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Banking big bang: what will it cost?
07 March 2010 By Cliff Taylor
So what exactly will this banking mess cost us taxpayers? Of course we won’t know the full answer for ten years or more.
Then, the National Asset Management Agency (Nama) will be wound up and we will finally calculate how much we got back from the loans which, according to the draft business plan, will cost us €54 billion.
This will be paid to the banks in bonds, so it is not cash upfront, but it is still an IOU from the taxpayer. It is still our cash.
While the balance between what we are paying for the bank loans and what they are actually worth will take years to crystallise, amore immediate bill looms on the horizon - the cost of recapitalising the banks.
We don’t yet know how much this will cost. This is because we have still to discover the extent of the writedowns on the loans transferred to Nama. We still don’t know how much capital the banks will be obliged to hold by the Central Bank. It is expected to aim for a Tier One ratio of around 8 per cent - in other words, for every €100 lent, the banks must hold €8 in capital in their reserves.
Crucially, a significant chunk of this will have to be in ordinary equity capital - cash from shareholders. This is one element of Tier One capital, which also includes other items such as investments from some classes of debt holders. Holding a high level of equity capital is seen as vital, as this is cash fully available to meet any losses.
At an Oireachtas joint committee hearing last week, Central Bank governor Patrick Honohan suggested that a ‘‘big bang’’ approach would be taken, forcing the banks to recognise their losses, not only on Nama loans, but also on non-Nama loans - and estimating what capital they would then need. Honohan indicated that, rather than dripping in extra capital as bad loans are gradually realised, stability must be restored more quickly by a ‘once and for all’ process, albeit one that will take some time to work through.
On the face of it, this would increase the chances of more state cash being needed this year, if the banks are forced to recapitalise quickly and take on new equity.
However, some questions remain, principally how quickly the Central Bank will oblige the banks to reach these new capital standards.
If the banks have to reach the 8 per cent bar by, say, the end of this year, then they will inevitably need a bag of state cash. If they are given more time - and analysts believe they may have to get to 6 per cent in the short term - then the immediate need for capital is less.
They might then have a bit more time to raise some of the money by booking profits on their normal operations, selling assets and reorganising their balance sheets.
Either way, it appears new equity capital will be needed soon and the state is the most likely provider.
Only when they are seen to recognise their loans and be properly capitalised will banks be able to access cash on the international markets to fund their operations, without the benefit of the state guarantee.
And then, on the top of the cost of recapitalising the two main banks,. the exchequer also falls the cost of filling the holes in Anglo and Irish Nationwide, with money that will come directly from exchequer funds.
With these uncertainties in mind, below is a snapshot of the position the main banks are in.
AIB
Status: has just announced its results, with write-offs of €5.4 billion pushing it to a €2.6 billion loss.
Capital needed: analysts estimate it may need €4.4 billion.
Options: new managing director Colm Doherty is talking up the option of raising capital by selling assets – such as its US, Polish and British operations – and says it has had expressions of interests from strategic investors interesting in taking a stake in the bank itself. Much will depend on the regulator’s rules on how quickly it must recapitalise. AIB still looks likely to need substantial state cash for recapitalisation.
The state could convert some or all of the €3.5 billion it invested in preference shares into ordinary equity, essentially an accounting transaction which would give the taxpayer a significant direct shareholding. Additional cash could come from the National Pension Reserve Fund, which was valued at over €22 billion at the end of last year.
Bank of Ireland
Status: will announce its results for the nine months ending December 31, 2009, some time later this month. Like AIB, it is facing big writeoffs.
Capital needed: somewhere in the €2.5 billion to €3 billion region, analysts believe.
Options: needs a bit less capital than AIB, though probably has fewer options in terms of asset disposals. Has been getting on with reorganising its balance sheet. Like AIB, a key problem is its share price.
Despite some gains last week, this still stands at a very anaemic looking €1.20.
This means that trying to raise extra cash in the markets would hugely dilute existing shareholders. And if the state ends up providing much of the capital, it could quickly take its stake over 50 per cent. As with AIB, the state has the option of converting its preference shares and/or putting in cash from the National Pension Reserve Fund.
Anglo Irish Bank
Status: shortly to announce shocking results. Will transfer over €30 billion in loans to Nama and write off between €10 billion and €12 billion.
Capital needed: scope for debate here, as there are various options being discussed about the bank’s future and whether, for example, it could split itself into a good and bad bank, and what this would mean for its need for capital. From what we know so far, it is likely to need at least €6 billion more from the exchequer, in addition to the €3.8 billion already paid over.
Options: it is still uncertain when this money will have to be paid, as the government will examine ways of stretching the liability over a period of years. Ministers argue that just shutting down the bank would also create problems, as funds would be pulled out and the exchequer could face a large demand for immediate funds.
A big problem is that, because putting money into Anglo could not be considered a commercial investment, the money can’t come from the National Pension Reserve Fund. It will have to come straight from already stretched exchequer funds.
Irish Nationwide
Status: we don’t know its 2009 results. Is also facing big write-downs. Currently in merger talks with EBS.
Capital needed: up to €2 billion has been indicated.
Options: as with the Anglo cash, it does not appear that money for Irish Nationwide could come from the pension reserve fund. This is why these two banks are such a headache for the government. The terms of the EBS merger will dictate capital needs.
Irish Life & Permanent
Status: a profitable life operation attached to an unprofitable bank. Capital needed: has indicated it may seek to raise €600 million for its banking arm when its future becomes clear.
Options: IL&P wants its banking operation spun off into the merged EBS/Irish Nationwide, or into some other combination to create a ‘third force’. The government is likely to seek some ‘bounty’ from Irish Life profits to agree to this, as would any other bank to take on its loan book.
EBS
Status: in merger talks with Irish Nationwide.
Capital needed: around €300 million after Nama transfers, it believes.
Options: the government will push the merger with Irish Nationwide.
Whether any foreign bank or investor would then take a stake remains to be seen, but there could also be a call for state cash.
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