slim nymph and wicked free

AIB can meet the challenge

The consequences of the NAMA and allied announcements yesterday included a slight fall in the share price of AIB today, amid very heavy trading, and a sharp rise in the price of BOI. The market seems to think that the State will end up owning more of AIB- probably a majority most people say -than of BOI

I don’t see it, really. Instead, I think AIB have plenty of options and, although the challenge set for them by NAMA and the Regulator is certainly a big one, I think they can do it and end up the year with a market value in the multi-billions, compared to c. a single billion today.
I don’t have the exact figures with me, so all figures given below are approximations, from memory

AIB need to absorb c. €10 bn. of NAMA losses and then end up the year with an additional €7 bn. in equity. So, that’s their target, €17 bn., say. To reach that, they will deploy their starting (end 2009) equity of €6 bn. and their provisions of €4 bn. (for NAMA). That approximately takes care of NAMA (but we may come back to NAMA because I believe it shouldn’t really cost the full €10 bn.) Read the rest »

Report on my “gamble on AIB” suggestion

On Feb. 28 I wrote a piece entitled “A Gamble on AIB today?” (see below), in which I recommended a flutter on AIB at that time. I’m happy to say !..yes, happy, because at that time the share was c. 1.00 euro, and it since–almost immediately- rose to c. 1.65 euro last week…an enormous profit in a couple of weeks or three.

Those of you who bought and then sold at that price (- this group does not include myself-), will be amused to see that the price fell to c. 1.40 yesterday and is now at c. 1.10 !!–almost all the way down again. The herd is in panic at the prospects of this afternoons announcement on what the NAMA transfer price will be, etc. That group of smart investors should be readying themselves to jump back in as soon as possible after the Minister’s statement. The gamblers will go in before his statement.

I dont believe he will take a majority or any substantial minority position in AIB. It simply doesn’t make sense. In fact, ‘twould be better if he agreed to take back his €3.5 billion and pass his preference shares and warrants to shareholders in a rights issue. That would leave the bank more attractive to prospective investors of an additional few billion to restore capital ratios, at a price of, say €5-7 euros a share.

In my humble opinion, AIB is fundamentally worth €15 euros a share or more, after these few billion in write offs are taken care of in a couple of years time. Just look around the eurozone at comparable banks- many of them in deep gratitude-for-government-aid mode- whose shares are trading at 15 times core earnings and more . AIB’s core earnings are €2 euros a share !

Banks – no need to panic

So, we have arrived at the moment of truth..NAMA is to reveal the price it will pay and the banking system will end up in government hands, according to the professional professors, the insider winkers, the usually well informad media commentators and the bewildered of RTE.

Well, I think they’re wrong. I’m sticking my neck out like an idiot, I suppose, but, in the midst of all the panic- share prices today are down c. 20% !- one should take a minute or two to calmly consider the realities: the last thing the State- and the citizens- need is majority-or substantial minority control of the two main banks. We simply can’t afford it !

The inevitable result of “nationalisation” is “re-privatisation sometime; and, at that time, who would buy the banks from the Government? Who could? The traditional investors in our banks- the 150,000 Irish resident individuals, of older age and simply looking for dividends as pension supplements- would have been wiped out and, if not dead, or in State-nursing homes, still suffering the bitter taste of savings lost investing in banks. No Irish corporations or institutions would have both the strategic benefit and the financial means to buy large stakes in the banks. The reality is that our main banks–and with them, control over all Irish owned deposits- would have to be passed over to foreigners. At that stage, we might as well throw away all pretence to economic sovereignty.

Admittedly the new Central Banl governor, Pat Honohan, made some very silly comments a few weeks ago, indicating that it is almost government policy to wipe out local shareholders and sell off our major economic assets. But he seems to have taken the foot out of his mouth in recent weeks.

In any case, I believe that Brian Lenihan and his advisors and top officials have a more sensible view of the importance of our banking system and of what is required from NAMA. And they would also realise that a move into State control would cause an immediate drainage of deposits from the system which could not be replaced by any government actions or guarantees and which would be a burden our economy could not support

Therefore, the right price for assets going to NAMA from the two main banks is the price at which the assets can later be sold for, subject to the maximum which the banks can afford while staying independently controlled in the private sector. This price, which may be around 30% discount on original assets values, is affordable by our nation- because its totally financed by the banks and it comes with an indemnity against loss provided by the banks, in effect. It is the price at which the banks will be able to raise capital privately- assuming some forebearance from Pat Honohan in the matter of unnecessariily early achievement of new stringent capital ratios- which most international banks cannot achieve in the short term anyway- and at which they can finance necessary activities in the rejuvenation of our economy

Aided by the likely positive change in the near future in the accounting rules pertaining to banks’ impaired assets – which will greatly help to diminish the impact on banks’ capital of residential mortgages losses- our two main banks will recover their relatively strong position over the next 2-3 years. The outcome for the nation will be far better than what we would achieve through (partial) nationalisation. And as for shareholders, don’t follow the herd but be strong now…have faith in Lenihan and look forward to a doubling of the share prices in AIB/BOI over the next few months. Indeed, shareholders should take up a rights issue, particularly if the banks could offer exactly the same terms on which they permitted the State to get in a year or so ago.

A gamble on AIB today?

I reproduce my contribution to the discussion board, Ask About Money, where Seantheman had “accused” me (politely) of probably being a disenchanted BOI shareholder.

To Seantheman

No, I never bought BOI, but it may now be time to do so. For those with loose cash–that excludes me !- it could be the opportunity of a lifetime. Remember, you never make real money following the herd…be a contrarian !

Especially this week it could be time to buy AIB, before their results are announced. In my humble opinion, all possible downside risk to the share price is already factored in…a few times over. You can buy a share for c. 40% of its expected core profits per share. !!!. That’s probably the amount it would normally pay out in dividends…So, you buy on a notional dividend yield of 100% (- or is it 1?…I’m not sure how its described)

Would you be a shareholder in a bank?

Of course AIB will have to face its NAMA -related write downs. Up to 8 bn. it seems. But I think it has already provided half of this from 2008 and expected 2009 profits. So that leaves 4 bn more–maybe the next two years profits?…After that you’ve got a bank earning 2 euros per share, which should therefore be valued at 20 euros +, just applying other Eurozone bank p/es. So, discount that by 50% to be safe…and you’ve got ten times profit on your investment, certainly within a few short years…its a no brainer

Oh, Yes…they must dilute their equity to bring in more capital…Em…maybe!…But at what price? They would be crazy to bring in private capital at one euro per share…They will do a deal at 5 euros, with some “strategic investor”, who will take, say, a third of the new equity, secured, if necessary, on the Polish or US operation. (The mechanism might be the new “coco” hybrid bonds, or a combination of these and other arrangements.)

This solution might be predicated on the EU not forcing AIB to sell off Poland or US. But I don’t think the EU has any case against AIB or BOI, considering that they’re paying 8% (!!) on the State’s preference share injection, and considering what easier deals banks all over the EU have received from their governments, in the way of State aid. (Also considering how much ordinary Irish individual shareholders have lost–all those people who voted for Lisbon !- compared to the much smaller percentage losses of other comparable eurozone banks in difficulty)

So, NAMA, plus debt management + the new strategic investor, if required, will fix the immediate write down problem and free the bank to make profits and apply them to repaying the preference shares and to get back to paying dividends within three years. The (bigger) funding problem will also be greatly assisted by these developments. Then, some will say, the bank must face the problem of valuations on the residential mortgage book. But, in that matter, we must keep in mind that accounting rules for treating banks impaired assets (mortgage loans for example) are very likely to be changed this year, permitting banks to spread the “expected” losses over the maturity periods of the loans. Given that most of these mortgages are for 30 year periods, the bank only has to take 1/30th of a hit to the P/L and Capital account in any year. Then, the bank should re-estimate the likely losses every year and make appropriate adjustments…so, the losses in earlier years will gradually be written back as profits in later years.

In summary, buy the banks now, quickly ! (BUT…I’m not an investment adviser, nor an investment or finance specialist in any sense…Follow my advice at your own risk)…I think I’ll copy this to my own blog

By the way, buying the bank shares now is the patriotic thing to do!. The banks are both currently majority owned by individual Irish residents, not by foreign funds or speculators. Let’s keep it that way, so that the management and deployment of a couple of hundred (?) billion Irish owned deposits will stay in domestic hands and may be used for Irish economic development as a priority

State to gain billions from NAMA assets

There is a curious statement in the EU Commissions press release today (IP/10/198, 26th February) :

“…the inclusion of an adequate remuneration for the state in the rate used to discount the assets’ long term economic cash flows…”

The implication here is that the Commission feels that the State is proposing to discount the future value of NAMA assets at too high an interest rate, and thereby calculating a net present value (NPV) for these assets which is less than their real value. In the Commission’s view, it seems, there is a proper discount rate, which adequately reflects any risk the State is taking on, but which–if the Minister’s statement on the same matter is considered, is lower that what NAMA was proposing to use. The Minister said:

” There will however be a reduction in the interest rates used for loan discounting purposes ”

So, the initially proposed discount rate is to be lowered, at the Commission’s insistence. This is very important and, given the scale of the NAMA property values, a change of a couple of percentage points can make a difference of billions of euros.

In fact, apart from the actual calculation of value of the NAMA assets, the State is getting very many billions from NAMA, a substantial gift from the major banks’ much maligned and sometimes verbally abused shareholders- all 150,000 of them , mostly Momas and Pops who only saved and invested to top up their pensions with a few dividends.

You see, NAMA is, as we have long argued…a Loan to the Sate by the banks. The State tried to hide that fact, right from the start, spinning the story to make it look like a bail out of the banks by the State. It had- and still has- nearly all financial and economic commentators in Ireland convinced by the spin. But, ultimately, the EU Statistics Office declared it to be a loan to the State, which should be included in the National Debt. Much to the consternation and bewilderment of many. As a result the Sate is trying frantically to cover up this loan by inserting a private special purpose venicle (SPV) in front of it…but we still await details of this

Now the Commission has acknowledged in the above quotation that not only is NAMA a Loan, but it is an extra cheap loan. You see, as we have argued before, the State should be paying something in the region of 4.5% currently for this loan, but instead will only be paying 1.5%…That’s a real benefit…and have no doubt about it, but the State will be receiving real cash out if this…nearly a billion annually of cash flow to start and then whatever cash, less some ( currently greatly over-estimated) costs, is realised for each property sale.

Because we dont have the details of individual loans, or the discounts pertaining to each or any knowledge as to when the non-performing loans will be turned into cash for NAMA, we cannot estimate the benefit to the State accurately. BUT, we can take the total value, of c. €50 bn. to be returned to the banks, and take the guesstimated redemption schedule of the IOUs handed to the banks in return for their property, starting in 4 years time and then continuing for a further 6 years…and we can say that, based on that schedule and the estimated redemption payments published in the NAMA business plan, the difference between today’s value of the future repayments discounted at 1.5% and the today’s value (NPV) estimated at 4.5% is …give or take..€10 billion.

Ten billion gift to the State!! By who, exactly?..Well, that’s the opportunity cost to the banks and c. 55% of that refers to AIB/BOI property…So, lets say thanks to the Momas and Pops who own these banks and start showing some sympathy to them in their severe losses.

A master purveyor of popular misconceptions

Vincent Browne’s late night chat show on TV3 is the best on television. Always amusing, often laughable, Vincent excels at pushing misconceptions on current topics down the throats of his invited guests and demonstrating to us how often he can leave them speechless and unable to correct him.(Of course, some of his guests seem far from expert in the topics in question: Martin Mansergh seems to understand little more about the banking crisis than Vincent himself!).

   Vincent Browne


Last night VB insisted that the public should be given an explanation as to why an ignorant and incompetent government should have paid AIB €3.5 bn. for “shares worth only €1.5 bn at the time”. Martin couldn’t answer, nor did other panelists volunteer to, although VB pressed the issue repeatedly for about five minutes.

The reality of course is that VB was referring to ordinary share capital of AIB at the time, which may have been worth €5 bn or so, and therefore the 25% which the taxpayer received should have cost us no more than €1.5 bn or so… Except that we did NOT buy any ordinary shares…we bought Preference shares…and they pay us an enormous 8% interest rate–more than 5 times higher than the interest rate we will be paying the banks on their loan of NAMA property to us…and–In Addition !!–we received the rights (“warrants”) to buy up to 25% of the ordinary shares for an additional tiny sum…less than a euro per share. (That would be enough to enable us to control the bank if we wanted to..)…Extraordinary that no panel member could explain that to Vincent…Perhaps they dont want to let on that we, the taxpayers, are already doing very well out of the two main banks. (We’ve also used them to help fund our nationalised bank, Anglo Irish)

Of course, the more the experts talk down the shares of the banks, the more likely it is that the banks will have to seek capital from the government. Where some other eurozone banks–with similar impairment problems and state subsidies as our banks- are still being valued at 15 times their core earnings or more , the Irish main banks are valued on the market at less than one years core earnings (in AIB’s case anyway–I dont have BOI figures to hand). If the bank needs an extra billion of equity capital then, it is expected to hand over 50% of its shares, whereas it’s eurozone peer bank in the same situation would only have to hand over 6%…So I suppose if some foreign bank comes in and offers two billion for 51%, we would be expected to be extra grateful and hurry to hand over control over tens of billions of euros of Irish depositors money to a foreign bank, and most likely one more in need of deposits than our own banks!!…That’s equivalent to ceding our national economic sovereignty…economic suicide by Irish eejits!

Vincent–do the due diligence…and understand why the existing Irish shareholders of AIB and BOI would be very very glad indeed to take up a rights issue on exactly the same terms as the deal the State negotiated for itself from these two banks, who were brought to their knees by a crisis effecting a third bank. The banks are at the bottom now. NAMA will give them some clarity as to future loss provision requirements. The international economy is improving. And new rules for accounting for future expected loosses will mean a big boost to Irish banks profits over the next few years. Buy the shares, Vincent…or stop complaining about others who do !

Are Messrs. Honohan and Lenihan on the same wavelength?

Last night I heard on “The Week in Politics”, on RTE tv, the affable and articulate new Governor of our Central Bank, Dr. Patrick Honohan, predict that the Irish banking sector will come into foreign ownership, when the government eventually sells its shares..

He has been predicting a rosy future for the banks, on the basis that they will be well capitalised, by state capital injections, and then will be sold on to some foreigners. In his view, expressed as a very confident assurance to the interviewer, the existing Irish shareholders will be left with very little. Of course they are already left with very little, and the Governor’s comments- as he seems to have “insider” knowledge – will not help to raise the share prices.

It could be quite likely, indeed, that some foreign banks- especially those seeking to repay the enormous subsidies they are already receiving from their own governments – will want to purchase access to the tens of billions of Irish depositors’ cash residing on the books of AIB and BOI. Whether this is in the national interest or not is another question. One should not forget a recent lesson of this world wide financial crisis that when push comes to shove governments will tell their banks to do their lending at home and not abroad. In part this explains why some foreign banks are reducing their Irish loan books.

I had assumed that a fundamental objective in the government’s approach to the banking problem in the last year or so is to rebuild the banking industry as Irish, not foreign institutions, in spite of some predatory designs from abroad. (Although, of course, one cannot admit such a policy objective in the EU context). One would think that the Governor of the CB would be of the same mind set. But No, he seems to find the prospect of future foreign ownershipa rosy one. (But, Governor…if you guys have no control over our currency, or monetary policy, and then the banks are to be directed from abroad…what do we do with our Central Bank?…give it to NAMA?)

The easier way to ensure a foreign takeover is to keep dumping on the shares. Skip the (virtually impossible ) task of nationalising the banks and trying to then fund their requirements for years. The delays in NAMA and recent statements by the Governor as well as continuous mocking by media commentators all provide downward pressure on the share prices and will soon lead to loss of ownership of our banking industry. I doubt very much that Mr. Lenihan would want that on his record.

Slan Abhaile, in Carmen de Arecho

Dreaming of Longford?   (Click to enlarge)

Dreaming of Longford? (Click to enlarge)

I like the photo, taken perhaps 30 years ago, probably near Carmen de Arecho, one fifty kilometers or so from Buenos Aires. A lot of Irish settled around here in the 19th century, and elsewere in B.A. province, and some also further into the native lands of Argentina.

They came mostly from Longford-Westmeath and some from Wexford. Some stayed in the capital, some even working as professionals, but many went West, starting as shepards on large Spanish owned estancias, and often under a system which gave them half the proceeds of the sale of wool or animals at seasons end. An extremely lonely life for some years (- unless the famous Fr. Fahy managed to find him a wife-), later was rewarded with land ownership. As a result, Senor Duggan told me, by the 1930s you could not venture out of Buenos Aires over land in any direction without crossing Irish owned land for the first thirty miles.

The Irish grew- many still grow- the beef of Argentina, and the English built the railroads to ship it…but back home in Longford we won’t let it into our country. Welcome, diaspora?

What was Pat Honohan saying, or trying to do to the banks?

It wouldn’t surprise me if Central Bank governor Pat Honohan was mis-quoted by both RTE and the Irish Times (Dec. 8, Simon Carswell), but, if not, he should issue a statement clarifying what he really intended to say at a recent Enterprise Ireland conference in Dublin.

 Dr. Patrick Honohan

Dr. Patrick Honohan

He forecasted a “rosy future for the banks” in Ireland, and “in due course there will be private capital scrambling into Irish banks they will be so strong”.. The banks ” will have adequate capital to convince the market that they are going ahead on their own steam, without having to rely on anyone else”

But then he also said that there (definately !!, it seems) would be capital injections into the banks next year, following NAMA, but, in spite of being a knowledgeable insider on this matter, he was unable to say whether this would include State capital or not. He then spoke about the banks maybe being forced to set aside a “further €30 billion” to absorb losses on their loans, and is quoted as stating “If Irish banks had 20 per cent of their assets more in capital (sic !!) – in other words, lets say, if they had €30 billion more in captial – it would have been enough”

What are you talking about Dr. Honohan? What do you want to say?..Do the banks face a rosy future without need for outside help, or do they need €30 bn. more in capital, that is about three times recent estimates?

No wonder the share prices dived after this. Good news for would be foreign predators..

Pols switch our anger onto the banks

I posted the following comment in answer to another commentator, to the interesting discussion board,, today. My fundamental feeling is that the shareholders of the two main banks are being unfairly villified by Irish media these days, and have been neatly passed responsibility for the States own mismanagement of our finances, which represent a far bigger problem for us all than the banks recapitalisation needs.

    Passing the buck

Passing the buck

(At most the banks need a one-off €10 billion in new capital, and they’ll find most or all of that from own resources or private investors: Compare that to the State’s need for €25 billion annually, for many years to come !). But in the public mind, the bankers are the cause of all our misfortune, thanks to very effective re-direction of our anger by the politicians and many media commentators who can’t think straight. My post today: Read the rest »

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Video: About NAMA(2009)