Buy-to-let arrears figures not pretty

The potential horror show of buy-to-let mortgage losses at the banks was laid bare in a report yesterday from stockbroker Davy which tried to get a handle on the estimated scale of the problem.

Davy now expects mortgage losses to fall beyond the €9 billion worst-case scenario in last year’s stress tests, putting them at between €10 billion and €11.5 billion.

But the remaining €8.5 billion of unused capital to cover losses on the sale of excess loans and other assets through deleveraging will mean the banks won’t need more capital.

The trouble with the buy-to-let loans is twofold: compared with owner-occupier mortgages there is no industry-wide information on the true level of buy-to-let losses; and the banks have not taken anything like the enforcement action they must take on the borrowers.

Many of these customers are professional investors so the banks should really be sticking more forcefully with the Government aim of keeping people in their own homes and not investors in a multitude of homes that they rent out.

Bankers privately complain that it is not a simple problem to solve, as borrowers have cross-guaranteed buy-to-let mortgages on family homes so it may not be possible to repossess one and not the other.

Repossession have been virtually non-existent relative to the extent of arrears levels, and many loans are still on interest-only.

Davy said that a quarter of buy-to-let mortgages at the Government-guaranteed banks had missed three or more monthly repayments at the end of last year.

The firm expects buy-to-let arrears to rise to 38.4 per cent and, based on an expected 60 per cent peak-to-trough decline in property prices, delinquent buy-to-let loans will total between €6 billion and €7 billion, or close to 40,000 buy-to-let properties in arrears.

Given these figures, it’s timely that the Central Bank should be planning to produce buy-to-let arrears figures across all of the banks.

These will appear in the mortgage arrears figures for the third quarter of the year when they are published in November.

They certainly won’t make pretty reading.

Chemist pretax profits rise as robots riding in

It might be investing heavily in robots to help pharmacists dispense prescriptions and counter the impact of declining sales, but the Sam McCauley chain of chemists is nonetheless performing strongly.

In line with the pharmaceutical sector as a whole, it has been hit by declining sales, with revenues falling by about 1 per cent to €80.3 million in the year to September 30th, 2011. However, the chain reported a significant boost to its profitability during the year.

It saw its pretax profits more than double, up by 125 per cent to €3.6 million, as savings of €5 million on administration expenses helped boost profitability.

It also squeezed employment costs, with pay for its 549 staff declining by 4.4 per cent to €12.9 million, from €13.5 million previously.

Given the boost in profitability, the directors of the firm recommended the payment of a €2 million dividend to shareholders.

In 2010, no such payment was made.

According to the accounts, the directors indicated that the company’s financial performance was “very satisfactory and reflected maturation of newer outlets and prudent management of our cost base”.

Looking ahead to 2012, the company said that it will focus on continuing to consolidate and reduce debt. According to its 2011 accounts, the company had some €20 million in outstanding bank loans, down from €23.3 million in 2010 and from €29 million in 2009.

With regards to new stores, the company has a “selective pipeline” of prospective new greenfield openings, while it will also review possible acquisition opportunities “as they arise”.

The chain recently decided to scrap its mark-up on prescription drugs, opting instead for a flat €7 “professional services fee”.

The McCauley group also owns 25 per cent of Amplifon Ireland, which supplies hearing aids.

Scent of sovereign annuity bonds in air

It has been a long time in gestation, but the issuance of sovereign annuity bonds now looks imminent, with a deal potentially taking place before the end of the year, and maybe as soon as September.

Already Zurich Life has been licensed by the Pensions Board to offer sovereign annuities, and the National Treasury Management Agency is ready to issue amortising bonds, which will then be packaged up into an annuity product by the insurance firms.

It is expected that € 2-€3 billion might be issued by the NTMA over the next 18 months

All it needs now are the trustees of a pension fund to step forward and declare their interest.

So why the reluctance?

On the face of it, annuity bonds are a win-win for both the State and pension funds.

Pension funds that are drowning in deficit will be able to purchase the bonds to reduce funding costs and boost solvency levels, while the State will be able to find a new audience for its debt – and hopefully kick-start a real return to the bond markets in 2013.

The reason of course that such bonds issued by the Government are so attractive is because of the higher risk they represent, and therefore the higher rate of interest they will pay.

For trustees desperately looking for a solution to the problems faced by their pension funds, it will mean a potentially difficult decision: take on the risk associated with Irish government debt, or face winding up the scheme.

Pricing is also likely to be an issue if the product is to get off the ground.

It’s expected that rather than a headline announcement revealing that the NTMA has sold a certain amount of bonds, the process will involve a series of individual negotiations.

And this could drag out issuance further.


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