The Republic’s National Assets Management Agency could impact on Northern Ireland’s banksNORTHERN Ireland banks, in common with their parent companies, are still making large provisions to cover non-performing property related loans.
This year is expected to bring even larger write-downs than the estimated £500m in 2008.
The results for the first half of 2009 announced last week offer a worrying trend. First Trust (part of Allied Irish Bank) and the Ulster Bank (Royal Bank of Scotland) have already commented. The Bank of Ireland and the Northern Bank (Danske Bank), as we write, are awaited.
The crisis in bank finances in the Republic is proportionately worse than in the UK banking sector. The Republic’s Minister of Finance, Brian Lenihan, has decided that the Irish government should transfer up to €90bn of non-performing bank loans from Irish banks into the National Assets Management Agency (NAMA).
For the Irish headquartered clearing banks this is a lifeline. Non-performing loans will be bought by NAMA at a market price, possibly about 75% of the nominal value, and the Irish based banks will gain new funds to be better able to revert to ‘normal’ banking along with further government funding to ensure a viable balance sheet.
The NAMA arrangements will reduce the commercial pressures on the Irish banks to foreclose on defaulting loans and force the sale of assets in an already depressed market.
NAMA reaches into Northern Ireland
NAMA is an Irish government agency. However, since Irish registered banks operate North and South, the impact of NAMA will cross the border. Non-performing developer loans arranged through branches of Irish banks in Northern Ireland, whether in euro or sterling, will transfer to be assets of NAMA and subject to its de
cision making. Borrowers in Northern Ireland will learn that their debt is to NAMA, not an individual bank. NAMA will have the same legal rights as the original lending bank. A borrower who objects to his debts being transferred could only avoid the transfer if the loan was now promptly repaid.
Repayment is an unlikely option since asset values have fallen and shifting a loan to another non-Irish bank would mean that additional security was needed.
Ulster and Northern are different
Of course, Northern Ireland’s financial structure also includes a large (partly State owned) RBS, trading as the Ulster Bank and a subsidiary of Danske Bank, trading as the Northern Bank. Developer loans owing to these two banks will remain with the bank which agreed the lending. Any legal action to enforce repayment will be decided by that bank. Already two big defaulting loans have already been subject to court action.
The British Government has created a different solution to the defaulting loans problem by supporting the capital structure of individual banks but leaving the questions of non-performance of loans as an internal issue for each bank.
The large non-performing bank loans in Northern Ireland will be managed in different ways depending on the national authority to which an individual bank relates.
A possible north-south difference will emerge when the actions of NAMA are judged alongside the commercial judgements of the non-Irish banks in Northern Ireland. Will NAMA have more patience since its objectives may be less time constrained?
Alternatively, will NAMA be less patient with sterling loans in Northern Ireland because its legal remit is more constrained in the North, for example, in terms of compulsory purchase powers to rationalise assets?
These are some of the topics that need to be clarified in the meetings now taking place between the Irish and British officials.
Opting into NAMA
There is a further dimension to the business overlaps between the British and Irish banking institutions.
The Ulster Bank is a major operator in the Republic. In theory the Irish NAMA might exclude non-performing loans owed to the Ulster Bank. The same could apply to the subsidiary of Danske Bank.
However, NAMA is expected to be allowed to take-over non-performing loans from externally owned banks if they opt-in to this arrangement.
Non-Irish banks would be required to decide whether to opt in, or not, but that decision would possibly mean that all non-performing loans would be transferred. It is unlikely that NAMA would allow a selective ‘pick and mix’ approach that allowed a bank to decide using its own risk assessments.
The contrasting approaches of the Irish and British authorities mean that their actions could be mutually unhelpful. These risks have been acknowledged and, with little publicity, acceptable working co-operation has been agreed.
The British authorities will be supportive, in the UK, of the NAMA structures and the actions through Irish banks. This should avoid any ‘beggar my neighbour’ actions.
Similarly, the Irish arrangements are trying to avoid any distortion because NAMA takes over the assets from Irish banks which might then leave external banks at a disadvantage.