Banks will keep €6bn loans bound for NAMA

CHANGES announced to the way the National Asset Management Agency (NAMA) operates mean AIB and Bank of Ireland will now hold on to €6.6 billion in loans they were due to transfer to the agency’s control.

Under the original regulations agreed last February, all loans with a value of more than €5 million issued by the banks were to go to NAMA – an estimated total of €80 billion worth of loans involving 1,500 borrowers.

However, that process has proved more complex than expected and is taking longer than hoped, and NAMA is running out of time as it is working under a European Commission deadline for completion of the transfers by the end of the year ideally and definitely by next February.

NAMA began the takeovers on a phased basis, beginning with tranches of the biggest borrowers/debtors, just 100 of whom were responsible for about €40 billion worth of loans – that’s 7% of borrowers with 50% of the total loans.

By raising the value of the loans to be transferred from AIB and Bank of Ireland from €5m to €20m, NAMA has instantly been relieved of responsibility for 650 borrowers/debtors and the €6.6bn in loans they represent, leaving it with 850 debtors and €73.4bn in loans to worry about.

The Department of Finance said the decision was taken for practical reasons and because it was felt AIB and Bank of Ireland had the staff and skills in place to deal with these loans.

“It’s an efficiency saving. It reduces the burden of outstanding loans to be transferred to NAMA,” a spokeswoman said.

Dermot O’Leary, chief economist with Goodbody Stockbrokers, was a little more blunt in his assessment.

“NAMA is taking too long,” he said. “It has got to the stage where the markets have lost confidence in the whole process and it would be difficult to meet the end of February deadline for completion of transfers.”

The image of NAMA abroad, which is crucial for confidence in the economy’s ability to recover, would also not be helped by the likelihood that these relatively smaller loans will end up having to be discounted to an even greater degree than the big loans that involved the top 100 borrowers/debtors.

At the outset it was expected the loans transferred to NAMA would realise an average of about 53% of their original value once the bad debts were cleared out of them but in some tranches, the value has fallen to 42% with expectations that the next tranche of Anglo Irish Bank loans will only make 33%.

Some of the smaller loans are likely to be worth even less than that because they are secured on properties outside the main cities or on development land that will now never be developed, meaning a lot of work for NAMA with the prospect of very little return.

Given that some commentators fear some of the bigger loans already transferred have been overvalued, even taking into account the discounts, or “haircuts” as they have been termed, every effort is being made to protect NAMA from becoming a loss-making venture.

The principle of leaving loans with AIB and Bank of Ireland after all their reckless lending may raise eyebrows but the Department of Finance said it had full confidence in the two banks to pursue the debtors as vigorously as NAMA would have.

“There is no incentive for them not to pursue the debts,” the spokeswoman said.

“They have owned up to the problems that created this situation and it’s in their interest to redeem as much as possible.”

In his statement on the issue, Finance Minister Brian Lenihan said: “The Financial Regulator will ensure that the banks put in place prudent provisioning for these loans.”

The raised threshold does not apply to loans yet to be transferred from Anglo Irish Bank as Anglo is now accepted as a lost cause whereas AIB and Bank of Ireland are functioning, albeit limping, banks.

The other financial institutions involved with NAMA, the EBS and Irish Nationwide Building Societies, are also unaffected by the changes to how the bad bank operates.