Banks face bigger hit on loans

BANK of Ireland and Allied Irish banks could face heavier discounts on their bad loans than previously forecast, it has emerged.

AIB, which has the biggest exposure to bad debts in land and property, may be hit by a discount of 25%, not the 20% previously suggested, on the transfer of its loans.

The likelihood of the bank facing a bigger hit on its loans follows intense political pressure from the Green Party and others who demanded the taxpayer be given greater protection with regard to the €90 billion loan book to be transferred to the state-run National Asset Management Agency in the coming months.

Bank of Ireland faces a 20% “haircut” on its asset values, up from 16%, according to financial analysts Davy Research.

As the state moves to limit the risk to the taxpayer a larger discount is looking more likely, it warned.

“Intense political pressure on a government with a slim majority has already prompted some changes in the draft bill in order to ensure its smooth passage through parliament

“The proposal that banks will share a portion of the risk suggests some incremental pain for the banks,” it added.

In the meantime, Finance Minister Brian Lenihan warned the banks who find themselves in the eye of this financial storm faced a “deep discount” on loans to ensure the pricing structure reflected the huge loss in property values.

NAMA, which is opposed by Labour and Fine Gael, could buy as much as €90bn in loans from the Irish banks, which look set to lose more on the transfer than previously thought.

It has also emerged the Government may also suspend some payments to banks if the agency suffers a loss in order to protect the taxpayer, Mr Lenihan said.

Commenting on the latest development chartered surveyor Conor O’Brien, who has experience of property crashes elsewhere, including Japan, said NAMA should help reduce the risk of long-term negative equity for many householders, especially those who have bought in the last 10 years.

If the new bank controls the release of properties and land coming on to the market over the next 10 years the country will avoid “a total meltdown” of the property market, he said.