Banks are facing a fresh Tier 1 capital ratio crisis because the valuations being put on the property loans they gave to developers are coming in below expectations. Several industry sources said that the banks are extremely unhappy with some of the valuations as they believed the properties were worth more than they are now being told.
Properties in Ireland in particular are coming in below expectations. As an example, one director said last week that land in Kilternan in south Dublin with "hope value" in terms of being rezoned had sold for at or above €4m per acre during the property bubble but would now be valued at between €900,000 and €1.1m per acre.
Sources said last week that the banks were also behind in their preparations for Nama and some have only dealt so far with their largest clients. Anglo is regarded as the best prepared, although some sources believe this is because it is now state-owned and that it would be like the other banks if it was still in private hands. Bank of Ireland and AIB are said to be behind the curve in terms of processing the loans.
"It's almost like they believed that a random sampling would be used," said one expert, "but by going through them loan-by-loan it's more likely that the overall portfolio values will come in below what they expected."
AIB said in its interim management statement last week that the discount to be applied to its loan book by Nama "can only be known following an extensive exercise in which those loans are individually valued on a case-by-case basis". It added that "it expects to provide an updated estimate of the likely effect on AIB when there is more clarity on matters such as the final amount of loans to be transferred, pricing and transfer timing of loans, fees payable to AIB, fair value of the consideration to be received and due diligence is completed".
However, its view "was that there is no reason to believe that the average discount applicable to AIB's Nama-eligible loans will fall significantly outside the minister's guidance of 30%", and added that the level of impaired loans transferring to Nama will have increased to €10.5bn from €6.7bn previously guided. The "significantly" in that statement is key, because every per cent above that adds to the amount of capital the bank will ultimately have to raise, be it from the state or from the private market.
On the flip side, there is a mini bubble in the London market at the moment as a huge wall of money chases a scarcity of stock, increasing capital values which will benefit the banks as some loans begin to stick their head above water.
But working out some of the troubled development loans will prove much more problematic because levies have to be paid to the local authority when construction commences and that, combined with the fact that much of the initial expenditure is non-income producing, is deterring developers from going on site.
"You can be faced with a bill for basements of €60m alone," said one source, who believes that developers will have to reapply to build townhouses instead of apartments in the current climate because the costs are lower, construction can be phased and better returns on investment are provided.
It's hard to get a glimpse into how this is affecting the property developers, most of whom are now insolvent.
One seasoned property investor, who has had financial woes, said last week that while certain assets were being sold, the banks' unwillingness to realise losses on loans means those assets that were bought with debt could not yet be sold. "The bottom has yet to be reached," he said.
Traditionally, Ireland has had very few publicly quoted property companies so it can be difficult to gain an insight into how Nama and the banks are affecting companies.
However, Real Estate Opportunities (REO), which is majority owned by Richard Barrett and Johnny Ronan's Treasury Holdings, provided some insight in its interim management statement last week that Nama "will start to bring some stability to the Irish property market during 2010".
REO has also changed its accounting year-end date to 28 February as that coincides with the establishment of the soured loan bank and the transfer of a number of REO's loans to the agency.
The company's statement continued that "until Nama becomes operational and loans have been transferred, bank finance continues to be limited. However, we are continuing to work closely with our existing lenders to renew debt facilities with non-Nama banks where necessary." It said that restructuring the company's Irish debt was unlikely until such time as Nama was formally set up. It's a situation a lot of Irish developers will be familiar with.
There is still a degree of puzzlement in property circles about why certain developers, who are widely believed to be insolvent, have yet to see their companies go into liquidation. The answer is that the majority of their loans are with a bank covered by Britain's asset protection scheme. Under that, the British Treasury initially agreed to cover 90% of a bank's losses over the initial hit that the banks must bear.
As a result, there has been no real incentive for the banks to move against the insolvent Irish developers who are their customers, so much so that Stephen Hester (inset), who runs Royal Bank of Scotland, which owns Ulster Bank, said earlier this year that they plan to "play a long game in working with our customers to work through their debt-management issues" and that this process could take years.