Transfer of loans to Nama sets up final phase of bank rescue plan

THE ESTABLISHMENT of the National Asset Management Agency (Nama) marks the third part of the Government’s plan to rescue the banking sector and put the country’s financial institutions on a sound and viable footing.

The first part involved the September 2008 bank guarantee to stop the flow of deposits out of the banking system. Part two comprised the recapitalisation of Allied Irish Banks (AIB) and Bank of Ireland, and the nationalisation of Anglo Irish Bank. The three banks have taken €11 billion in State funds but more will inevitably be needed to keep them solvent.

Part four will involve consolidation within the banking sector, but Nama must first remove the most contaminated loans from across the banking sector before the future shape of the banking landscape is surveyed.

Nama, according to the Government’s stated aim, should erase any lingering fears about inadequate capital reserves across the banks by forcing the five participating lenders to acknowledge the losses on their most toxic loans – those to builders and developers.

By purchasing €77 billion in development and associated loans for the discounted price of €54 billion, the Government believes Nama will force the lenders to recognise whether they have sufficient levels of capital and force them to seek further investment – be it from the State or privately – if they don’t.

While this works out at an average discount of 30 per cent, the Government has said that this will remain an estimate until each loan has been independently valued by Nama.

Filling the capital holes is expected – in the absence of any investment from private investors or capital-raising through asset disposals by the institutions – to increase State ownership across the banking sector.

The Government is preparing to convert its 25 per cent indirect stakes in AIB and Bank of Ireland into full shareholdings to address these issues.

Central Bank governor Patrick Honohan said 10 days ago that the State “could well” end up with majority stakes in the two banks.

The legislation setting up Nama was only passed in mid-November, some seven months after the Government first publicly outlined its plans for such an agency to cleanse the banks of their most toxic loan portfolios.

Minister for Finance Brian Lenihan set December 21st as Nama’s “establishment day”, from which date banks have up to 60 days to apply to participate in the scheme.

The draft business plan had envisaged the participating lenders transferring the top 10 borrowers on their development loan books to Nama by the end of the year. These borrowers owe €16 billion or more than a fifth of €77 billion in loans being moved to Nama.

The Department of Finance expects the first loans to start moving to Nama from early February and for all 1,500-2,000 developers with loans at the five lenders to have moved by the end of July 2010. More crucially, department officials expect the banks to be able to determine their capital requirements in the first quarter of 2010 when the Nama discount is applied to the biggest development exposures. It should be clearer then as to how large the Government’s stakes will be in the two biggest banks.

The trickle-down effect through the development loans will enable the banks to assess just how big the holes will be in their capital reserves following the first transfers.

Two days before Christmas AIB said that it expects to receive about €17 billion in Nama bonds – the State debt that the Government is using to buy the loans from the banks – for €24.2 billion in loans heading to the agency.

Shareholders at AIB voted at an egm on December 23rd to participate in Nama.

Analysts expect Bank of Ireland to face a discount of 26-28 per cent on its loans, while AIB, which has a larger exposure to developers with higher loan-to-value ratios, to face a 33-35 per cent “haircut”.

Both banks have lost about half their value since the Government announced last September that they face an average 30 per cent discount as analysts have grown more pessimistic about the writedowns they face.

Anglo has the largest amount in loans moving to Nama with €28 billion in assets moving to the agency and the department has confirmed that the State-owned bank will participate in the so-called “bad bank” plan.

Members at the country’s two building societies, EBS and Irish Nationwide, have voted to give the Minister for Finance “special investment shares” in the customer-owned lenders in return for a State investment.

Their participation in Nama is now a foregone conclusion as Irish Nationwide and EBS prepare to transfer €8.3 billion and €1 billion respectively to the loans agency.

The two societies will need up to a combined €2.4 billion from the Government. This will be injected in the early part of 2010, coinciding with the first Nama transfers.

The tricky part of assessing the value to be assigned to the loans of the top 10 borrowers, which will set the valuation process for the rest of the loans, has already begun.

Initial valuations on these borrowers’ loans were to have been provided by Friday, December 18th. However, valuations were still being handed over to Nama by the institutions in the days running up to Christmas.

The banks are following strict valuation guidelines, set down by Nama’s investment banking advisers at HSBC, based on the market value of the underlying assets. But they can apply a maximum premium of 20 per cent on some land portfolios, taking account of Nama’s “long-term economic value” definition which gives the banks flexibility.

The second half of 2010 will see Nama start tackling the exceptionally tricky task of holding, developing and selling assets, but it will be some time before taxpayers see a return on the State’s €54 billion payment.