Showing posts with label Irish bank shares. Show all posts
Showing posts with label Irish bank shares. Show all posts

Thursday, July 22, 2010

Economics 22/7/10: Banks downgraded - expect more fireworks

After hammering Irish sovereign ratings, Moody’s rightly took the shine off the six guaranteed banks’ bonds. Not surprising, really, and goes to show just how meaningless the term ‘stable outlook’ can be. Now, few facts:
  • Moody’s has downgraded the long-term ratings for EBS Building Society and Irish Life & Permanent from A2 to A3, stable outlook didn’t help much here.
  • Moody’s also downgraded the government-guaranteed debt of all six guaranteed institutions: AIB, Bank of Ireland, EBS, Anglo, IL&P and Irish Nationwide.
  • Prior to the latest downgrade, AIB and BofI both had stable outlook, and this has been maintained.
  • The reason for the downgrades was the reduction in the government’s ability to support the banks stemming from the sovereign debt downgrade announced Monday.
What’s next, you might ask? Barring any news on loans impairments etc, the growth prospects for banks will have to be the key. And here, folks, there isn’t any good news. No matter how you can spin the thing.

BofI and AIB are disposing of their performing assets – divisions and businesses in the US, UK and elsewhere – in order to plug the vast holes in their balance sheets caused by their non-performing assets.

And it’s a fire sale: Polish BZWBK – 70.5%-owned by AIB – is the only growth hopeful in the entire AIB stable. Yesterday, some reports in Poland suggested that PKO Bank Polski, Banco Santander, BNP Paribas and Intesa San Paolo are the only ones remaining in the bidding. Neither one can be expected to pay a serious premium.

Take a look at M&T in which AIB holds a 22.5%. Not a growth engine, but a solid contributor to the balance sheet. The US bank Q2 profit quadrupled as it is facing the market with structural aversion to banks shares. So M&T is losing value in the market as it is gaining value on AIB’s balance sheet. But hey, let’s sell that, the gurus from Ballsbridge say, and pay off those fantastic development deals we’ve done in Meath and Dundalk.

Likewise, BofI are selling tons of proprietary assets, including proprietary wholesale services platforms, which are performing well.

Will the money raised go to provide a basis for growth in revenue in 2010-2012? Not really. BofI needs new capital. Not as badly as AIB, but still - €2.9bn capital injection in June is not going to be enough to cover future losses. It is just a temporary stop-gap measure to cover already expected losses plus new regulatory capital floors. Future losses will require future capital.

AIB is desperate. €7.4bn is a serious amount of dosh and there are indicators they’ll need more. Of course, in order to properly repair its balance sheet, AIB will need closer to €10bn this side of Christmas (as estimated by Peter Mathews - see here).

However, the bank won’t make any noise about that for political reasons.

Even after getting no serious opposition to their banks recovery plans for some two years already, the Government is starting to get concerned about continuous and never diminishing demand for capital from our banks. This concern is not motivated by the suddenly acquired desire to be prudent with taxpayers’ cash. Instead it is motivated by the optical impressions Irish banks appetite for Exchequer funding is creating around the world. Sovereign ratings are now directly being impacted by banks weaknesses and some investors are starting to ask uncomfortable questions about viability of AIB outside state control. There’s an added sticky issue of Irish Government deficit potentially reaching 20% of GDP this year should our banks come for more cash.

And they will... not in 2010, possibly, but in 2011, once Nama last tranche closes in February (or thereabouts - remember, it has blown through few deadlines already and can strategically move past February 2011 with closing off its purchases, to allow more time for banks to play the 'Head in the Sand' game).

If you want to see what is really happening in our sovereign bonds markets, check out the next post on this blog, which will be covering this.

Saturday, May 29, 2010

Economics 29/05/2010: EBS - taxpayers are on the hook, again

One really has to start worrying about the going-ons at the DofF, the CBFSAI and in the Government. After all, over recent weeks we have been told that:
  1. The leadership in this country is finally getting its hand on the pulse of the financial sector and the economy (a tale that emerged back in March when Minister for Finance, the Governor of the CB and the FR made back to back statements concerning the plans for the banking sector stabilization, and subsequently went on to assure the nation that all is now going to be fine);
  2. Ireland has turned the corner (we've heard this in its various variants since May 2009);
  3. With Nama working overtime, lending is about to be restored across the nation;
  4. There are no more nasty surprises (apart from the ever-shifting capital targets in the Anglo);
  5. That banks can now sort themselves out and hence there will be no need for a sweeping Guarantee extension comes September;
  6. That Ireland is so far ahead of the PIIGS curve, it is reckless and dangerous, and erroneous, to claim otherwise.
Well, as of today we, the taxpayers, own another banking institution - the EBS - which, up until now was regarded as the least sickly of the Irish banks. Per Irish Times report today: "The Government’s move came after the society failed to attract private investors. The State now seems set to invest up to €875 million in total over the next 10 years."

Pardon my French, but what the h***ll is going on in our circles of power? One would naturally expect the Government and the regulators responsible for the banking sector to be in a daily contact with the institution, like EBS, while it is engaged in a major talks with potential buyers. And one would expect the talks to progress over time, with some clear indications as to whether the deal was likely or not. A sudden release of this new information is, therefore,
  • either a reflection of the fact that our banking sector authorities did not have a clue as to the progression of the talks - in which case they once again failed to 'keep their hand' on the patient's pulse; or
  • they have at the very least did not disclose pertinent information to the markets and the public as to the state of these talks.
Either way, the news that the taxpayers are once again stuck for ca €1 billion in bailout funds (more than the amount of €600mln the Spanish Government had to inject in one of its banks, triggering a massive run on Spanish markets) without any, and I repeat, any public official making the matter public until the deal was done!

Of course, another remarkable thing about the deal is that it comes on foot of Nama being deployed in the market. Last year, myself, Brian Lucey, Peter Mathews, Karl Whelan and others have warned that nationalization of the failing Irish banks was the least costly option for their recapitalization that should be pursued. Nationalization of EBS would have cost no more than €650-800 million and would have led to a 100% ownership of the bank by the State. In return, we could have imposed a speedy reform on the bank's board and management, and actively repaired its balancesheet.

Instead, we have paid countless millions for it through Nama, shelled out almost €1 billion in direct capital commitments, supplied it with a state Guarantee worth well in excess of €200 million in risk-related implicit costs, and still control only 51% of the bank. We are now left with a quasi-state asset that cannot be reformed and is at a risk of being left to linger like a zombie stuck between private markets and the politicos.

One wonders, will anyone, responsible for Nama and the rest of our banks policy ever be held accountable for this waste?

Friday, December 25, 2009

Economics 26/12/2009: Irish banks - twinned by crisis

A picture worth a thousand words:
Let me quickly explain - these are close price correlations (1 month moving) for AIB and Bank of Ireland. I divided the entire time horizon into 4 zones:
  • Zone 1: through December 2004 - the tail end of the pre-credit bubble conditions, when Irish economy still had some residual Celtic Tiger growth in it. And, aptly, the banks were still financing growth in real economic activities. Thus, we clearly have periods where correlations fall below 0.3 levels, signaling some differences between the two banks. And they occasionally were reaching below zero, signaling substantial differences between the banks.
  • Zone 2: January 2005-July 2007 - the credit bubble. During this period, the two banks worked hard on erasing any significant differences. One went to the UK, another followed. One landed in 100% mortgages, another followed. One started to throw money after cowboy developers. The other followed. And so on. If in the previous period, min-min correlations envelope (the extent of diversification offered by the shares pair) ranged from -33% to -37% and to -47% (implying occasional flight to hedge opportunities of substantial degree and rising though out the period), in the Zone 2 period, min-min envelope ranged from -28% to -6.4%, shrinking the flight to hedge opportunities. In other words, the two shares were much poorer diversification instruments against each other.
  • Zone 3: August 2007 - January 2009 - the credit bubble bursting period. Here, the two shares converged to telling virtually an identical story. It was, indeed, true that by the end of this period, BofI and AIB became virtually indistinguishable. One's own risk was matched by the other risk. And the min-min envelope shrunk from 37% to 41%, getting dangerously close to that 50% mark.
  • Zone 4: Since February 2009, the min-min envelope has contracted to 79.3% signaling that in effect the two shares have no substantial differentiation between them. In other words, from the point of risk hedging or risk-return consideration (e.g. under mean-variance criterion-based models) there is no reason to hold both stocks in a diversified portfolio. The surprising, indeed amazing, stability of these correlations since February 2009 suggests that the markets have reached the new equilibrium - or the New Long Term, where the markets no longer are caring for separating BofI from AIB.
One more thing is worth adding. You'd think that a look at pairwise correlations between two largest banks in this country would be warranted for our technically apt and smart stockbrokers... You'd be wrong - as far as I know, none seemed to have been bothered to send their clients a simple chart on correlations between the two banks.

Sunday, December 13, 2009

Economics 13/12/2009: Nothing exceptional

Last couple of weeks, there have been some pretty severe news flowing from the Irish economy and Irish banks. Is the current bear market in Irish banks shares a temporary adjustment / profit taking or is it a long overdue fundamentals-driven correction?

Here are few charts and my view of the story.
The general trend, per chart above, has been down since 2007 peaks, but also - convergence of the two banks to the same trading range. By 2009 beginning, the investors were no longer willing to significantly distinguish between BofI and AIB shares, preferring to treat them as a single sick puppy, rather than two different banks with different management styles, business models and investment exposures.
And guess what - they still do. The entire 2009 trading was still based on the story of Irish Banks, rather than individual stories of AIB and BofI. Now, over a short period of time, say during general market panic, this can be explained by a temporary loss of fundamentals clarity, implying that investors might see both banks as being the same. We are no longer in this period, as global markets willingness to take risks has improved significantly in H2 2009. But the same markets that are now willing to differentiate Goldman Sachs from Bank of America are still unwilling to differentiate AIB from BofI.

Another interesting feature of the data is that Nama effect (a positive push for shares of AIB and BofI) has now been fully exhausted. And this is pretty impressive - we approve €54bn in funds, nearly bankrupting the entire economy, and in return we get the markets sending banks' share price back to where they were in May 2009, prior to the Nama approval.

So in terms of absolute prices, neither Nama, nor the latest Budget, seem to be working. But what about the risks in actual trading positions on the banks?
Well, if anything intraday volatility in AIB is down, not up, in the last 12 months. And that shows once again that the markets are not buying into AIB story. There is now less heterogeneity in investors' assessment of AIB value proposition than before:The same is true for BofI:The same story for a broader IFIN index

And there is nothing out of the ordinary in terms of volumes either:
Still relatively heavy, but not as heavy as in late 2008 - early 2009.

But now look as spreads (high-low) and monthly volatility: calmer, much calmer seas than over 2008. Again, no panic - just calm and measured trading here.
One can't really say here that investors are treating Irish banks shares in some idiosyncratic way, with an abnormally high sensitivity to risk. There is actually much less sensitivity to risk in the markets today than in 2008 and even 2007. So the current bear trend in Irish banks shares is driven by the markets assessment of fundamentals. In other words, markets are doing the job - spotting the 'dog' and pricing it down...
Any doubt? The above chart confirms that there is no abnormally heightened sensitivity to risk when it comes to AIB and BofI shares. The only outline events of 2009 in these shares relate to the bear rally that has just ended. The downtrend, therefore, is the norm.