IRELAND ON RECOVERY PATH

Transcription

1 IRELAND ON RECOVERY PATH Ireland doing everything asked of it that is within its control; but turmoil in euro area makes recovery more challenging Presentation for institutional investors, January 2012

2 SUMMARY Ireland has delivered on targets and private capital has been attracted 2

3 2011 marked the turning point, following three bad years Recapitalisation of banks completed by end-july 2011 Government cost limited by private capital raised and burden-sharing Overseas investment in Bank of Ireland; covered bond issues by BoI and IL&P; and large-scale take-up of BoI rights issue were positive signs Contingent liability from banking sector has finally been quantified Government set to have deficit of 10% of GDP at most for full year, beating Troika target of 10.6% Troika (EC/ ECB/ IMF) very pleased with delivery on all Programme benchmarks Economy grew for first time since 2007 Export growth remains resilient so far, despite euro area difficulties But domestic demand may continue to decline at a slow pace in 2012 Summit on July 21 st, 2011 delivered rate cut and term extension This bolsters debt sustainability and is worth more than 4% of 2011 GDP Helps to cement domestic buy-in to ongoing fiscal consolidation Threat to Ireland's 12.5% corporation tax rate removed NAMA has now raised 6bn of gross cash from sales of assets Ireland's main contingent liability being reduced 3

4 Pro-forma Core Tier 1 ratios stand out in euro area after huge PCAR re-capitalisation Ireland s banks look ahead of the game versus the rest of the euro area because they ve already provided for likely losses AIB BoI IL&P Source: Department of Finance Dec-10 Jun-11 4

5 Exchequer deficit improved versus a year ago ( bn excluding banking recapitalisations) Central Government (cash) deficit 2.7bn lower like-for-like in 2011 compared with Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Department of Finance 5

6 Economy pulled out of long recession in H Activity slipped in Q3, as domestic economy declined Real GDP Real GNP Nominal GDP Nominal GNP Q Q Q Q Q Q Q Q Q Q Q Q Source: Central Statistics Office (CSO) 6

7 SECTION 1: MACRO Irish economy stabilised grew for first time in four years in 2011, thanks to exports 7

8 Rapid recovery in exports, but euro area crisis is a threat for Exports above previous peak Source: CSO 8

9 Ireland s PMIs now among the highest in euro area 70.0 Service activity holding up particularly well, thanks to 65.0 US/ UK exposure Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: Markit; NCB Manufacturing Services 9

10 Ireland's composite PMI is a good guide to GDP On current evidence, Ireland may avoid recession unlike other non-core countries 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% % -2.0% -4.0% % -8.0% 30.0 Q Q Q Q Q Q Q Q Q Q Q % Source: Markit; NCB; CSO PMI composite (LHS) GDP % change yoy (RHS) 10

11 Euro area economy slowing, but not collapsing 65 Euro area PMI below 50, signalling recession, but has stabilised for now Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Source: Markit; Bloomberg 11

12 Domestic economy still in deleveraging phase Investment and consumer spending may reach bottom in next 18 months, but government spending will shrink out to 2015 at least Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: CSO Nominal domestic demand (index, peak = 100) Real domestic demand (index, peak = 100) 12

13 Employment decline accelerates again in Q Disappointing decline may be one-off following steady improvement Q Q Q Q Q Q Q Q Q Source: CSO 13

14 Unemployment rate stabilising at 14%-14.5% Employment declined 1.1% in Q3, but labour force also fell almost 1% 2 0 Q Q Q Q Q Q Q Q Q Source: CSO 14

15 Real disposable income still declining ( per person) 23,000 22,000 21,000 Hit by lack of non-wage earnings; higher taxes; elevated energy prices; and lower social transfers 20,000 19,000 18,000 17,000 16,000 15, E 2011E Source: CSO; NTMA 15

16 Household net worth per capita reduced by falling house prices (chart is net worth per capita) Falling house prices cause self-reinforcing cycle; and negative equity a barrier to second-hand transactions Q Q Q Q Q Q Q Q Q Q Source: Central Bank; NTMA 16

17 Personal savings ratio highest since early 1990s 20.0% 15.0% Households are in the process of deleveraging and confidence will take a long time to rebuild 10.0% 5.0% 0.0% -5.0% Source: CSO 17

18 Consumer spending still declining: set to continue through 2012 (quarterly m is scale) Spending suffering from declining disposable incomes, high household debt and negative wealth effects Source: CSO 18

19 Housing starts still falling Starts now below 5,000 on a 12-month basis, but need to run below level of demand for some time Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Source: Department of the Environment, Heritage and Local Govt. 19

20 Investment as a % GDP at all-time low Long run average Excesses are being purged, so investment is unlikely to mean revert in near term Source: CSO 20

21 Economic and fiscal forecasts: Budget F 2012F 2013F 2014F 2015F GDP (% change, volume) GNP (% change, volume) Current Account (% GDP) General Government Debt (% GDP) General Government Balance (% GDP) Inflation (HICP) Unemployment rate (%) Source: Department of Finance: Budget 2012 (issued December 6 th, 2011) 21

22 SECTION 2: REBALANCING Competitiveness gains have been significant; Ireland outperforms other non-core countries thanks to its flexible economy 22

23 Ireland becoming more competitive and living within its means: current account (% GDP) back in surplus 3.0% 2.0% 1.0% Last year saw first current account surplus since % -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% Source: CSO 23

24 Economy-wide employment has re-balanced quickly (% share of each sector in total employment) 60.0% 50.0% 40.0% Employment has not increased in the public sector: it has simply declined at a slower pace than elsewhere 30.0% 20.0% 10.0% 0.0% Agriculture Industry Construction Public sector (incl. private health & education) Private sector Source: CSO Peak (Q2 2007) Q

25 Ireland to benefit more than most from decline in FX value of euro in recent months (chart: export shares) 70.0% US/UK together have same weight in Irish 60.0% exports as euro area 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Source: CSO UK Rest of EU US Rest of World 25

26 Ireland s competitive position vastly different to the non-core countries Unit Labour Costs (Q1 2001=100) Current Account Balance (% GDP) Ireland has few structural rigidities 2.0% 0.0% -2.0% -4.0% % -8.0% % % -14.0% 90 Q Q Q Q Q Q Spain Greece Ireland Italy Portugal Source: European Commission -16.0% Spain Greece Ireland Italy Portugal Source: DataStream 26

27 Ireland is far more open than other non-cores Exports (%GDP) Imports (%GDP) Openness proxy Ireland Spain Italy Portugal Greece Source: Datastream (for 2010) 27

28 Ireland s export performance was much stronger than Portugal and Greece even during bubble Ireland s exports above their previous peak; not the case in Portugal or Greece Greece (export volume 2000 = 100) Portugal (export volume 2000 = 100) Ireland (export volume 2000 = 100) Source: Datastream 28

29 SECTION 3: PROPERTY Residential property prices have further to fall, but commercial market has probably bottomed 29

30 Mortgage volumes have collapsed Credit supply and demand issues impact, but there were tentative signs of a bottom in Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: IBF 30

31 Mortgage credit restrictions on the rise Credit standards loosening Credit standards tightening Q Q Q Q Q Q Q Q Q Source: ECB bank lending survey for Ireland 31

32 National house prices down 46% from peak in Dublin market, which is more liquid, has seen 54% fall (index peak = 100) 40 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Source: CSO All country Dublin 32

33 Valuation of housing has adjusted but does not yet look compelling 10.0% 9.0% 8.0% 7.0% 6.0% Reasonable rental yield (annual rent/ average house price) range: similar to other risky assets 5.0% 4.0% 3.0% 2.0% 1.0% Collapse in yield during bubble 0.0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: CSO; ESRI; NTMA Gross yield Net yield 33

34 House prices as a ratio of disposable income per capita nearly back to typical trough of 8-9x Prices followed disposable income per person for a decade from Source: CSO; NTMA 34

35 But private housing rents are now rising Source: CSO Rents are rising, suggesting that current available supply in balance with demand 35

36 Commercial property valuations (particularly office and industrial) look attractive versus history Highest yield level on record (data back to 1995), thanks to 65% drop in prices nd half 1990s average Average since Q Q Q Q Q Q Q Q Q Source: IPD 36

37 Foreign buyers now interested on valuation grounds Positive carry Made no sense for foreign buyer Yield pick up significant 2.0 Q Q Q Q Q Q Q Q Q Q Q Q Q Source: IPD; NTMA 5-year Euro swap rate + 300bp margin Ireland Commercial Property yields 37

38 SECTION 4: BANKING Ireland has drawn a line under bank re-capitalisation; Contingent liability quantified for the State; Execution of deleveraging plan progressing well 38

39 Loss of market confidence in banking system in 2010 The six domestic banks funding profiles bn Dec-08 Dec-09 Dec-10 June -11 Sept-11 Change v Dec 08 Retail deposits Corporate deposits Debt Capital Markets Repo/Interbank Central Bank Total Source: Financial Measurement Program Report / Central Bank of Ireland Between September to December 2010 the domestic banks lost over 100bn of funding following credit rating downgrades (via a combination of deposit outflows coupled with an inability to roll over debt instruments) A large quantum of senior debt (c. 30bn) matured in September 2010 as the original government guarantee (Credit Institutions Financial Supports Act) expired and was replaced by the Eligible Liabilities Guarantee (ELG) scheme 39

40 Domestic deposits have stabilised Flat over last six months Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Households Non-financial corporations Source: Central Bank of Ireland - resident private sector (unconsolidated balance sheet) 40

41 Reliance on ECB funding has declined significantly Reliance on ECB liquidity down c. 40bn from peak (scale on left is m) Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 ELA Covered banks' liquidity from repo Estimate of Eurosystem reliance covered banks Source: Central Bank of Ireland; NTMA 41

42 Capital - NAMA haircuts erode equity base December 2010 ( bn) Loans transferred Discount/Haircut NAMA Bonds received AIB % 9.0 BoI % 5.6 Anglo % 13.4 INBS % 3.4 EBS % 0.4 Total % 31.8 Source: National Asset Management Agency (NAMA) The original National Asset Management Agency (NAMA) writedowns were expected to be in the region of 30% (v 57% actual); bonds swapped for the loans increase banks eligible assets c. 44% of loans are secured on assets outside the Rep. of Ireland (primarily UK) 71% of total portfolio is classified as investment (incl. residential & hotels) with 29% as Land and Development 23% of loans performing at June 2011 (no change since December 2010: 23%) Over 6.9bnof asset sales already agreed by the end of 2011 (see NAMA section) 42

43 Capital injections following NAMA transfers (up to 2010 year-end) bn Anglo INBS AIB **BOI EBS ILP Total Government recapitalisations (Dec 2010) Equity Preference Shares Promissory Note* Special Investment shares Subtotal Government Recapitalisation Liability Management Exercises ("LMEs") (upto March 31) Subtotal LMSs Total (asat March 31, 2011) Source: Company data * Promissory notes are an unfunded instrument drawn down over 20 years ** BoI also raised 1.9bn independently from capital markets in April 2010 via a combination of a placing, rights issue and debt for equity swap ( 3.6bn in total including Government contribution) 43

44 Overview of the Process for Recapitalisation and Restructuring of the Irish Banking Prudential Capital Assessment Review carried out by the banks for the period in a stress scenario Banks submitted detailed forecasts of funding position through to 2013 in a Prudential Liquidity Assessment Review Blackrock Solutions ( BRS ) carried out a bottom up review of future loan losses and other assets Capital requirement based on stressed, adverse scenario with contingencies taking into account potential losses post 2013 and other uncertainties Source: Central Bank of Ireland Prospective profile of the Irish banking system Deleverage banking sector to ensure future stability Utilising PCAR and PLAR analysis, the Banks in conjunction with the Central Bank have developed deleveraging plans Identification of non-core loans to be deleveraged by 2013 through disposals and run-off Forecasts are based on target funding ratios set by CBI Results fed into the PCAR and deleveraging work 44

45 Programme for Financial Support 2011 (including PCAR and PLAR) The Financial Measures Programme involved a comprehensive review of sector s capital and liquidity positions The Prudential Capital Assessment Review (PCAR) assessed the capital resources under a baseline scenario and a stringent three year stress scenario resulting in a further 24bn recapitalisation to meet a minimum Core Tier 1 ratio of 10.5% and 6% in the base and stressed scenarios respectively The capital raise incorporates 5.3bn to cover additional but unlikely losses as a means of providing an extra buffer against the emergence of potential losses post 2013 (of which 3.0bn is to be in the form of contingent capital) The Prudential Liquidity Assessment Review (PLAR) targets a reduction in the size of the banks loan to deposit ratios towards 122.5% by 2013, as a means of de-risking the balance sheet and reducing wholesale exposure while avoiding fire-sale losses in the process Total Capital Requirement under the FMP Report bn AIB BOI EBS ILP TOTAL Capital required pre-buffer Additional capital buffer (equity) imposed by the Central Bank Contingent capital imposed by the Central Bank Total capital required Source: PCAR

46 PCAR 2011 recapitalisation sources bn NPRF Exchequer Other Total Allied Irish Banks/EBS Bank of Ireland (BoI) Irish Life and Permanent (IL&P) * 24.0 Source: Department of Finance Following the sale of BoI shares to private investors, the State s total PCAR 2011 bank recap amounted to 16.5bn (this is significantly below the total 35bn contingency fund originally earmarked for the banking package at the time of the EU/IMF bailout) * Other comprises LMEs ( 5.6bn which includes anticipated further burden sharing of 0.4bn in relation to BoI s subordinated debt), BoI s private sector contribution ( 1.7bn) and IL&P s internal capital generation ( 0.2bn) 46

47 Successful completion of BoI rights issue On 25 July 2011, the Government announced the completion of negotiations with a group of significant investors (Fairfax Financial Holdings, WL Ross, Capital Research and Management Company, Fidelity Investments) who committed to buy up to 1.123bn of the State s stock (equate to 34.9% of the total outstanding shares) BoI share ownership % NPRFC 15.1% Existing Stockholders 30.9% The Investors 34.9% Exchanging Bondholders 19.0% Source: Department of Finance 47

48 Total cost to Irish State for Bank recapitalisation AIB/EBS BoI ILP Anglo/INBS Total Preference Shares (2009) * 7.0 Cash - Capital Contribution (2009) Promissory Notes/Special Investment Shares (2010) Ordinary Share Capital (2010) Total pre-pcar/plar PCAR / PLAR 2011 Cash -Capital Contribution From Exchequer Contingent Capital NPRF Capital ** 9.0 Total PLAR Total Cost of Recap * 1.7bn of BoI s government preference shares were converted to equity in May/June 2010 ( 1.8bn still left in existence). The government also received 0.5bn from the warrants relating to BoI s preference shares (excluded from table above) * Bank of Ireland cost is net of share sale to private investors 48

49 6% Core Tier 1 ratio under stress scenario drove capital requirement of 24bn Bn BN of additional capital as conservatism buffers 2.3BN of cash capital for additional conservatism 3.0BN of contingent capital to safeguard against loan losses beyond 2013 Capital short-fall 24BN CT1 capital 2010 Source: PCAR 2011 Stock provisions yr operating profit before provisions & deleverage costs 3yr stress loss projections based on BRS Loss on deleveraging non core loans Completed capital increases since end 2010 Stress CT pre capital injection 2013 Capital stress CT1 6% Capital buffers 49

50 Capitalisation of Banking Sector Current and pro forma CT1 following recapitalisation AIB BoI EBS* ILP CT1 Ratio (June 2011) 9.9% 9.5% 8.0% 8.4% Pro-forma CT1 ratios including 24bn recap 22.4% 15.4% 22.6% 26.0% * EBS is at Dec 2010 (since merged with AIB) Peer Core Tier 1 ratio analysis 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% ILP EBS Building Society Allied Irish Banks Bank of Ireland Swedbank RBS Lloyds Banking Group Banco Popular Bco de Sabadell Marfin Populr Bk Deutsche Bank BNP Paribas Credit Agricole Banesto KBC Bankinter Unione Banche Italiane Banco Popolare Banca Milano Monte dei Paschi Postbank Commerzbank * Note: Citigroup estimates (2011 year-end) except for Irish banks (pro-forma June 2011) 50

51 Restructuring of Irish domestic banking sector Domestic banks re-organised into two pillar banks Pillar 1: (Merger of Allied Irish banks with EBS Building Society) EBS to initially operate as AIB subsidiary Pillar 2: (Bank of Ireland) BoI to remain as independent institution but is required to dispose of 30bn of non-core assets (by 2013) Revised restructuring plan was approved by the European Commission (20 December 2011) Irish Life and Permanent Plan is separate Life business from bank, but institution to be fully recapitalised in any case Wind-down of unviable banks The deposits of Anglo Irish Bank (c. 8.2bn) and Irish Nationwide (c. 4bn) were transferred to AIB and IL&P in February 2011 Joint restructuring plans approved by the EC: now renamed Irish Bank Resolution Corporation (IBRC). To be wound down by 2020 Auction of US commercial property loan portfolio (c. $9bn) completed in Q4 after process conducted by Eastdil with third parties, external advisors 51

52 Deleveraging of domestic banking system Smaller banking system to better reflect size of Irish economy going forward Target loan to deposit ratio of 122.5% by 2013 (from c. 180% at Dec 2010) 70bn of non-core assets have been earmarked for disposal via redemptions/provisions and controlled asset sales Process almost half complete by end-2011 Actual market disposals are expected to amount to c. 34bn (c. 50% of total deleveraging) Recapitalisation caters for up to 13bn of potential losses from asset sales assumed under stress test Banks have reorganised balance sheets/operations into core and non-core Deleveraging Committees set up to monitor disposal process Semi-annual interim targets to assess deleveraging progress The government no longer intends to transfer land and development loans (of less than 20m) from the banks to NAMA. Final transfer of 1.9 billion of loans transferred in Q As a result the Portfolio Par value of loans transferred from the banks reached final total of 74bn versus the cost to NAMA of 31.5bn 52

53 System Deleveraging, post May 2011 updated plans AIB BOI EBS IL&P Non-Core 25.1 bn Non-Core 39.1 bn Non-Core 2.3 bn Non-Core 10.4 bn Noncore 29% Core 71% Noncore 34% Core 66% Noncore 14% Core 86% Noncore 28% Core 72% Core 61.2 bn Core 76.2 bn Core 14.1 bn Core 26.6 bn Note: Balances as at 31 December 2010 Deleveraging: bn AIB BOI EBS IL&P Total 2010 Net loans to customers Net loans to customers Total (change in loans ) LDR% 123.5% % 121.1% 121.7% 122.6% 1 The LDR target is based on the assumption of flat deposit growth Source: Central Bank of Ireland & Institutions deleveraging plans 1 Note: Deleveraging shortfall in AIB of 560m currently being reassessed 53

54 2010 Zero Balance Sheet Growth Core & Non-Core Deleveraging 2013 Core 179bn c.- 10 bn >30bn Core 169bn Amortisations New lending Other Non-Core 77bn c.- 60 bn Amortisations Disposals Other Non-Core 17bn In the zero balance sheet growth scenario, ILP and EBS must deleverage an element of their core assets. This is achieved through run off, with limited new lending and expected amortisations/redemptions used to reduce net loans. Source: Central Bank of Ireland, Institutions Note: 1. Based on zero balance sheet growth scenario, excludes additional 560m of additional deleveraging to be identified by AIB 2. System in this instance refers to loans to customers of AIB, BOI, EBS and ILP only 54

55 Non-Core Analysis 2010 Non-Core Loans: 77bn 2010 Non Core loans to customers 1 Non- Mortgage consumer and Other 1% SME 10% NAMA II 11% Residential Mortgages 40% Europe 5% US 9% AsiaPac 1% RoW 0% Ireland 24% Corporate 19% CRE 19% GB 61% Approximately 76% of the non-core assets are outside Ireland, which increases to 86% when NAMA II loans are excluded. Non-Irish assets are likely to prove more liquid from a disposal perspective and are likely to be saleable at lower discounts than Irish assets in the period to Source: Central Bank; institutions 55

56 Non-core banking assets Allied Irish Banks (c. 25bn) UK loan portfolios International Corporate Loans Land & development (Sub - 20m) Bank of Ireland (c. 39bn) UK intermediary sourced mortgages Selected international niche businesses (project finance, asset based lending) Land & Development (Sub - 20m) International commercial investment portfolios Irish Life and Permanent UK mortgages Commercial portfolios Source: Company data 56

57 SECTION 5: NAMA NAMA fully up-and-running; further sales in pipeline for

58 Property Market Measures Budget 2012 contained a number of significant measures aimed at boosting the property market Should help boost NAMA s book of loan assets, underpin collateral in the banking system and may bring forward mortgage demand Stamp duty on Commercial Property cut from 6% to 2% Now lower than the current UK rate. Should boost overseas demand NAMA can directly approve rent reductions with tenants of commercial properties under its control Changes to upward-only rent legislation shelved Incentive Scheme Property bought between today and the end of 2013 will be exempt from CGT on sale as long as it is held for at least seven years Mortgage interest relief raised Won t be available after This may bring forward some housing demand Some legacy tax reliefs will be honoured for small buy-to-let investors This may help to reduce arrears in this troubled part of the mortgage market, all other things equal 58

59 NAMA progress to end December 2011 Following the passing of the NAMA Act in late 2009 and the receipt of EU Commission approval in February 2010 a lot of progress has been made as outlined below Successfully acquired 12,000 loans (over 35,000 individual properties) related to 73.8 billion par of loans relating to 800 debtors for 31.8 billion Successfully injected over 30 billion of liquid assets into five participating Irish institutions Paid down over 1.6 billion of NAMA debt ( 1.3bn NAMA Bonds and 0.3bn to the State) Cash balances of 3.8 billion as at 31 December 2011 Over 6 billion in cash generated by NAMA over first 21 months to 31/12/ Operating profit of 305m before impairment charge of 1,485m 2011 Operating Profit forecasted to exceed 600m New organisation established from scratch (Almost 200 staff recruited with long standing experience in banking and property) Decisions made on debtor business plans relating to 70 billion 95% of portfolio Over 6.9bn billion in approved sales as at 31 December 2011 (90% outside Ireland) 4,500 individual credit decisions made incl. 950m in development and working capital 59

60 NAMA Model (1) Bank Sells 100m Loan to NAMA ECB/Market Bank NAMA (4) Bank generates liquidity through repo s of NAMA Bonds with ECB / Market (2) NAMA pays Bank 42m Government Securities in return Borrower (3) Borrower continues to owe 100m to NAMA despite NAMA only having paid 42m to the Bank for the Loan. 60

61 Summary of bond activity since inception 31,000 30,500 30,000 29,500 29,000 28,500 28,000 27,500 27,000 26,500 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Source: NAMA Senior bond issuance gross Outstanding bonds after redemptions Bond issuance of c. 1 bn in Q was due to final asset transfers Senior Notes in issuance at year end 31 Dec ,106,000,000 Subordinated Bonds in issuance at year end 31 Dec ,601,000,000 Further Senior debt redemptions to be reviewed by NAMA Board in Q

62 NAMA Strategy is three-pronged Financing Provide equity capital and credit facilities only where appropriate NAMA will provide staple/vendor financing on commercial property sales in Ireland New capital is a scarce resource: it will be advanced by NAMA only where it makes commercial sense and enhances NAMA s financial position Only undertake development to realise full value of underlying asset NAMA has approved the advance of 950m in working and development capital Asset disposal Will be orderly and phased to generate maximum return for taxpayer There will be no fire sales; neither will assets be held to speculate NAMA s profitability goal will be consistent with potential growth in the economy, by facilitating functioning property market 23% of NAMA portfolio is performing. That figure should rise, as business plans are approved or rejected: 95% of business plans by value ( 70 billion nominal) have been reviewed Debt reduction targets; to reduce contingent liability of the Irish State By year-end 2013: 25% of NAMA bonds to be repaid; 40% by end-2015; 80% by end 2017 and 100% by end

63 Distribution of larger debtors Nominal Debt Number of debtors Average nominal debt per debtor m Total nominal debtin this category m In excess of 2,000m 3 2,784 8,352 Between 1,000 and 2,000m 9 1,564 14,077 Between 500m and 999m ,322 Between 250m and 499m ,023 Between 100m and 249m ,483 TOTAL ,257 Source: NAMA 63

64 Management of larger debtors Largest 190 Debtors 61bn Other 610 Debtors - 13bn Intensively managed by NAMA key credit decisions and relationship management carried out by NAMA multidisciplinary teams. Credit decisions made by NAMA. Cascading system of credit limits and delegated authority: NAMA Board Credit Committee -NAMA management NAMA units in banks. NAMA will have a presence in each of the bank units day-to-day credit decisions and operations liaison and oversight role. Loan administration performed by participating institutions Relationship management and loan administration carried out by participating institutions within NAMA parameters. 64

65 Breakdown of original NAMA portfolio (price paid for loan assets) bn Land & Development % of Total Investment % Total Total book % Total Ireland % % % UK & NI % % % USA/Europe 0.6 6% 1.4 7% 2.0 6% Total % % % The portfolio consists of 71% Investment and 29% Land & Development Source: NAMA The UK and NI accounts for 37% of the portfolio. Assets outside Ireland account for 43% The most difficult part of the portfolio to monetise is likely to be L&D in Ireland of 5.4bn but Dublin accounts for 3bn of this. The remaining 26.4bn should be realised (in today s money) from the rest of the portfolio Commercial property market rents have undershot in Ireland, while the residential market may deflate further Good opportunity to continue to realise value in the UK (excl. NI) in the short term Budget 2012 changes may help to put a floor under Irish commercial property values, by restoring confidence and liquidity in time 65

66 Further Information NAMA information available on For more information, requests can be sent to the address Receivership information added in July 2011, with monthly updates thereafter. As at November 2011, website contains details of over 1,057 properties where Receivers / Administrators have been appointed. Geographical breakdown of these 1,057 properties 69% ROI 13% NI 18% UK 66

67 SECTION 6: BUDGET 2012 Budget not as severe as previous three years: fiscal drag is lessening 67

68 Fiscal Consolidation thus far Ireland s Fiscal Consolidation began in July 2008 Consolidation to date has totalled more than 21bn or c. 13% of GDP; further consolidation of 12.4bn until 2015 Will have 7.8bn expenditure; 4.6bn tax split 2012 Consolidation will amount to approximately 3.8bn Fiscal drag is lessening Table 1: Annual Gross fiscal consolidation ( bn and % GDP) (4.7%) (4.1%) (3.9%) 2012E 3.8 (2.4%) 68

69 Budget 2012 breakdown The 2012 package of budget measures were announced by the Government in December bn consolidation split into expenditure reduction of 2.15bn and revenue-raising measures of almost 1.7bn Note, however, that there is significant carryover of revenue measures from previous consolidations totalling 0.6bn Table 2: Split of Budget bn gross consolidation ( bn) Capital expenditure 0.75 Current expenditure 1.4 Revenue of which carryover 0.6 Source: Department of Finance 69

70 Budget 2012: Current Expenditure Measures Expenditure measures focus on reductions in social protection spending and the health sector Includes some job cuts for public sector workers Table 3: Breakdown of current expenditure reduction ( bn) Social protection Health Education Other Source: Department of Public Expenditure and Reform 70

71 Budget 2012: Revenue Measures VAT rate increased from 21% to 23% Household charge introduced (fore-runner to property tax) Carbon tax & motor tax increased Capital Gains Tax and tax on deposit interest increased to 30% Tax relief for indigenous exporters to BRICs countries Exemption limit of Universal Social Charge raised to take lower paid workers out of tax net Table 4: Breakdown of revenue measures ( bn) VAT 0.56 Household charge 0.16 Excise changes 0.18 CGT/ CAT 0.13 Source: Department of Finance 71

72 SECTION 7: FISCAL Fiscal trends improving: further three-year challenge to reach debt sustainability 72

73 Gains from bubble period given back, but living standards (GDP per capita) higher than 15 years ago This is one key reason that fiscal austerity has been accepted, although GNI per capita has fallen back even further Source: CSO 73

74 Tax revenue beginning to recover from trough: at about mid-2004 levels now Note that tax revenue accounts for about 60% of General Govt. revenue Source: Department of Finance 74

75 Swing in primary balance required to stabilise debt ratio another 8pp of GDP from end Debt stabilising primary balance reached in E 2011F 2012F 2013F 2014F 2015F Source: Department of Finance; CSO 75

76 Ireland s fiscal challenge made easier by rate cuts Years Turnaround required in Primary Balance (% of GDP) GDP (% chg. real) GDP (% chg. nom) Belgium ( ) Denmark ( ) Finland ( ) Sweden ( ) Ireland ( ) Ireland ( F)* Source: NTMA Ireland is halfway through the process, but it remains politically difficult anywhere to consolidate when inflation is low 76

77 Rollovers of bonds light in 2012 and Government fully funded to end-2013, so 12bn in 2014 is first challenging year Source: NTMA Ireland govt. bonds Troika loans 77

78 Gross Government debt stabilises at 119% of GDP in Debt is reported gross and does not take account of offsetting financial resources F 2014F Source: Department of Finance 78

79 APPENDIX

80 Timeline of banking sector developments March and May 2009 NPRF investment by way of preference shares of EUR 3.5bn each in BOI (March) and AIB (May) September 2010 Estimates for fiscal costs associated with support measures for the banking sector were raised to c. EUR 45bn 31 July 2011 PCAR 24bn recap largely completed (excluding 0.4bn forbearance afforded to BoI& sale of Irish Life) -LME gains of 5.2bn generated, BoI source 1.7bn from private investors, contribution from State of 16.5bn September 2008 Bank Guarantee Scheme introduced (CIFS) January 2009 Nationalisation of Anglo Irish Bank The Eligible Liabilities Guarantee Scheme (ELG) extended (to cover shorter maturities) December 2010 IMF/EU financial support package signed NPRF investment of EUR 3.7bn in AIB March and September 2009 The Prudential Capital Assessment (PCAR) raised the Core Tier 1 Capital Ratio to 8%, including a minimum of 7% in Core Tier 1 equity capital December 2009 NAMA established March 2011 Following PCAR/PLAR 2011, AIB/EBS, BoI and IL&P are required to raise 24bn in order to meet a Core Tier 1 ratio of 10.5% and 6% in the base and stressed scenarios respectively The banks are also required to deleverage c. 70bn of loans to meet a loan to deposit ratio of 122.5% by December 2011 BoIcomplete remaining 0.4bn recap 80

81 Loan book analysis Total loans ( bn) AIB BOI ILP EBS Total Residential mortgages Corporate SME CRE other Total (Dec 2010) Source: PCAR 2011 Mortgage analysis ( bn) AIB BOI ILP EBS Total Irish owner occupier Irish Buy-to-let Total Irish UK owner occupier UK Buy-to-let Total UK Total residential mortgages (Dec 2010) Source: PCAR

82 Central bank projected losses under adverse scenario Projected stressed losses derived from bottom-up analysis of loan data by Blackrock Solution bn AIB BOI ILP EBS Total Residential mortgages Corporate SME CRE other Total % of loan book Residential mortgages 9.9% 3.9% 7.9% 8.7% 6.7% Corporate 4.7% 5.2% 0.0% 0.0% 4.9% SME 13.9% 10.6% 0.0% 0.0% 12.3% CRE 26.2% 18.8% 19.5% 23.4% 22.1% other 25.0% 16.4% 20.7% 0.0% 20.7% Total 13.4% 8.0% 9.1% 9.4% 10.1% Source: PCAR 2011 The 27.7bn of projected losses is significantly more conservative than the banks own forecast provisions over the same period (c. 22bn) and is designed to add to the credibility of the tests The losses are projected on a repossess and sale approach using stressed property values with little recognition of customer repayment capacity, incorporating the write-down experience of foreign jurisdictions (UK repossession levels) Negative equity (as opposed to unemployment levels) had a large bearing on forecast residential loan losses Modelled rental income declines assumed on commercial real estate (with little regard to sustainable cash flows from actual lease contracts) 82

83 Projected adverse case losses by bank and portfolio used for capital purposes (derived from BlackRock analysis) Product AIB BOI ILP EBS Total Residential Mortgages BlackRock lifetime loan losses post-deleveraging Corporate SME CRE Non-mortgage Consumer and Other Total Source: PCAR 2011 CB three-year projected losses BlackRock lifetime loan losses post-deleveraging CB three-year projected losses BlackRock lifetime loan losses post-deleveraging 4,908 (15.8%) 3,066 (9.9%) 1,133 (5.5%) 972 (4.7%) 4,085 (21.2%) 4,286 (7.2%) 2,366 (3.9%) 1,379 (6%) 1,179 (5.2%) 2,871 (16.6%) 5,209 (15.4%) 2,679 (7.9%) 0 (0%) 0 (0%) 0 (0%) 2,495 (15.7%) 1,380 (8.7%) 0 (0%) 0 (0%) 0 (0%) 9,925 (7.1%) 5,838 (4.1%) 1,608 (3.7%) 1,362 (3.1%) 5,398 (14.8%) 16,898 (12%) 9,491 (6.7%) 2,512 (5.8%) 2,151 (4.9%) 6,956 (19%) CB three-year projected 2,674 1, ,603 4,511 losses (13.9%) (10.6%) (0%) (0%) (9.9%) (12.3%) BlackRock lifetime loan losses post-deleveraging CB three-year projected losses BlackRock lifetime loan losses post-deleveraging CB three-year projected losses BlackRock lifetime loan losses post-deleveraging CB three-year projected losses 4,717 (27.5%) 4,490 (26.2%) 1,674 (29.8%) 1,403 (25%) 16,517 (17.6%) 12,604 (13.4%) 4,950 (24.2%) 3,847 (18.8%) 1,332 (24.5%) 891 (16.4%) 14,819 (11.8%) 10,119 (8%) 411 (20.1%) 400 (19.5%) 444 (26.8%) 342 (20.7%) 6,064 (16.1%) 3,421 (9.1%) 225 (26.7%) 197 (23.4%) 0 (0%) 0 (0%) 2,719 (16.3%) 1,577 (9.4%) 8,114 (20.1%) 7,159 (17.7%) 2,477 (19.5%) 2,052 (16.1%) 27,522 (10%) 20,014 (7.3%) 10,303 (25.5%) 8,934 (22.1%) 3,450 (27.1%) 2,635 (20.7%) 40,119 (14.6%) 27,722 (10.1%) 83

84 Projected adverse case mortgage book losses used for capital purposes derived from BlackRock Ireland Owner Occupier Buy-to-Let UK Owner Occupier Buy-to-Let Total Residential Mortgages AIB BOI ILP EBS Total BlackRock lifetime loan losses postdeleveraging 4,846 (17.6%) 3,836 (13.7%) 5,103 (19.4%) 2,495 (15.7%) 16,280 (16.7%) CB three-year projected losses 3,007 2,016 2,594 1,380 8,997 (10.9%) (7.2%) (9.9%) (8.7%) (9.2%) BlackRock lifetime loan losses postdeleveraging 2,968 2,075 2,975 2,164 10,181 (14.7%) (9.9%) (15.3%) (15.5%) (13.7%) CB three-year projected losses 1,791 1,115 1,598 1,164 5,668 (8.9%) (5.3%) (8.2%) (8.3%) (7.6%) BlackRock lifetime loan losses postdeleveraging 1,879 1,761 2, ,099 (25.5%) (24.9%) (30.8%) (17.1%) (26.2%) CB three-year projected losses 1, ,330 (16.5%) (12.7%) (14.4%) (11.2%) (14.3%) BlackRock lifetime loan losses post deleveraging (1.8%) (1.4%) (1.4%) (-) (1.4%) CB three-year projected losses (1.7%) (1.1%) (1.1%) (-) (1.1%) BlackRock lifetime loan losses postdeleveraging (1.2%) (0.6%) (1.3%) (-) (0.7%) CB three-year projected losses (1.1%) (0.5%) (1.1%) (-) (0.6%) BlackRock lifetime loan losses postdeleveraging (5.2%) (2.9%) (1.4%) (-) (2.4%) CB three-year projected losses (5.3%) (2.2%) (1.1%) (-) (1.9%) BlackRock lifetime loan losses postdeleveraging 4,908 4,286 5,209 2,495 16,898 (15.8%) (7.2%) (15.4%) (15.7%) (12.0%) CB three-year projected losses 3,066 2,366 2,679 1,380 9,491 (9.9%) (3.9%) (7.9%) (8.7%) (6.7%) Source: PCAR

85 Stress loss projections in of 27.7bn; total lifetime stress economic loss projections of 43.1bn Billions Crystallised stress losses in period Non-disposed book Stress default but not crystallised Stress loss projections Stress default post 2013 Lifetime stress economic loss projections of non-disposed Lifetime economic loss of disposed book BRS total lifetime economic losses permanent stress BRS lifetime economic losses base scenario Source: PCAR

86 Residential mortgage loans: total universe and loss assumptions Projected losses by bank, including the impact of deleveraging Baseline Adverse Figures in m Total notional balance Projected lifetime losses % Projected lifetime losses % AIB 31,014 3, % 4, % BOI 59,941 2, % 4, % EBS 15,891 1, % 2, % ILP 33,872 3, % 5, % Total 140,718 9, % 16, % Source: PCAR 2011 Given lack of recent foreclosure data in Ireland, BRS calibrated the foreclosure experience in other jurisdictions to the current Irish economic, political and social conditions BlackRock assumed that Irish repossession rates would converge with those in the UK Implicit in the model is the assumption that forbearance of high LTV loans moderately increases losses by increasing time andexpense to recovery, while impairing property value through accumulated disrepair Loss severities relatively high, as forced sale discounts and expenses are taken into account House price index challenged through property "drive-bys" involving local real estate expertise Differentiated models for Buy-to-Let and Owner Occupied for Ireland and for UK given variances across these different pools BRS models were subjected to in and out of sample testing and a variety of test statistics to ensure robustness The BlackRock models are statistically robust and performed well in out-of-time and out-of-sample testing 86

87 Corporate loans: total universe and loss assumptions Projected losses by bank, including the impact of deleveraging Figures in m Baseline Adverse Product type Total notional balance Projected lifetime losses % Projected lifetime losses % AlB 20, % 1, % BOI 22, % 1, % Total 43,538 1, % 2, % Source: PCAR 2011 Loan loss forecasts for Corporate loans were based upon a combination of manual loan file reviews and a more statistical PD/ LGD approach BlackRock focused its efforts during the loan file reviews on the largest and/or most impaired loan exposures with a view to achieving maximum risk-based coverage Critical metrics used in the loan review analysis were debt service measures (e.g. debt-to-ebitda), sustainable cash flow and borrower credit characteristics In order to ensure asset quality was accurately reflected in the loss models, BlackRock performed detailed manual file reviews on 75% of loans (by value) over 50mm with the results of the review used to inform forecasting assumptions for the remaining portfolio. The results of the manual re-underwriting were used to inform the assumptions used in the loan loss forecasting of these loans BlackRock has substantial in-house knowledge of projected default (PDs) and loss severities (LGDs) for corporate sectors / clusters based upon historical experience JPM s Default Monitor, Moody s, and BRS proprietary databases are used in corporate lending analysis 87

88 SME loans: total universe and loss assumptions Projected losses by bank, including the impact of deleveraging Baseline Adverse Figures in m Total notional balance Projected lifetime losses % Projected lifetime losses % AlB 19,229 3, % 4, % BOI 17,305 2, % 2, % Total 36,534 5, % 6, % Source: PCAR 2011 "Loss" is the crystallized principal loss through insolvency/realized collateral or write downs from balance sheet restructurings The main driver of losses is the current stock of criticized loans (watch list or impaired) Given the severity of the economic downturn in both Ireland and UK, both institutions have undergone a significant review anddownward re-rating cycle over the last three years BlackRock applied a forbearance overlay to its loss projections for Ireland to take the current and future level of forbearance and the significant balance sheet restructuring backlog into account 88

89 CRE loans: Total universe and loss assumptions Projected losses by bank, including the impact of deleveraging Baseline Adverse Figures in m Total notional balance Projected lifetime losses % Projected lifetime losses % AlB 17,124 3, % 4, % BOI 20,414 3, % 4, % EBS % % ILP 2, % % Total 40,428 8, % 10, % Source: PCAR 2011 BlackRock performed bottom-up (Deep Dive) analysis on the large facility exposures (c. 20% of the portfolio) with a view to achieving maximum risk-based coverage Facilities under 50mm were reviewed via a series of deterministic tests to evaluate whether property cash flows are sufficient to service the debt, based on which the term and maturity default3 were calculated for each facility in the portfolio Given the data quality issues in this portfolio, BRS applied significant conservatism, e.g. Given that the loss forecasting model is based significantly on Net Operating Income and current drawn balance, if these fields were missing from a loan's data, the loan was excluded from bottom-up analysis and a more pessimistic loss rate was applied If maturity date was missing, an assumed maturity of January 2011 was applied If payment schedule was missing, loan assumed to be interest-only Default triggers are more conservative than banks would typically apply, e.g. At maturity, regardless of debt servicing coverage, if the LTV >120%, the loan is considered in default Workout costs depend upon the loan balance, ranging from 10% (for balances up to 10mm) to 3.5% (for balances above 200mm) based upon discussions with bank's management, and real estate attorneys 89

90 Non-mortgage consumer and other: total universe and loss assumptions Projected losses by bank, including the impact of deleveraging Baseline Adverse Figures in m Total notional balance Projected lifetime losses % Projected lifetime losses % AlB 5,621 1, % 1, % BOI 5, % 1, % ILP 1, % % Total 12,721 2, % 3, % Source: PCAR 2011 The historical data for this category of loans is robust enough to be used as the predictor for future losses BRS obtained data from the banks on loans becoming three months past due and subsequent "cure rates" For this category, three months of missed payments means a loan is delinquent; a borrower has three subsequent months to "cure",else the loan will be considered a loss For secured loans (e.g. secured by automobiles) BRS used loss assumptions for liquidations based on actual performance of securitized loans for which BRS was able to obtain data For unsecured debt, BRS assumes that the debts have nil value after they been nonperforming for six months, which is marginally more conservative than banks' assumptions 90

91 Irish covered banks: Summary balance sheets m AIB BOI ILP EBS Anglo INBS * Summary balance sheet as at 30 June June June Dec June Dec 2009 Total Assets Loans and advances to customers* 73, ,686 34,982 16,473 15,471 2, ,109 Promissory notes ,804-24,055 NAMA notes 19,549 4, ,986 Loans and advances to banks 5,992 6, ,030 1,189 16,978 Available for sale assets 16,373 14,241 31,725 2,575 8,332 5,740 78,986 Other assets 8,595 28,197 7, ,930 3,853 52,283 Cash 3, ,656 Total assets 126, ,438 75,257 20,087 54,081 13, ,053 Liabilities Deposits from banks 36,294 38,720 18,417 5,756 41, ,216 Customer accounts 63,932 65,143 14,968 9, , ,493 Debt securities in issue 14,374 22,140 8,245 3,568 5,684 5,395 59,406 Subordinated liabilities 126 2, ,970 Other liabilities 5,288 20,198 31, , ,133 Total liabilities 120, ,864 73,303 19,395 50,677 11, ,218 Total equity 6,861 6,574 1, ,404 1,350 20,835 Total liabilities and equity 126, ,438 75,257 20,087 54,081 13, ,053 Source: Company data Since 2010 year-end the banks have reduced total subordinated liabilities by c. 2.2bn via additional liability management exercises *INBS received total promissory notes of 5.3bn and NAMA bonds of 2.8bn during