The big three obviously did not translate the ‘everything is honky dory’ script into German. The brokerage Dresdner reckon that €6.3billion in write-downs over the next 2 years is realisitc. They reckon the big three face losses of 8% of their loan book on property compared to 5.4% in the UK, or a 50% higher rate of impairment. Dresdener call these provisions high ‘but realistic’.
With deafening silence from the Dublin based analysts…
Dresdner, like everyone who is looking at the Irish banks, is strugling to find an appropiate historical parallel in order to quantify expected loan losses. Irish analysts keep on looking back at previous Irish recessions but I don’t think that such comparisons are appropiate. The level of private sector indebtedness in Ireland is unprecedented, whereas in previous slowdowns/recessions it was the government’s balance sheet that looked stretched.
Dresdner, I think, are using the experience of the UK banks during the early 1990s which is arguably a more realistic approach.
However, i have yet to see one research report which looks at the Irish economy the way this website has. Of all the published research on the Irish banks (and the Irish economy) that I have read not one has referred to the large number of empty properties (thus enormous excess supply) and only the likes of Morgan Kelly have think that €360bn of private sector debt is of any economic significance.
Much would depend on how the losses were shared between the big three.
Should one take the hit for the lions share it would be curtains.
In any event if write downs were to exceed profits it would mean that the banks lending would have to contract or else new capital would have to be raised, by way of rights issue which would dilute individual shareholdings.
These assessments can only be based on the slippage in valuations to date.
If the market slides further you might be talking about several times that multiple in write downs.
What’s needed is more of the US medicine. Shovelling the crap assets over to the ECB in return for fresh clean Euros is a good start. Now what we need is the equivalent of taking the 6 trillion dollars of Freddie and Fannie private debt onto the public balance sheet, as they did with the stroke of a pen last weekend.
That’s trickier over here. How do you sucker the French and German public into taking this on?
Maybe what we need is a systemic banking crisis to bounce the ECB into doing a Northern Rock Irish style?
I need to do some more reading on that issue. My initial thinking is that these mortgage back securities we not unloaded in any real sense, but are offered up as collateral in return for some more liquid securities. The banks still own this paper and will be required to take it back when either:
a) the ECB requires them to post more reliable collateral
b) the repo arrangment expires and they have to repay the funds they borrowed and take back the collateral they posted.
Possibly I don’t understand the practical mechanics of the arrangement.
Option 2, I believe. And since the last ECB meeting, the banks have to take a haircut of 12% (+ possibly another 4.4%) on the ABS value in return for the cash.
As has been pointed out here and elsewhere, the big three have only about a billion in the ECB at the moment. My guess is most assets are in covered bonds. That could change if the asset quality diminishes and the covered bond breaches its covenants so the bank has to take the assets back on their balance sheet. I don’t know the details of the covered bonds, though.
I don’t quite understand the Dresdner note. 8% loan loss on property book. Fine. Combined profits of about 13 billion (er from where?). 6.3 billion loss. But don’t BoI have a property loan book of 100 billion? So that would be a loss to them of 8 billion alone never mind the others. Or am I missing something as usual?
The loan loss ratio of 8% appears to be 8% of the residential developer book, the figures for which verbatim printed above. For loans that are related in some way to property there are many subdivisions. The loans are split firstly between Property/Construction and Residential Mortgages. Then the Property/Construction is split between Residential vs. Commerical and then Investment vs. development. By the looks of things Dresdner then have access to the split between small/medium and large customers.
AIBs property/construction loan book in ROI is €30 billion of which 35% is residential development, in the UK it’s 30% of €10 billion which approx. adds to the Dresdner figure. (2008 half year report)