Summary
Bank of Ireland may be able to raise internal capital following NAMA though says rights issue not required. Many variable market related factors and accounting assumptions must fall in their favor, while a Euro 1bn fresh equity requirement is more likely over a 3 year horizon. The Irish Government with its NAMA policy is giving the banks time in which to raise equity. BOI have just raised a €1bn unsecured bond which will be used pre 31 Dec 09 to repurchase Government held pref shares.
Analysis
NAMA impact on BoI
BOI is to transfer €16bn of loans off balance sheet to NAMA at an average haircut/discount of 23%. Due to the composition of its transfer (with a greater proportion of investment than land and development), coupled with the fact that it has no exposures above €300m in its land and development book, it is believed that it will emerge from this downturn in a relatively stronger position than its rivals.
NAMA is beginning the process of de-risking the balance sheets of the Irish banks. Significant issues still remain as they are focused on the Irish economy and still have significant property exposures on their balance sheets. BOI is seen generally as fairly valued at current levels based on a TNAV multiple of 1.2x compared to the European average of 1.4x and a UK average of 1.3x.
Capital Base
On capital, the BOI group is aiming for an equity tier 1 of between 5-6% over the current 3 year cycle. Management has implied that accessing equity markets was unlikely until NAMA is fully in place. Opinion is the banks must have an equity tier 1 of at least 6% in the current cycle. Under this assumption, BOI must raise equity of circa €340m with AIB requiring over €2.5bn.
Based on various analysis, it is estimated that BoI would only need an additional €200m to report an Equity Tier 1 of 5% at September 2010 (which troughs at 4.5% at March 2011). These numbers incorporate loan losses of €7.3bn for the three years to March 2011, which is €0.3bn greater than management’s latest guidance, which has just been raised from €6bn to €7bn. Now, with the NAMA uncertainty removed, it is felt that BoI is in a strong position to begin to redeem an element of the Government’s €3.5bn preference shares prior to year-end (thereby reducing the attaching warrants on a pro rata basis up to €1.5bn).
After factoring in the impact of the NAMA process, it is forecast BoI’s tangible equity will slip into negative equity of €0.5bn at the bottom of the cycle (March 2011).
However, giving it the benefit of the doubt and adding back various predicted positive adjustments as follows, (i) the equity receivable on exercise of the Government’s warrants (€0.1bn), (ii) deferred tax assets relating to losses which may be carried forward to off-set against future tax liabilities of €0.6bn, (iii) negative available for sale (AFS) balances of €1.5bn which are expected to redeem at par, (iv) a negative FX hit to reserves of €0.3bn and lastly (v) €0.3bn out of the €1.5bn deficit in the Group’s defined benefit pension scheme at March 2009 (reflecting the recent rally in global equity markets), the outlook is
Mar 2011Tang Equity post writedown -500m
Warrants +100m
Tax losses +600m
AFS Writeback +1500m
FX Writeback +300m
Pension deficit Writeback +300m
Tang Equity 2900m
Shares and Warrants 1200m
Adjusted TNAV 2440m
New Equity 1000m
New Tang Equity 3900m
Wholesale Funding
Bank of Ireland has today 30 Sept 2009 issued a €1bn unsecured, unguaranteed bond. The 3.5-year issue, which was over 2.5 times subscribed, is priced at 245bps over mid-swaps. It compares with AIB's recent €1bn three-year issue at 250bps over, and is a further sign that wholesale funding markets are in the process of normalizing for Irish banks. 92% of orders came from outside Ireland, with more than 220 investors from 26 countries participating in the transaction. This follows its recent successful 5-year covered bond mortgage secured issue, its first outside the Irish government guarantee. This bond was oversubscribed 2.5x with the majority of investors outside Ireland. The bond was issued at 1.90% over midswaps or at a yield of 4.65%. The issue was expensive with recent issuance by Hypo Real Estate and Deutsche Bank at circa 0.50% over mid-swaps for 5 and 7-year issuance respectively.
The issuance is positive despite its cost as it highlights the bank is able to access bond markets and lengthen the maturity profile of its wholesale funding. It does have the effect of reducing the amount of eligible assets the group can use to raise cash from the ECB and the high cost of the funding will impact on Net Interest Margins going forward. The market for covered bonds in Europe has reopened over the last few months helped by greater investor confidence and more importantly by the purchase by the ECB of covered bonds. This easing in wholesale funding markets is a welcome development and comes at a time when banks are continuing to compete aggressively for customer deposits. For instance, Bank of Ireland recently launched a new three-year fixed 'reward' account that delivers a fixed rate of 9% over the term. NAMA should facilitate some easing in the intensity of the competition, as removing impaired loans from the banks balance sheets improves loan-to-deposit (LTD) ratios (from 160% to 130-140% at BOI) and the bonds banks get in exchange enhance their liquidity.
BOI have also stated it aims to reduce its reliance on ECB and BOE funding from €17bn to €10bn by the end of September 2010, highlighting Bank of Ireland’s ability to attract deposits and wholesale funding.
Capital base maintenance and buyback of preference shares does not bode terribly well for new lending in Ireland for the foreseeable future, combined with banks widening margins and cost cutting may possibly lead to BOI being able to fund new equity internally but a circa €1bn new issue is more likely.
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.
