of Nama, he warned.

AIB was better positioned to maximise the value of the Nama 2 loans and it was in the State’s best interests to manage them as it owns most of the bank, he said.

The department said it had responded earlier this week to AIB, clarifying the position in relation to the issues raised by Hodgkinson in his letter.

The department has since decided not to take associated loans linked to the smaller land and development loans into Nama 2. The Nama 2 legislation, published last month, will be considered after the election.