It will be another day of bleak bank news — we had better get used to it

TODAY was supposed to be the day when we would get “finality” and “definitive” endgame figures about the extent of bank losses and size of ultimate cheque tax payers would have to write to bail them out. Dream on.

Today is Groundhog Day — merely another staging post in the drip feed of partial information. A deliberate decision has been taken to avoid announcement of total losses. This third round of stress testing will not be the last. This is because €85bn of non-core assets are not going to be sold off in the foreseeable future.

Multiple media leaks since the weekend of the announced recapitalisation suggest between €18bn and €23bn is required. This compares with the €10bn of our own money through the National Pension Reserve Fund that was agreed to be injected by Brian Lenihan before the end of February. This was to meet new 12% capital adequacy ratio requirements. The IMF/EU bailout also provided a contingency fund of buffer capital of €25bn, intended to provide extra recapitalisation arising out of shrinking of bad loans off the banks’ balance sheets. Stall the ball.

Our bankers, Central Bank, civil servants and politicians have convinced the world not to proceed with this deleveraging. They successfully argued this would result in a fire sale of assets, thereby maximising losses. The NAMA route of imposing haircuts and establishing losses will no longer be pursued. This crystallised the cost of bad debts. The resultant cash call of recapitalisation cannot be borne anymore. So what is to be done with property loan losses? The new Government has apparently bought into the latest wheeze by bankers to avoid reality. The new buzz word is “warehousing”. This is created by a Special Purposes Vehicle — to be called Paddy Mac. Janey Mac would be much more appropriate. The design is to keep these assets and loans in a state of suspended animation for a decade. Just who will underwrite this pretence is not apparent. Medium term (ie five to seven years) ECB funding of €60bn is set to replace hand-to-mouth existence of Exceptional Liquidity Assistance.

The overall complexity of our toxic banks can be simplified. In September 2008, when the manure hit the fan, the Government guarantee for our six indigenous financial institutions covered a combined loan book to the value of €400bn. Anglo Irish Bank accounted for €72bn of same. We were originally told the state’s liability for Anglo would be €4bn. The current acknowledged figure of €34bn is almost 50% of the loan book. Let’s assume Anglo’s losses were the most toxic of the entire sector. Instead of a 50% write off of loans, a reasonable average weighting might be 25%. Hey presto, Irish bank losses will probably finally be around €100bn (€400bn x 25%). To date, we’ve stumped up €46.3bn. Add in this afternoon’s announcement of up to €25bn and the running total of €70bn is still well short of the full story. NAMA was due to get a further tranche of €16bn from loan portfolios under €20m. FG and Labour halted this process. NAMA paid €30.2bn in exchange for loans of €71bn. This 60% discount has not produced results NAMA purported to achieve — to provide credit flows to the lending institutions and stabilise the property market. Instead, their overhang of property continues to paralyse establishment of a floor in prices. NAMA effected three statutory receiverships — involving former empires of Liam Carroll, Bernard McNamara and Paddy Kelly. NAMA’s 83 hotels epitomise the overall dilemma. At some point you have to foreclose and embark on asset recovery. It is this bullet that official Ireland won’t bite. The endgame for NAMA is property liquidation and acceptance of the losses. Official policy remains deferral and hope.

Attrition on the banks is not limited to loan losses. Their deposit base is eroding on an ongoing basis. Corporate treasury departments carefully monitor all the ministerial, bureaucratic and eurocratic pronouncements with a respectful silence. Customer deposits stood at €230bn in August 2008. By the end of September 2010 they had contracted to €203bn. At the end of last year, they had diminished to €169bn. Several billion more walked in the first quarter of 2011. The underlying trend reflects scepticism and disbelief, resulting in a flight of capital. They aren’t fooled by any tests that attempt to disguise underlying insolvency. No one publicly speaks this evil.

What will latest stress tests mean for individual institutions? Speculation surrounds injections of around €20bn as follows: €10bn for AIB, €5bn for BoI, €4bn for Anglo and €1bn each for EBS and Permanent TSB. As the state currently owns 36% of BoI, an extra €5bn seems to make majority state ownership inevitable, leading to potential nationalisation. Branch rationalisation and significant job cuts are unavoidable. A merger of AIB and BofI cannot be ruled out. Cardinal Captial Group looks like acquiring EBS. Patrick Honohan’s “for sale” sign hangs over each institution. Delay on key decisions continues to obscure visibility on a new banking landscape, while SMEs are starved of working capital.

What’s new today? Hidden component thus far of our banking minefield is the residential mortgage book. This comprises 790,000 mortgages at a book value of €117m. Previous assessments avoided quantifying potential deficits. Various scenarios of lowering house prices yield different figures.

WORST-CASE scenario of peak to trough impairments suggests negative equity problems for up to half of mortgagees. Latest Permanent TSB figures, relating to subsidising tracker mortgages, reflect acute pain. The differential between 5% cost of funds and 2% customer repayments is yielding operational losses of €400ml annually. Costs of incentivising householders to transfer to variables will be horrendous. 60% of mortgage books are these unprofitable trackers. Politically inspired moratoriums mean final impairments from mortgage books will be a slow burner. A 25% impairment rule of thumb looks predictable.

The endgame is a long, long way off. The latest remedy buys time to keep ATMs functioning. Upside of insolvency is that pain moves from debtor to creditor. The donkey has been beaten with a stick of debt compliance and cannot respond further. Responsibility, ultimate culpability and adjustment now shift to the pay master. The ECB are not so obtuse as to not realise their €120bn is at high risk of partial default. This represents their Fukushima. If they accept discounts on bonds now, contagion could spread throughout the eurozone. They have shifted position, with hints acknowledging that when the ESM replaces the EFSF, multilateral write offs can be contemplated.

Without debt restructuring, there can be no ultimate resolution. Today’s stress test results and concerted Government response won’t provide immediate prospects of attaining capital from the markets. The only certainty of today’s events will be that Lenihan’s rhetoric of “turning the corner” and “rock bottom day” will be accompanied by this Government’s references to closure. The fat lady in Frankfurt has yet to stand up, let alone clear her throat. We continue with denial and obfuscation in a tunnel of toil until creditors take the hit on property losses. There is no likelihood of an imminent rebound. Expect today’s news to become an annual event until 2013.