Nama remains the great imponderable

ANALYSIS:AIB's €4.3bn bad-debt forecast could be torn up once the asset agency's discount is set, writes SIMON CARSWELL.

THE BIG unknown – how much of a discount the State will pay for toxic bank loans – remained just that, unknown, as Allied Irish Banks (AIB) reported dire results for the six months to June 30th.

AIB posted a pretax loss of €872 million – the bank’s first interim loss since it was set up in 1966.

This loss even includes a one-off gain of €623 million from the bank’s bond swap in June. Excluding this, the underlying pretax loss stands at €1.5 billion.

Things didn’t even get this bad when the Government last bailed out the bank in 1985 with the purchase of debt-riddled insurer ICI or when rogue trader John Rusnak cost AIB €750 million in 2002.

Yesterday’s figures illustrated the scale of the dramatic and rapid deterioration across the bank’s €134 billion loan book in just six months. Once again land and development were to blame and bad debts dominated proceedings.

The bank wrote off €2.37 billion on bad loans, of which 72 per cent relates to loans to developers.

Adding to the bad debts provided for last year, AIB has written off more than €4 billion of its €134 billion loan book over 18 months. This compares with €1.7 billion written off by Bank of Scotland (Ireland) on its €33 billion loans in the same period. Lloyds Banking Group, its UK parent, wrote off €1.2 billion of its Irish loans in the first six months of this year.

AIB could not say whether its €4.3 billion full-year bad debt forecast would be accurate. The great imponderable remains Nama.

Chief executive Eugene Sheehy said the €2.37 billion half-year bad debt write-off was in line, but finance director John O’Donnell warned that all bets were off if Nama took over €16 billion of AIB’s development loans this year.

A further €10 billion in associated loans on investment properties provided as collateral are also expected to be bought by Nama.

O’Donnell said the €4.3 billion full-year bad debt forecast could be “torn up” once the Government sets the discount at which it will buy loans with a book value of €90 billion across the sector.

The rate of deterioration in AIB’s loans was also a surprise yesterday. One in four of the bank’s loans are under review, vulnerable or loss-making, compared with about one in 10 six months ago.

Sheehy said that it was “speculation” to suggest that the Government would end up taking a majority stake in AIB due to losses incurred on the Nama transfers. “So much depends on the valuation process and the pace of it.”

Sheehy said that time is “not unhelpful”, adding that it all depends on when the loans will be transferred. By spreading the transfers and the anticipated losses over this year and next, AIB may be able to take these hits from operating profits before bad debts.

On this front, the bank performed quite strongly in what is effectively a zombie banking industry with “anaemic” demand.

Operating profits before bad debts fell 6 per cent to €1.7 billion as the bank has taken a knife to costs, slashing them by 7 per cent.

The strong “pre-provision operating profits” and the bank’s claim that bad debts will peak this year may explain why AIB’s shares rose 8.4 per cent to €1.86 yesterday.

The bank was also keen to quell any expectation that it may sell its interest in either Polish bank Zachodni or US lender MT.

Sheehy said AIB didn’t plan to sell its overseas businesses to raise the remaining €400 million of this year’s €1.5 billion capital-raising exercise to cover bad debts but also didn’t rule it out as an option.

While AIB’s Irish and UK businesses reported a loss, the Polish and US units performed strongly.

Sheehy said that diversification helped the bank when it was in difficulty at home and he couldn’t see how selling out in Poland and the US “enhances the situation”.

Depending on the scale of the Nama-related loan losses, these assets could yet be on the block.