ANALYSIS:NAMA'S PRIMARY objective is to unclog the banks of their most toxic loans, inject up to €54 billion of fresh cash onto their balance sheets in the process, and use this to kick-start lending into a credit-starved, struggling country.
The process involves €77 billion of €406 billion in loans across the domestic banking sector being purchased for €54 billion, an overall 30 per cent discount being paid by the State.
The by-product of the process is that Nama will create what the Government hopes will be five cleansed financial institutions.
However, it will also leave some lenders a shell of what they were, particularly the institutions that lent heavily to beleaguered property developers and investors.
For example, Irish Nationwide, which is selling €8 billion of its €10.5 billion loans to Nama, will afterwards shrink to almost a quarter of its current size.
This will pave the way for a consolidation in the sector, and marriages between the smallest surviving institutions – namely the EBS and Irish Nationwide with Irish Life Permanent’s banking division, Permanent TSB,
which is not participating in the Nama plan.
Minister for Finance Brian Lenihan said he expected Nama to lead to a “reformed and reinvigorated banking system” but, contrary to expectations, he did not specifically outline how he sees the industry shaping up in the future.
“It is too early to outline a definitive shape for the new system, and there has to be scope for subsidiaries of external banks to play their full part,” he said. “This will be a focus of my work over the coming weeks.”
The reference to foreign-owned banks will appease the likes of UK-owned Bank of Scotland (Ireland), part of Lloyds Banking Group, which has signalled that it could form part of the merger with the three smallest lenders in the formation of the so-called “third force”, providing business banking and complementing the focus of the other participating lenders on savings and mortgages.
The main changes to the banking system are capital requirements facing the country’s two largest banks, Allied Irish Banks (AIB) and Bank of Ireland.
Between them, they are transferring loans with a face value of €40 billion to Nama. This comprises just over half the loans heading into the Government’s “bad bank”.
According to market analysts, Bank of Ireland is facing a discount of 24 per cent on the book value of the Nama-bound loans, with a face value of €16 billion.
This compares with an estimated 27 per cent “haircut” on the loans with a face value of €24 billion on the books of AIB which are moving to Nama.
Combined, it is estimated that the banks will have to write off €10 billion on these loans – €6.5 billion for AIB and €3.8 billion for Bank of Ireland – although both lenders have already taken some provisions against these loans.
AIB is anticipated to need up to €2 billion, while the estimates for Bank of Ireland’s requirements vary from zero (according to its one-time subsidiary Davy stockbrokers) to €500 million.
If the banks were unable to raise capital from private investors, asset sales or by other avenues, the Government would end up with a stake of about 30 per cent in Bank of Ireland and between 67 and 70 per cent in AIB based on the fresh capital needed.
However, it is not a foregone conclusion that the Government will end up with a majority stake in AIB or a minority stake in Bank of Ireland following Nama.
AIB was quick out of the traps with a statement yesterday evening following the Minister’s speech, saying it planned to raise an additional €2 billion over the next 12 to 18 months.
This could be done through sales of assets or overseas business or through a rights issue where it would raise extra funds by selling new shares to investors.
Such a rights issue could be underwritten by the Government.
AIB pointed out that the discount on its loans fell below the 30 per cent average across all the €77 billion loans moving to Nama.
For every 1 per cent reduction in the discount, the writedown on its loans would be reduced by about €240 million.
The bank said the actual write-down will be phased over the next 12 months.
This will give the bank some time to take the pain, while at the same time trying to raise capital.
AIB also pointed out that its top 25 “connections” or customers accounted for about €8 billion, or 33 per cent of the €24 billion loans, and had about 80 per cent of their collateral value concentrated in Dublin, implying that this collateral ranks at a higher value.
Bank of Ireland will explain the Nama effect on its business today.