Brendan McDonagh: Nama chief

The average discount applied to the entire €77bn Nama portfolio of bad bank loans is now expected to approach 34% with only Bank of Ireland likely to get a haircut as low as the 30% guided by Nama chief executive Brendan McDonagh in January, market sources say.

According to rough analysis carried out by a Dublin stockbroker, which has been seen by the Sunday Tribune, Anglo Irish Bank and Irish Nationwide will face discounts of 36%, EBS 35%, AIB 32% and Bank of Ireland 30%, giving a weighted average of 33.5% based on the amount of assets each lender is expected to send to the agency.

Higher discount levels will add billions more than originally expected to the capitalisation needs of the in­stitut­ions, as every extra percentage point on the average haircut adds a cumulative €750m-plus to the bill, according to calculations by Royal Bank of Scotland.

Recent reports had put the haircuts for Anglo and Irish Nationwide as high as 40% based on valuations carried out on the €19bn in loans owed by the banks' largest borrowers. But both AIB and Bank of Ireland were widely expected to come in under 30% to balance that out. Both banks made optimistic statements last September that their discounts would come in well below aver­age, but have gradually re­treated from such certainty.

The adjustments will be especially difficult for Bank of Ireland and AIB to cope with, as their estimated haircuts now exceed original predictions by as much as 10%, putting holes of more than €1bn and €2bn respectively, in their core capital. Both banks will be under pressure post-Nama to raise capital far above their market value to avoid majority state ownership.

The building societies may need as much as €2.4bn, which the government has already acknowledged, while the capital needs of Anglo, which is preparing to radically shrink in size, are less pressing.

Weak collateral has reportedly become a serious problem for Nama and the banks during the last few weeks as valuers have been applying deeper discounts on loans with unclear loan security, leading to widespread market speculation that the average Nama haircut across banks would exceed previous government estimates of 30%.

AIB has called much of its regional lending staff to Dublin in the weeks since Christmas in a last-minute bid to complete documentation for loans, while Bank of Ireland has reportedly challenged valuations on as much as 40% of the €16bn it is expected to transfer to Nama.