Goodbody stands by bad bank discount prediction

THE Government is likely to acquire the bad debts from the country’s two main banks, via the National Asset Management Agency (NAMA), at a considerable discount.

In a detailed report into the prospects for Ireland’s banking system, Goodbody Stockbrokers said yesterday that it is standing by its original forecast of a near 20% discount for AIB’s debts and a “haircut” of just under 17% for Bank of Ireland.

Approximately 45% of the two banks’ so-called bad loans are linked to the property and construction sector – the remainder spread across consumer loans, loans to small and medium-sized enterprises (SMEs) and residential mortgages.

While it is unlikely that mortgage loans will be taken over by NAMA, at least 20% of AIB’s total loan book will qualify for the state’s proposed new “bad bank” project which comes before the Dáil on September 16.

Goodbody banking analyst Eamonn Hughes said yesterday that NAMA remained “the most appropriate solution” to the Irish banking sector’s current woes, something which has been echoed by the likes of the EU and the International Monetary Fund (IMF) in recent times. He downplayed talk of any further partial or full nationalisation of the banks – a subject which arose again, earlier this week, from An Bord Snip Nua author, economist Colm McCarthy.

“Improving the banks’ liquidity levels is the main issue and NAMA provides that solution. Nationalisation wouldn’t have done that per se. Nationalisation should be the last entry point and that has been the thinking behind the process which has been under way for the last few months,” Mr Hughes said.

“The bad bank model has been used successfully before and has a relatively straightforward and transparent structure, in that it takes problem loans off bank balance sheets, which means they have certainty over those losses and should be more willing to lend, and will aid bank liquidity.

“While the main risk is that the amount paid for the loans is more than that ultimately recovered; it is an important first step in restoring a better flow of credit to the economy – which should limit the extent of the downturn.”