Thursday, June 2, 2011

Over €100 Billion of Bank Losses now recognised

The release during the week of the addendum to the stress tests allows us to consider the total amount of loans losses that have been accounted for in the banking system.

First we consider the losses that the banks incurred on the transfer of their developer loans books to the National Asset Management Agency (NAMA).  We have been directed to a useful summary table on page 54 (pdf) of the Nyberg Report (I thank namawinelake for the pointer to this table).

NAMA Transfers

As a result of the €72.3 billion of NAMA transfers up to December 2010 the banks were forced to crystallise €41.8 billion of losses on these loans.  Next we turn to the expected losses on the loans that remained on the banks’ balance sheets after the NAMA transfers.  This table combines data from the original stress test document which covered AIB, BOI, EBS and IL&P and this week’s addendum which dealt with Anglo and INBS.

Projected Losses

The figures for Anglo are a little confusing and unfortunately we are not given the same detail as provided for the other banks.  The analysis for Anglo was merely a check on the PwC analysis undertaken last September.  There are a number of loss rates given for Anglo but the addendum states that “[t]he loss rate used by CBI in the capital assessment in September 2010 was 33.6%.”  There is also a figure of 46.7% which is listed as “Central Bank additional conservatism to stress Sept 2010” but I’m not sure what was done with this figure so we’ll stick to the 33.6% projection.

The stress tests on the four live banks also allow for €13.2 billion of losses on the run-off and disposal of non-core assets.  This will be the deleveraging of €72.6 billion of (mainly foreign) loans.   Although a €13.2 billion loss is allowed for the banks, BlackRock estimate that the lifetime loss on these loans will be €3.0 billion.   We will use this as our measure of loan losses.

There are also losses other than the NAMA transfers that had been allowed for by the end of December 2010.  The stress test documents show that the four banks had stock provisions of €9.9 billion accounted for at that time.

All told, the total amount of loan losses accounted for is now €107.6 billion and is pretty much aligned to the most conservative of loss projections made during the crisis.

Will the banks have enough money to be able to absorb these losses?  Remember that about half of these losses are projected losses from the adverse scenario of the stress tests.  These may or may not materialise.

There are four sources of funds available to absorb these losses:

  • The banks’ existing equity capital at the start of the crisis,
  • The banks’ operating profits during and after the crisis,
  • Haircuts enforced on junior bondholders, and
  • Capital injections from the State

The Nyberg Report shows that the covered banks had about €25 billion of equity capital in 2007.  This is been eliminated.  Over the period 2007 to 2010 the banks generated about €5 billion of operating profits and BlackRock forecast that under the adverse scenario the four banks in the original stress tests will generate €4 billion of operating profit in the period from 2011 to 2014.

Junior bondholders have already taken about €10 billion of haircuts.  There is little actual evidence of this but his is Dail statement on the day of the stress test announcements, Michael Noonan said:

It is acknowledged by all that a large part of the €46.3 billion already invested by the State in the banks will not be recovered, but the State has not borne the full burden of the collapse. Approximately €60 billion of private equity value in Irish banks has also been destroyed since early 2007, much of it held by ordinary Irish citizens. Subordinated bondholders have also already contributed approximately €10 billion to the cost of the bailout.

The most recent round of haircuts junior bondholders are expected to raise another €4 billion.  The €20 billion contribution of the State to the €24 billion recapitalisation will bring the State’s support to the banks up to €66 billion.

All told, there have been contributions of €114 billion to our delinquent banks.  If the projected losses of €108 billion materialised this would not leave the banks in a very strong position and they would only have €6 billion of capital remaining.

One thing to note here is that the €53 billion of loan losses projected from the stress tests are “lifetime” loan losses.  In fact, of the  €40 billion of lifetime losses that the BlackRock adverse scenario projects for AIB, BOI, EBS and IL&P, €28 billion of these losses are expected to materialise in the period after 2013 and as it states in the stress test document:

Besides, any such losses are spread over a quarter century, allowing a lot of time for provisions to be set aside out of normal profits in what would then be a recovered and downsized banking system operating in a non-stressed situation.

This may not be ideal but it does mean that the banks will be in better capital position over the next three years than was indicated above.  It is assumed then that the operating profits the banks will earn after 2013 will be sufficient to absorb the provisions for the losses that occur after 2013.

I think it is pretty clear that we appear to have finally fully grasped the severity of the banking collapse we face.  There has now been recognition of €108 billion of loan losses in the system.  Half of this is a projection and we must wait until the true extent of the crisis is revealed but there are few suggestions that it will be higher than this. 

To cover these losses, €114 billion of funds have been provided by shareholders, junior bondholders and the State.  If all the projected losses occurred immediately the banks would be in a precarious state but because they will be spread out over the next 15 years (though heavily concentrated over the next three years) the capital position of the banks does look like it can be stabilised.


  1. Seamus, should total losses be €106.7 as opposed to €107.6. Not that €900million makes much of a difference in the overall scheme of things. It is amazing how this whole crisis makes a huge amount of money seem almost irrelevant.

  2. Or not. My mistake sorry long weekend and all that. Your figures are right. They are always right.

  3. Hi Patrick,

    We'll go with 107.6 and as you say it's amazing how relatively insignificant €900 million has become. It is a truly colossal amount of money.

    I have one doubt about the analysis above and this is the treatment of the €9.9 billion of "stock provisions" of loan losses on the banks' balance sheets at the end of December. I have assumed that the stress test loan losses for the period beginning January 2011 are in additional to this.

    To counter this though the stress tests have allowed for a €13.2 billion loss on the deleveraging the banks are being forced to undertake. I have only included the €3.0 billion that BlackRock forecast would be the lifetime losses on these loans rather than the full €13.2 billion loss the banks are projected to make on the deleveraging.

    All told I am pretty confident that we have now finally recognised more than €100 billion of losses in the covered banks. Are we finally getting to the bottom of this?

  4. Hi Seamus, I'm struggling to see where Noonan gets the figure of €60bn for losses taken to date by private equity capital providers: €25bn in equity capital pre crisis, €5bn in operating profits, €10bn in jnr bondholder haircuts = €40bn (I presume he is not trying to include the current round of haircuts). Should there be a figure for other sources of new capital eg BoI rights issue and AIB disposal of BZW and MTB stakes.

  5. Hi Kevin,

    I presume Noonan is talking about the market capitalisations of the banks which at the peak would have approached €60 billion. This is a loss in the value of the shares but does not accurately reflect the loss to shareholders. That would depend on the price they paid, dividends and other factors. The reduction in equity capital is a better measure.

  6. I have confimed that the "stock provisions" for losses are in addition to the projected losses in the stress tests.

    See slide 6 of this interesting presentation from PTSB.

    For losses we have

    NAMA + PCAR + Deleveraged Loan + Stock Provisions
    41.8 + 52.9 + 3.0 + 9.9 = 107.6

    The banks are actually being made to allow for €13.2 billion of losses on the deleveraging process rather than the €3 billion adverse scenario projected losses on these €72.6 billion of loans.

    The PTSB presentation linked to above is also interesting in this regard. See slide 8. This shows that PTSB is being required to sell €8.4 billion of UK loans (residential and commercial mortgages). These loans are relatively well performing and in the adverse scenario a loss of €0.5 billion or 6% is projected. The projected loss rate on Irish loans is 15%.

    ALthough these loans are projected to have an €0.5 billion loss PTSB are being required to obtain capital to fill a €2.2 billion loss that selling these assets immediately may generate.

    PTSB is being forced into state ownership because of €1.1 billion of projected losses on its Irish mortgages over the next three years, €2.2 billion of losses on the near-term sale of its UK mortgages and a €0.7 billion capital buffer. This is the €4.0 billion the bank needs. I am not sure that nationalising PTSB is necessary.