Summary
Bank of Ireland has provided evidence that the composition of their loans to be transferred to NAMA is much better than the averages for all the affected banks. Their capital will not be impacted more severly than originally estimated due to the NAMA discounts and they are right to be confident that the NAMA discounts can be absorbed without recourse to external capital raising. They will however seek to raise capital before the end of 2009 in order to reduce the Government's stake in the bank.
Analysis
Bank of Ireland has raised its bad debt forecast from €6bn to €7bn for the three years to March 2011. The increase is not due to expected additional losses arising from the transfer of their land and development loans to the Government Bad Bank (NAMA). The Bank has provided metrics which demonstrate that the composition of their land and development book is much better than that of the other banks transferring assets to NAMA. On that basis the bank will experience a haircut considerably below the average of 30% estimated for all the affected banks.
The transfer of the loans to NAMA will be carried out over two financial reporting periods so that the bank's preprovision profits over the three years are available to absorb the discount being taken by NAMA as the loans are transferred to them. So Bank of Ireland's capital ratios will be sufficient to absorb the discounts arising as the loans transfer to NAMA.
The additional bad debts now being forecasted are anticipated to occur in the wider economy as unemployment continues to rise faster than expected. The estimate allows for a greater proprtion of defaults to arise in loans other than those transferring to NAMA. However the bank bought back Tier one debt securities at a discount, on a voluntary basis, in Summer 2009 which improved equity tier one by €1bn. These transactions provide additional capital cover to withstand the revised higher bad debt forecast.
The bank needs to raise €1.5bn of new capital before December 31st in order to avail of an option to reduce the Irish Government's 25% stake in the bank. If the Government is paid down from the proceeds of a new capital issue then their option to convert that stake to equity at 20 cents a share will lapse. Bank management is understandably coy on this matter, at this time, because the NAMA legislation has not yet been piloted successfully through the Parliament. Also the half year results are not scheduled to be published until November so that, logistically, there is a tight timeframe to raise the capital in time to pay the Government.
Bank of Ireland must be hoping for the NAMA legislation to be completed before end October and I expect thet the publication of the half year results will be brought forward to that date also. I am confident that Bank of Ireland will launch a capital issue in November as they have a huge incentive to pay the Government and avoid a significant dilution in the equity shareholders' interests.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
