Brian O'Doherty's Blog  

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

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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)

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
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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.

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!).

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 !

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.

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?

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.

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..

I posted the following comment in answer to another commentator, to the interesting discussion board, AskAboutMoney.com, 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.

(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 »

I have heard Frank Fahy this morning referring to the NAMA “borrowing” as something that should not be included in the National Debt. This is the first time I have heard government spokespersons acknowledge that NAMA is a scheme in which the government “borrows” assets from the banks. Indeed,all of the media “Business reporters”, as well as dozens of acadedmic economists and finance professors have commented for months on NAMA without acknowledging this fundamental reality. Some well promoted commentator-superstars, such as David McWilliams, even go so far as to suggest that Ireland will have to borrow €54 bn in order to “bail out” (i.e. give to) the banks. “Highway robbery” David calls it; “Immoral and unfair” according to Brian Lucey. Others row in behind. European Central Bank short term loan facilities for Euro-zone banks are referred to as “NAMA money” which its not. The public is totally bewildered. Hysteria-prone journalists such as Vincent Browne become apoplexic.

The reality is that it is the government which borrows from the banks: the flow of cash, or near-cash, is from banks to the government, receiving on behalf of the taxpayer. The government is Not borrowing from the ECB, nor is it guaranteeing the banks’ later borrowings from ECB, if any..Efforts to obsfucate that fact, by calling the transaction a state “purchase” of banks’ assets, and by insisting on the red herring of “risk sharing”, and by refusing to explain why the state must pay 1.5% interest to the banks (- a rip off in itself-), or threatenting nationalisation as the option – a disaster for the state as surely Gilmore-Bruton-Burton- Gang of 46 must realise by now- these are all disinformation tactics which have managed to fool nearly all our professional economists, but which have now been exposed by our EU masters. Indeed the government has deliberately given the impression that it negotiated ECB facilities for our banks, as part of the NAMA process…whereas in fact these facilities have been in place for all euro zone banks for over a year and have nothing necessarily to do with the Irish scheme. (In fact, outrageously, the government is trying to grab that ECB bank liquidity scheme for itself…at least by proposing to pay the banks only 1.5% whereas, in reality, our government should be paying nearer 5%). Read the rest »

Filippa Giordano….

Have you ever wondered who are these evil shareholders of the Irish  banks, whose selfish and greedy speculation in the financial market has so badly injured the national interest and brought us to the edge of economic ruin?

Well, the two main banks with the most “toxic” of assets are Anglo Irish- whose shareholder is now the State, and formerly a relatively small number of “golden circle”, politically-connected types- and Irish Nationwide, whose “shareholders” are actually “members”, who contributed their savings in order to build up a little down payment towards an eventual mortgage.  The vast bulk of those who bought shares in Irish banks on the stock exchanges – and whose property is being taken in NAMA-  are shareholders in Allied Irish Banks (AIB) or Bank of Ireland (BOI).  From the annual reports of those banks we have some idea of who they are or what they look like:

At December 31, 2008, AIB had c. 90,000 shareholders, of whom 95% had less than 10,000 shares each (55% less than 5000 shares). These are classified as “retail” investors and they traditionally accounted for ownership of c. 35% of the bank’s total equity capital, the balance being held by a few- c. 350- “institutional” investors.  Eighty four (84%) percent of the retail investors were residents of the Republic of Ireland.  Since the crisis in the last year, it seems that big, mostly foreign, institutional investors dumped the shares but most Irish retail investors held on, losing up to 95% of the value of their investments. (Recently, the shares have regained about 15% of their maximum value). As a result, retail, private, Irish-based investors are now estimated to own about 65% or more of AIB. Read the rest »