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Posts tagged ‘Tier 1 capital’

Reggie Middleton on the button again

For Those Who Failed To Heed My Warnings On Portugal, Visualize The Contagion That Causes European Bank Failure!!!

For anybody who didn’t catch the hint, another banking crisis the continuation of the banking crisis is inevitable. I’ve said it before, Is Another Banking Crisis Inevitable? This is the current landscape, undoubtedly fudged over by optimistic marks.

Banks NPAs to total loans
Source: IMF, Boombust research and analytics

Euro banks remain weak as compared to their US counterparts

Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.

I really do mean substantial!

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

We have also presented an alternative scenario since we believe that EU stress test had failed not only to include banks HTM books but also the loss estimates were highly optimistic, as has much of the economic and financial forecasting that has come from the EU. It is highly recommended that readers review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for a detailed view of a long pattern of unrealistically optimistic forecasting. Here’s and example…


Now, enter the sovereign entity of default to be known as Portugal!

Portugal has just illustrated the worst of the potential path to contagion – runaway free market rates. Thier latest debt auction results reveal… The yields on their 6 Month bill literally spiked from 2.984% three weeks ago to 5.117%. People, that is nearly double their funding cost from just THREE WEEKS ago. This is the definition of unsustainable. The 12 Month jumped from 4.311% to 5.902%.

Putting this into perspective, Portugal will pay 20.2 basis points more to issue 1 year debt in its own name than it would pay to borrow 5 year debt from the EFSF (European bail out credit facility). You don’t need me to tell you that this is a bailout or default waiting to happen – and very, very soon.  Here’s the post where I laid it out on the line: Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Remember, I included a full

Attention subscribers: A new subscription document is ready for download The Inevitability of Another Bank Crisis

Portugal bond haircut analysis for all to peruse. This is the time that it’s most useful, and if anything it is on the optimistic side.  There’s actually a chance a credit event may occur by the time I give my Gloom and Doom speech in Amsterdam (www.seminar.ingref.com). Many people have asked me if there is chance CRE will pull through since many pockets are showing improvements. It’s as simple as your belief in whether CRE can thrive in a stagflationary environ with sharply spiking interest rates amid shaky and collapsing banks. I’ve made my viewpoints clear:

Greece and Ireland are in very similar boats, despite being post bailout. And as all know, I have warned thoroughly about both of these nations through ample analysis. Instead of going through each and every one of my posts that fill the bill, look at the early work (with subscription material) or my latest European opinion and analysis. Of course, by now I’m not the only one to sound the alarm that an interest rate storm is about to erupt and it will travel the world.

From CNBC: Euro Zone Considers Greek Restructuring: Report

Some euro zone governments are concerned highly indebted Greece will not be able to refinance itself and may have to restructure its debt, the Financial Times Deutschland reported on Wednesday. The newspaper said representatives of several euro zone governments told the paper that a restructuring could no longer be ruled out. …”An extention and top-up of the aid package would not be politically possible. Then, consequences would have to be drawn,” the paper quoted a source in the finance ministry of a large euro zone country as saying.

It also quoted an advisor to the leader of an EU state as saying: “We must have a plan B ready” for the possibility Greece requires more financial assistance. Greek and European officials have long insisted that Greece can recover without restructuring its debt, and that even discussing a restructuring now would be counter-productive by damaging banks across Europe and causing panic in markets. On Saturday, the International Monetary Fund denied a report in German magazine Der Spiegel that it was privately pressing Greece to restructure its debt.

From JP Morgan, via the FT.com:

Irish banks have recently issued €18bn of notes backed by government guarantees with the aim of replacing expensive ELA funding from the Irish Central Bank (at the ECB’s marginal lending facility of 1.75% plus a penalty) with ECB funding at 1%. This replacement is likely to be reflected in the end- February financial statement of the Irish central bank. As of the end of January, Irish banks borrowed €126bn from the ECB (down €6bn from December) and €51bn from the national central bank’s ELA (unchanged from December).

The issuance of state guaranteed notes not only allows Irish banks to unwind their ELA dependence and reduces the cost of borrowing from central banks, but it also protects them against rating downgrades. Rating downgrades of non-guaranteed bonds raises the haircut applied by the ECB or in extreme cases can make these non-guaranteed bonds ineligible with the ECB.

This has been a problem for Greek banks, which, at the end of last year rushed to issue €25bn of government guaranteed bonds to meet new, more punitive collateral requirements by the ECB. The Greek government has just extended state-guarantees to Greek banks by another €30bn, on top of €55bn of outstanding state-guaranteed bank bonds. It appears that one Greek bank has already made use of the new €30bn liquidity package, issuing €1bn of government- guaranteed paper this week.

To the extent that this extra €30bn is being used by Greek banks, it will mean that from the €140-150bn of collateral that Greek banks have posted with the ECB so far, almost all of it will be government-related collateral (€85bn of stateguaranteed bank paper, €45bn of Greek government bonds owned by Greek banks and €8bn of zero-coupon bonds which the Greek government had lent to Greek banks in 2008). The huge exposure to government-related collateral puts the ECB at a huge disadvantage in the event of government restructurings/defaults.

If you remember, I warned of this months ago! This literally getting uglier by the second. Reference:

Full post at source:http://boombustblog.com/discussion/2011/04/06/for-those-who-failed-to-heed-my-warnings-on-portugal-visualize-the-contagion-that-causes-european-bank-failure/


Anyone remotely interested in the coming market shake out cannot afford to be without this man’s insight .His analyzes is the best I have come across and you can be sure it’s independent and to the point .Reggie’s forensic analyzes puts him streets ahead every time .Well done Reggie.

State has injected a further €525m into EBS

The Irish Times


The Government has injected a further €525 million into EBS Building Society, it was confirmed today.

The new funding comes through special investment shares issued to Minister for Finance Brian Lenihan. The shares give Mr Lenihan control of the building society, including the composition of theboard and passing of members’ resolutions.

The latest funding means EBS will meet the core tier 1 capital ratio of 8 per cent by December 31st.

The institution was told by the Central Bank in March to raise €875 million by the end of December. However, in November it told the building society it needed to increase its capital ratio to 13.5 per cent by the end of the year, meaning it needs to find an additional €438 million. The Central Bank today said it has since extended that deadline to the end of February.

Other lenders had been given until at least the end of February to achieve new targets, set on November 28th.

EBS, which the government is currently looking to sell, has already received €100 million in funding from the State in the form of a promissory note, and a €250 million injection through the issuance of special investment shares.

Irish Life & Permanent and Dublin-based private equity group Cardinal Asset Management are currently bidding to buy EBS. FInal bids are expected to be in next week.

New legislation coming before the Dáil today will give the Minister for Finance new powers that would allow the Government to inject further funds required if the EBS is not sold.

source http://www.irishtimes.com/newspaper/breaking/2010/1215/breaking8.html

The Irish Times (above) reports this morning that the State has injected a further €525m into EBS. This is in addition to the €100m in cash injected in the building society in May 2010 and the €250m injected via a promissory note in June 2010 (Ciara O’Brien gets the two mixed up in her Irish Times article).
What this means is that the €875m that was flagged as the additional capital requirement in the Financial Regulator’s PCAR in March 2010 has now 100% been provided by the State whereas previously there had been a suggestion that a third party, perhaps one of the two remaining bidders for EBS (Irish Life and Permanent and the Cardinal Consortium) might stump up some of the requirement. The €875m was provided as follows (a) €100m in cash in May 2010 (b) €250m in promissory notes in June 2010 and (c) €525m in cash in December 2010. The PLAR published by the Financial Regulator on 28th November, 2010 signalled that EBS would need raise a further €438m by 28th February 2011 (that’s on top of the €875m) and the betting would be that the State will need pony up that also. And where did the €525m just now injected in EBS come from? That would seem to be from either the NTMA cash balance (the “fully funded until the middle of next year” money) or from the NPRF (whose €17bn unencumbered funds might have been made available for running the State but instead are being shoveled into the banks).
The €875m that has been shoveled into EBS so far (and the additional €438m that will be burned there by the end of February 2011 – shoveling and burning imply some sort of constructive locomotion but alas it’s merely loco as the money is unlikely to be even partially recovered) are as nothing though compared with Allied Irish Banks (AIB) which will require a further c€3.7bn in the next two weeks to meet the PCAR (Sept 2010 version) and will need an additional c€2.5bn by the end of February 2011 to bring the overall State investment in AIB to €12.745bn approx (€3.78bn already invested in preference shares and share acquisition costs, €3.7bn in the next two weeks and €5.265bn by the end of February 2011 and that’s on top of €3.4bn generated by AIB through disposing of its Polish Bank Zachodni and US M&T stakes). The €3.7bn in the next two weeks is also likely to come from the NTMA strategic reserve or the NPRF.
I think it is noteworthy that EBS has been provided with its 31st December 2010 PCAR requirement two weeks early whereas AIB which is in the wars with its bonus controversy will seemingly wait until the fuss has died down before it is gifted its €3.7bn.
Bank of Ireland appears to be okay for the next two weeks though my strong view is that NAMA’s absorption of the sub €20m exposures will create a further, thus-far undeclared, hole in BoI’s capital. NAMA, BoI, the Financial Regulator and the Department of Finance seem to be working on the basis that the remaining tranche for BoI would attract a 42% (40% in one ministerial statement) haircut. Confidential messages received here indicate that there will be some horror stories that will be uncovered by NAMA and that there is no genuine reason for BoI’s smaller exposures to have a lesser haircut than AIB’s (which according to the September 2010 estimates, the latest available, is to be 60%).
Irish Life also appears okay for the time being and has exceptionally been given until May 2010 to find €243m of capital and the betting is that it can do this without recourse to the State.
And that leaves the two lead-zombies in our financial landscape – Anglo and Irish Nationwide Building Society (INBS). The bailout cost for INBS went from €2.7bn in April 2010 to €3.2bn in August 2010 to €5.4bn in September 2010. The €5.4bn is on the basis that NAMA applies a 70% discount to INBS’s last tranche and that there are no additional unprovisioned losses on the remaining €2.6bn of non-NAMA loans (the last recorded provision on these was €0.2bn). You would hope that at this stage there is limited further downside with INBS but (a) their non-NAMA loan provisions look low and (b) as with the other banks there is concern over undiscovered losses with derivatives.
And so to the chief-zombie, Anglo. My understanding is that NAMA has transferred practically all of Anglo’s NAMA loans though NAMA has not issued a statement on the matter (it found the time to issue a lengthy reply to the CIF-comissioned hatchet job on the agency but not the time to report on a transfer that was flagged as urgent at the end of September 2010). Paddy McKillen’s estimated €900m of lending is still with Anglo pending the outcome of the appeal which is starts today in Dublin’s Supreme Court, but my understanding is practically everything else has been absorbed. So is NAMA able to confirm the final (estimated, pending full due diligence by the end of March 2011) discount? Is it 67% (I understand it is) or as high as the worst case scenario of 70%? And how is Anglo getting on with its €38bn of non-NAMA loans? Has the outlook improved on these (mostly commercial property non-land and development, half located in Ireland and one third in the UK and remainder in the US) loans?
And remember that Anglo and INBS have thus far been mostly funded with promissory notes (IOUs signed by the Minister for Finance and deemed good enough for Core Tier 1 capital by our Financial Regulator). These IOUs need to be converted to real money and a long-held concern on here was that there would be frontloading of the conversion to cash, not a convenient 1/10th per annum for the next 10 years. So what will the shoveling profile be for the promissory notes?
The great concern with the present shoveling is that it is depleting real money from the NTMA (the “fully funded to the middle of next year” reserve) and the NPRF. And should the actual cost of rescuing the banks increase and we need an additional bailout, we may find that we have sacrificed our strategic reserves and will be left effectively seeking funding from a “beggars can’t be choosers” position or a messy default.

source https://mail.google.com/mail/?hl=en&shva=1#inbox/12cea0c727190daf

Changing Anglo Irish Banks Name

Anglo Irish Bank Corporation (Anglo) is to change its name within weeks, pass its deposit book which was worth €33bn in June 2010 (or indeed sell? why not, after all if Anglo is paying depositors from 1.5% and given the cost and difficulties in accessing money market funding, the deposits might have some value) and will rebrand its €38bn residual loan book under a different name which according to Anglo Chairman, Alan Dukes speaking on RTE radio this morning, will be run down over a period of years.

It seems from Irish Times reporting that Anglo’s loanbook will “conceivably” be combined with INBS’s loanbook and that there is to be a v4.0 restructuring plan (v1.0 in November 2009 was rejected out of hand by the EC, v2.0 in May 2010 was rejected in early September 2010 despite Brian Lenihan making personal entreaties to Competition Commissioner Joaquin Almunia in Brussels and v3.0 was reportedly submitted to the EC “the last week of October 2010” – let’s hope v4.0 is a charmer!).

The media seemed obsessed yesterday with the change of name as if taking a sledgehammer to the signs on the bank building will obliterate the toxicity of the loans and derivatives that will remain in the rebranded bank (€38bn alone from Anglo).
Despite the flurry of activity with Anglo in the last couple of days, that bank did not feature in the awkwardly-worded release from the Central Bank on Sunday night which accompanied the announcement of the bailout. The press release dealt with Allied Irish Banks (AIB), Bank of Ireland (BoI), EBS and Irish Life and Permanent (ILP – parent to Permanent TSB) and announced a further €10bn injection into these four financial institutions – €8bn in capital injections and a further €2bn in “early measures to support deleveraging” – a total of €10bn. The wider bailout announcement made clear that another €25bn would be available as a contingency.
Of the €8bn in capital injections, €5.265bn is to go to AIB, €2.199bn to BoI, €0.438bn to EBS and €0.098bn to ILP which will lead to all four institutions having a Core Tier 1 capital cover of 12.5-14.0%. AIB, BoI and EBS have another three months to 28th February, 2011 and ILP has six months to 31st May, 2011, to put the additional capital in place. At this stage it is not clear to what extent the State will need make up to €8bn available and to what extent the capital can be raised privately through a rights issue or disposal of assets. There was no indication which banks would be the beneficiaries of the €2bn in “deleveraging support”
The announcement from the Central Bank was dreadful in that there was little information or rationale for the details in the announcement which also announced that AIB and BoI would now transfer €0-20bn land and development loan exposures to NAMA, a volteface on the decision announced on 30th September, 2010 to allow those two banks to keep €5-20m exposures because it was more “effective and efficient”. Why is AIB’s Core Tier 1 capital to go to 14%? How safe are credit unions in the State which are to be subjected to stricter rules in 2011 – “A significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011.” And in the interview with Governor of the Central Bank on RTE yesterday, of course no-one asked for a rationale though it seems that Patrick himself wasn’t in favour of the capital injections.

Bizarre and confused and doesn’t inspire confidence.
And speaking of inspiring confidence, it seems that after the Prudential Capital Assessment Review announced in March 2010 and updated in September 2010, there is to be another PCAR undertaken by 31st March 2011 and this time there will be a review of loan provisions by (a) the Central Bank and (b) an “independent third party”– you’d have to ask if that is to be the same unidentified “independent consultants” which informed the predicted loss levels on 30th September, 2010. It was disappointing in the extreme to hear the Financial Regulator, Matthew Elderfield, last week outline future examination of non-NAMA loans at the banks at a “granular level” – why the blazes has this not happened already? NAMA uncovered atrocious lending practices and documentation on a loan-by-loan basis, why has this regime of independently verifying non-NAMA loans not already taken place?

The Irish Times today reports that an “independent assessment of the new financial regulator will also take place to ensure that international best practice is being followed”.
The immediate reaction of the stock market to the announcement on Sunday night was very positive – shares in the three State-guaranteed banks not in 100% State-ownership recorded major gains yesterday with Allied Irish Banks up €0.02 (6%) to €0.362, Bank of Ireland up €0.05 (17%) to €0.31 and Irish Life and Permanent up €0.30 (58%) at €0.81. The markets seem to have formed the view that ILP will be able to raise its own capital by May 2011 without recourse to the State which might have brought that institution into majority State control.
So where does the announcement on Sunday leave the six State-guaranteed banks?
(1) AIB – still 18.6% State-owned today and likely to be 100% nationalised
(2) BoI – still 36.5% State-owned today and if the €2.199bn is to come from the State, the State will own over 70% of BoI. If the €214m preference share dividend due by BoI to the NPRF in February 2011 is paid in ordinary shares then the State share will increase to nearly 80%
(3) EBS – presently 100% owned by the State but offered for sale with two final bidders (a) ILP and (b) Cardinal Consortium with rumblings that ILP may have to drop out
(4) INBS – 100% state owned, deposits likely to move to new bank in association with Anglo, loans to be run down over time
(5) Anglo – 100% state owned, deposits likely to move to new bank in association with INBS, loans to be run down over time.

source http://namawinelake.wordpress.com/

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