Thursday, March 12, 2015

Government Bonds held by the State-Owned Banks

A lot of attention has been given to the Irish government bonds held by the Central Bank of Ireland and the benefits that arise from the recycling of interest payments back to the Exchequer.  In a vein similar to this are the substantial holdings of Irish government bonds by the ‘covered’ or Irish-headquartered banks.  A breakdown of the overall interest bill is here.

Originally the covered banks were AIB, Anglo, BOI, EBS, INBS and PTSB but now only AIB, BOI and PTSB remain.  This chart shows their combined holdings of Irish government bonds since 2008.

Cov Bonds

It can be seen that around nil in the run-up to the crash in 2008 but increased substantially during the crisis and now the banks have a holding with a market value of around €19.4 billion. 

This is significant because both AIB and PTSB are almost fully state-owned so the interest paid on these bonds does not leave the broader government sector.  There are similar benefits with BOI but to a lesser extent as that is now 14 per cent state-owned.

The recent interim financial reports for 2014 from the banks allow us to see the breakdown of this €19.4 billion across the three banks.  Some extracts from the reports are reproduced below the fold but the relevant figures for end-2014 are:

  • AIB: €9,107 million
  • PTSB: €3,857 million
  • BOI: €6,409 million
  • Total: €19,373 million

These are market value figures.  The face value is probably around 15%-20% less given than the current yields are much less than the interest coupons.  Still it is likely that between them AIB and PTSB hold around €10 billion of government bonds.  If the average interest coupon is 4 per cent then €400 million of the annual interest bill is going to state-owned banks.  It doesn’t have the full circular nature back to the Exchequer as with the interest flows to the Central Bank but it not a net loss to the State either.

It could also be considered that the money the government used to bailout the banks was borrowed from the banks themselves.  And hopefully we will be able to pay this money back by selling the equity stakes we have built up in the banks so the interest expenditure never leaves the government sector.

It is also worth noting that the banks will have made significant profits on these bonds.  Their holdings grew rapidly from mid-2011 and roughly doubled (from €9 billion to €18 billion) over the next 12 months.  Two things are notable about this period when the banks purchased these bonds on the secondary market.

  1. The summer of 2011 was when AIB and PTSB received most of their recapitalisation funds from the state (following the March 2011 PCAR exercise).
  2. It was the period when the yields on Irish government bonds were at their highest.

The banks used the recapitalisation funds, in part, to buy Irish government bonds and have made large profits on them.  The table from AIB’s annual report shows an “unrealised gross gain” of €1.3 billion from it’s holding of Irish government bonds. 

We can imagine this being roughly double, around €2.5 billion, across the holdings of the three banks. Not only are we not paying interest to third-party investors on the money used to bail out the banks, the banks actually made a profit by using the money to buy Irish government bonds on the cheap from such investors.

Here are the extracted tables. First AIB (pdf page 265):

AIB Bonds

And PTSB (pdf page 22):

PTSB Bonds

And finally BOI (pdf page 154):

BOI Bonds

No comments:

Post a Comment