ireland on recovery path - nama wine lake · 2012. 1. 26. · presentation for institutional...
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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
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SUMMARY
2
Ireland has delivered on targets and private capital has been attracted
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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 21st, 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
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Pro-forma Core Tier 1 ratios stand out in euro area
after huge PCAR re-capitalisation
15
20
25
30
Ireland’s banks look ahead of the
game versus the rest of the euro
area because they’ve already
provided for likely losses
4
0
5
10
15
AIB BoI IL&P
Dec-10 Jun-11
Source: Department of Finance
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Exchequer deficit improved versus a year ago (€bn
excluding banking recapitalisations)
-8.0
-6.0
-4.0
-2.0
0.0
2.0
Central Government
(cash) deficit €2.7bn
lower like-for-like in 2011
compared with 2010
5
Source: Department of Finance
-20.0
-18.0
-16.0
-14.0
-12.0
-10.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009 2010 2011
2011
2009
2010
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Economy pulled out of long recession in H1 2011
160
170
180
190
200
Nominal GDP
Real GDP
Activity slipped in
Q3, as domestic
economy declined
6
Source: Central Statistics Office (CSO)
100
110
120
130
140
150
Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Nominal GNP
Real GDP
Real GNP
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SECTION 1: MACRO
7
Irish economy stabilised grew for first time in four years in 2011, thanks
to exports
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Rapid recovery in exports, but euro area crisis is a
threat for 2012
35000
40000
45000
Exports above
previous peak
8
Source: CSO
20000
25000
30000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Ireland’s PMIs now among the highest in euro area
50.0
55.0
60.0
65.0
70.0 Service activity holding up
particularly well, thanks to
US/ UK exposure
9
Source: Markit; NCB
30.0
35.0
40.0
45.0
50.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Manufacturing Services
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Ireland's composite PMI is a good guide to GDP
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
50.0
55.0
60.0
65.0
On current evidence, Ireland
may avoid recession unlike
other non-core countries
10
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
30.0
35.0
40.0
45.0
Q4 2000 Q4 2001 Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010
PMI composite (LHS) GDP % change yoy (RHS)
Source: Markit; NCB; CSO
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Euro area economy slowing, but not collapsing
50
55
60
65Euro area PMI below 50,
signalling recession, but
has stabilised for now
11
30
35
40
45
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
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Domestic economy still in deleveraging phase
70
80
90
100
110
12
20
30
40
50
60
Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Nominal domestic demand (index, peak = 100) Real domestic demand (index, peak = 100)
Investment and consumer
spending may reach bottom
in next 18 months, but
government spending will
shrink out to 2015 at least
Source: CSO
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Employment decline accelerates again in Q3
0.0
1.0
2.0
Disappointing decline
may be one-off following
steady improvement
13
Source: CSO
-4.0
-3.0
-2.0
-1.0
Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
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Unemployment rate stabilising at 14%-14.5%
10
12
14
16
14
Source: CSO
0
2
4
6
8
Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Employment declined
1.1% in Q3, but labour
force also fell almost 1%
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Real disposable income still declining (€ per person)
20,000
21,000
22,000
23,000Hit by lack of non-wage
earnings; higher taxes;
elevated energy prices; and
lower social transfers
15
Source: CSO; NTMA
15,000
16,000
17,000
18,000
19,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E
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Household net worth per capita reduced by falling
house prices (chart is € net worth per capita)
130000
140000
150000
160000
170000
Falling house prices cause
self-reinforcing cycle; and
negative equity a barrier to
second-hand transactions
16
80000
90000
100000
110000
120000
Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Source: Central Bank; NTMA
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Personal savings ratio highest since early 1990s
10.0%
15.0%
20.0%
Households are in the
process of deleveraging
and confidence will take
a long time to rebuild
17
-5.0%
0.0%
5.0%
Source: CSO
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Consumer spending still declining: set to continue
through 2012 (quarterly €m is scale)
20000
21000
22000
23000
24000
18
Source: CSO
15000
16000
17000
18000
19000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Spending suffering from
declining disposable incomes,
high household debt and
negative wealth effects
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Housing starts still falling
50000
60000
70000
80000
90000
19
0
10000
20000
30000
40000
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
Starts now below 5,000 on
a 12-month basis, but need
to run below level of
demand for some time
Source: Department of the Environment, Heritage and Local Govt.
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Investment as a % GDP at all-time low
20.0
25.0
30.0
Long run average
20
0.0
5.0
10.0
15.0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excesses are being purged,
so investment is unlikely to
mean revert in near term
Source: CSO
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Economic and fiscal forecasts: Budget 2012
2011F 2012F 2013F 2014F 2015F
GDP (% change, volume) 1.0 1.3 2.4 3.0 3.0
GNP (% change, volume) 0.4 0.7 1.7 2.3 2.3
Current Account (% GDP) 0.5 1.7 2.5 3.3 3.7Current Account (% GDP) 0.5 1.7 2.5 3.3 3.7
General Government Debt
(% GDP) 107 115 119 118 115
General Government
Balance (% GDP) -10.1 -8.6 -7.5 -5.0 -2.9
Inflation (HICP) 1.2 1.9 1.4 1.5 1.9
Unemployment rate (%) 14.3 14.1 13.5 12.9 11.6
Source: Department of Finance: Budget 2012 (issued December 6th, 2011)
21
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SECTION 2: REBALANCING
22
Competitiveness gains have been significant; Ireland outperforms other
“non-core” countries thanks to its flexible economy
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Ireland becoming more competitive and living within
its means: current account (% GDP) back in surplus
-1.0%
0.0%
1.0%
2.0%
3.0%
Last year saw first
current account surplus
since 1999
Source: CSO
23
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Economy-wide employment has re-balanced quickly
(% share of each sector in total employment)
30.0%
40.0%
50.0%
60.0%
Employment has not
increased in the public sector:
it has simply declined at a
slower pace than elsewhere
24
Source: CSO
0.0%
10.0%
20.0%
30.0%
Agriculture Industry Construction Public sector (incl. private
health & education)
Private sector
Peak (Q2 2007) Q3 2011
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Ireland to benefit more than most from decline in FX
value of euro in recent months (chart: export shares)
40.0%
50.0%
60.0%
70.0% US/UK together have
same weight in Irish
exports as euro area
25
0.0%
10.0%
20.0%
30.0%
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
UK Rest of EU US Rest of World
Source: CSO
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Ireland’s competitive position vastly different to the
non-core countries
Unit Labour Costs (Q1 2001=100) Current Account Balance (% GDP)
130
140
150
Ireland has few
structural
rigidities
-4.0%
-2.0%
0.0%
2.0%
26
Source: European Commission Source: DataStream
90
100
110
120
130
Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011
Spain Greece Ireland Italy Portugal
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Spain Greece Ireland Italy Portugal
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Ireland is far more open than other non-cores
Exports (%GDP) Imports (%GDP) Openness proxy
Ireland 101 82 1.23
Spain 27 29 0.93
Italy 27 29 0.93Italy 27 29 0.93
Portugal 31 38 0.81
Greece 21 29 0.71
Source: Datastream (for 2010)
27
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Ireland’s export performance was much stronger
than Portugal and Greece even during bubble
120
130
140
150
Ireland’s exports above their
previous peak; not the case
in Portugal or Greece
28
90
100
110
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Greece (export volume 2000 = 100) Portugal (export volume 2000 = 100) Ireland (export volume 2000 = 100)
Source: Datastream
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SECTION 3: PROPERTY
29
Residential property prices have further to fall, but commercial market
has probably bottomed
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Mortgage volumes have collapsed
40000
50000
60000
30
0
10000
20000
30000
Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011
Credit supply and
demand issues impact,
but there were tentative
signs of a bottom in 2011
Source: IBF
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Mortgage credit restrictions on the rise
3.25
3.50
3.75
4.00
Credit standards loosening
31
2.00
2.25
2.50
2.75
3.00
Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Credit standards tightening
Source: ECB bank lending survey for Ireland
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National house prices down 46% from peak in 2007
80
90
100
110
32
Source: CSO
40
50
60
70
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
All country Dublin
Dublin market, which is
more liquid, has seen 54%
fall (index peak = 100)
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Valuation of housing has adjusted but does not yet
look compelling
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Reasonable rental yield (annual rent/ average house price) range: similar to other risky assets
33
Source: CSO; ESRI; NTMA
0.0%
1.0%
2.0%
3.0%
4.0%
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Gross yield Net yield
Collapse in yield
during 2001-
2007 bubble
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House prices as a ratio of disposable income per
capita nearly back to typical trough of 8-9x
14.0
16.0
18.0
20.0
Prices followed disposable
34
6.0
8.0
10.0
12.0
1976 1981 1986 1991 1996 2001 2006 2011
Prices followed disposable
income per person for a
decade from 1986-1996
Source: CSO; NTMA
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But private housing rents are now rising
150.0
160.0
170.0
180.0
35
100.0
110.0
120.0
130.0
140.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Rents are rising, suggesting that
current available supply in
balance with demand
Source: CSO
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Commercial property valuations (particularly office
and industrial) look attractive versus history
7.0
8.0
9.0
10.0
2nd half 1990s average
Average since 1995
Highest yield level on record
(data back to 1995), thanks
to 65% drop in prices
36
Source: IPD
2.0
3.0
4.0
5.0
6.0
Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011
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Foreign buyers now interested on valuation grounds
6.0
7.0
8.0
9.0
10.0
Positive
carry
37
Source: IPD; NTMA
2.0
3.0
4.0
5.0
6.0
Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011
5-year Euro swap rate + 300bp margin Ireland Commercial Property yields
Made no sense for
foreign buyer
Yield pick up
significant
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SECTION 4: BANKING
38
Ireland has drawn a line under bank re-capitalisation; Contingent liability
quantified for the State; Execution of deleveraging plan progressing well
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The six domestic banks funding profiles
€bn Dec-08 Dec-09 Dec-10 June -11 Sept-11
Change v
Dec 08
Retail deposits 152 146 136 118 121 -31
Corporate deposits 103 80 32 21 21 -82
Debt Capital Markets 140 123 69 58 55 -85
Repo/Interbank 89 50 30 19 21 -68
Central Bank 37 62 142 123 122 +85
Total 521 461 409 339 339 -181
Loss of market confidence in banking system in 2010
• 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
Source: Financial Measurement Program Report / Central Bank of Ireland
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Domestic deposits have stabilised
80000
100000
120000
140000
160000
Flat over last six months
40
Source: Central Bank of Ireland - resident private sector (unconsolidated balance sheet)
0
20000
40000
60000
80000
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
Households Non-financial corporations
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Reliance on ECB funding has declined significantly
80000
100000
120000
140000
160000
Reliance on ECB liquidity
down c. €40bn from peak
(scale on left is €m)
Source: Central Bank of Ireland; NTMA
41
0
20000
40000
60000
80000
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
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Capital - NAMA haircuts erode equity base
December 2010 (€bn) Loans transferred Discount/Haircut
NAMA Bonds
received
AIB 20.2 55% 9.0
BoI 9.9 43% 5.6
Anglo 34.1 61% 13.4
INBS 8.7 61% 3.4
EBS 0.9 57% 0.4
Total 73.8 57% 31.8
• 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 €6.9bn of asset sales already agreed by the end of 2011 (see NAMA section)
Source: National Asset Management Agency (NAMA)
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Capital injections following NAMA transfers (up to
2010 year-end)
€bn Anglo INBS AIB **BOI EBS ILP Total
Government recapitalisations (Dec 2010)
Equity 4.0 - 3.7 1.7 - - 9.4
Preference Shares - - 3.5 1.8 - - 5.3
Promissory Note* 25.3 5.3 - - 0.3 - 30.9
Special Investment shares - 0.1 - - 0.6 - 0.7
Subtotal Government Recapitalisation 29.3 5.4 7.2 3.5 0.9 - 46.3
Liability Management Exercises ("LMEs")
2009 1.8 0.3 1.2 1.0 - - 4.3
2010 1.6 - 0.4 1.4 - - 3.4
• * 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)
2010 1.6 - 0.4 1.4 - - 3.4
2011 (up to March 31) - 0.1 1.5 - 0.1 - 1.8
Subtotal LMSs 3.3 0.4 3.0 2.5 0.2 - 9.4
Total (as at March 31, 2011) 32.6 5.8 10.2 6.0 1.1 - 55.7
Source: Company data
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Overview of the Process for Recapitalisation and
Restructuring of the Irish Banking
• Prudential Capital Assessment
Review carried out by the
banks for the period 2011-2013
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 Prospective profile
of the Irish banking
• Forecasts are based on
target funding ratios set by
CBI
• Results fed into the PCAR
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
• Capital requirement
based on stressed,
adverse scenario
with contingencies
taking into account
potential losses
post 2013 and other
uncertainties
of the Irish banking
system
• Results fed into the PCAR
and deleveraging work
Source: Central Bank of Ireland
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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 processreducing wholesale exposure while avoiding fire-sale losses in the process
€bn AIB BOI EBS ILP TOTAL
Capital required 2011-2013 pre-buffer 10.5 3.7 1.2 3.3 18.7
Additional capital buffer (equity) imposed by the Central Bank 1.4 0.5 0.1 0.3 2.3
Contingent capital imposed by the Central Bank 1.4 1.0 0.2 0.4 3.0
Total capital required 2011-2013 13.3 5.2 1.5 4.0 24.0
Total Capital Requirement under the FMP Report
Source: PCAR 2011
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PCAR 2011 recapitalisation sources
€bn NPRF Exchequer Other Total
Allied Irish Banks/EBS 8.8 3.9 2.1 14.8
Bank of Ireland (BoI) 1.2 0.0 4.0 5.2
Irish Life and Permanent (IL&P) 0.0 2.7 1.3 4.0
10.0 6.5 7.5* 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)
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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%
47
NPRFC 15.1%
Existing Stockholders 30.9%
The Investors 34.9%
Exchanging Bondholders 19.0%
Source: Department of Finance
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Total cost to Irish State for Bank recapitalisation
AIB/EBS BoI ILP Anglo/INBS Total
Preference Shares (2009) 3.5 3.5 * 7.0
Cash - Capital Contribution (2009) 4.0 4.0
Promissory Notes/Special Investment
Shares (2010) 0.9 30.7 31.6
Ordinary Share Capital (2010) 3.7 3.7
48
Ordinary Share Capital (2010) 3.7 3.7
Total pre-PCAR/PLAR 2011 8.1 3.5 0.0 34.7 46.3
PCAR / PLAR 2011
Cash - Capital Contribution From
Exchequer 2.3 2.3 4.6
Contingent Capital 1.6 1.0 0.4 3.0
NPRF Capital 8.8 0.2 ** 9.0
Total PLAR 12.7 1.2 2.7 0.0 16.6
Total Cost of Recap 20.8 4.7 2.7 34.7 62.9
* Bank of Ireland cost is net of share sale to private investors
* €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)
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6% Core Tier 1 ratio under stress scenario drove capital
requirement of €24bn
9.9
3.9
2.3
3.0
10
20
30
€ Bn
27.7
Capital
short-fall
€ 24BN
€5.3BN 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
13.3
8.4
2.3
-20
-10
0
10
2013 Capital
requirements
@ stress CT1
6%
Stress CT1
2013 pre
capital
injection
10.3
Completed
capital
increases
since end
2010
3.5
Loss on
deleveraging
non core loans
13.2
3yr stress
loss
projections
based on
BRS
3yr operating
profit before
provisions &
deleverage
costs
Stock
provisions
2010
CT1 capital
2010
Capital
buffers
Source: PCAR 2011
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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%
Peer Core Tier 1 ratio analysis
30.0%
35.0%
* EBS is at Dec 2010 (since merged with AIB)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Co
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ILP
50
* Note: Citigroup estimates (2011 year-end) except for Irish banks (pro-forma June 2011)
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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
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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 Q4 2011. 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
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Core72%
Non-core28%
Core86%
Non-core14%
Core66%
Non-core34%Core
71%
Non-
core
29%
System Deleveraging, post May 2011 updated plans
Core €61.2 bn
Non-Core €25.1 bn
Core €76.2 bn
Non-Core €39.1 bn
Core €14.1 bn
Non-Core €2.3 bn
Core €26.6 bn
Non-Core €10.4 bn
AIB BOI EBS IL&P
53
Deleveraging: 2010 - 2013Deleveraging: 2010 - 2013
Source: Central Bank of Ireland & Institutions’ deleveraging plans1 Note: Deleveraging shortfall in AIB of €560m currently being reassessed
Source: Central Bank of Ireland & Institutions’ deleveraging plans1 Note: Deleveraging shortfall in AIB of €560m currently being reassessed
Note: Balances as at 31 December 2010
� The LDR target is based on the assumption of flat deposit growth
€bn AIB BOI EBS IL&P Total
2010 Net loans to customers 86.4 115.3 16.4 37.0 255.1
2013 Net loans to customers 68.1 84.1 11.5 21.3 185.0
Total (change in loans 2010-13) 18.3- 31.2- 4.9- 15.7- 70.1-
2013 LDR% 123.5%1
122.3% 121.1% 121.7% 122.6%1
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Amortisations New lending Other
Zero Balance Sheet Growth – Core & Non-Core
Deleveraging
Core
€179bn
2010
Core
€169bn
2013
>30bn
c.-€10 bn
54
Amortisations Disposals Other
Non-Core
€77bn
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.
c.-€60 bn
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
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
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Non-Core Analysis
2010 Non Core loans to
customers12010 Non-Core
Loans: €77bn
Residential Mortgages
40%
Corporate 19%
SME10%
NAMA II11%
Non-Mortgage consumer and Other
1%
Ireland24%
US9%
Europe5%
AsiaPac1%
RoW0%
55
� 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 2013.
CRE19%
19%
GB61%
Source: Central Bank; institutions
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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)Land & Development (Sub -€20m)
International commercial investment portfolios
Irish Life and Permanent UK mortgages
Commercial portfolios
Source: Company data
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SECTION 5: NAMA
57
NAMA fully up-and-running; further sales in pipeline for 2012
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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 controlproperties 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 2012. 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
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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
59
• Over €6 billion in cash generated by NAMA over first 21 months to 31/12/2011
• 2010 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
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NAMANAMAECB/MarketECB/Market BankBank
(1) Bank Sells €100m Loan to NAMA
(4) Bank generates liquidity
NAMA Model
60
BorrowerBorrower
(4) Bank generates liquidity
through repo’s of NAMA
Bonds with ECB / Market
(2) NAMA pays Bank
€42m Government
Securities in return
(3) Borrower continues to owe €100m to NAMA despite
NAMA only having paid €42m to the Bank for the Loan.
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Summary of bond activity since inception
28,000
28,500
29,000
29,500
30,000
30,500
31,000
61
26,500
27,000
27,500
28,000
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
Senior bond issuance gross Outstanding bonds after redemptions
• Bond issuance of c.€1 bn in Q4 2011 was due to final asset transfers
• Senior Notes in issuance at year end 31 Dec 2011 - €29,106,000,000
• Subordinated Bonds in issuance at year end 31 Dec 2011 - €1,601,000,000
• Further Senior debt redemptions to be reviewed by NAMA Board in Q1 2012
Source: NAMA
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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• 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-2019
62
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Distribution of larger debtors
Nominal DebtNumber of
debtors
Average nominal
debt per debtor
€m
Total nominal
debt in this
category
€m
In excess of €2,000m 3 2,784 8,352
Between €1,000 and €2,000m 9 1,564 14,077
63
Between €1,000 and €2,000m 9 1,564 14,077
Between €500m and €999m 17 666 11,322
Between €250m and €499m 28 358 10,023
Between €100m and €249m 78 160 12,483
TOTAL 135 417 56,257
Source: NAMA
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Management of larger debtors
Largest 190 Debtors – €61bn
Intensively managed by NAMA – key credit decisions and
Other 610 Debtors - €13bn
Credit decisions made by NAMA. Cascading system of credit limits and delegated authority:
NAMA Board – Credit Committee - NAMA
64
– key credit decisions and relationship management
carried out by NAMA multi-disciplinary teams.
Loan administration performed by participating
institutions
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.
Relationship management and loan administration carried out by participating
institutions within NAMA parameters.
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Breakdown of original NAMA portfolio (price paid for
loan assets)
€bn
Land &
Development % of Total Investment % Total Total book % Total
Ireland 5.4 58% 12.7 56% 18.1 57%
UK & NI 3.3 35% 8.4 37% 11.7 37%
USA/Europe 0.6 6% 1.4 7% 2.0 6%
Total 9.3 29% 22.5 71% 31.8 100%
65
Source: NAMA• The portfolio consists of 71% Investment and 29% Land & Development
• 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
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Further Information
NAMA information available on www.nama.ie
For more information, requests can be sent to the email address
Receivership information added in July 2011, with monthly updates
thereafter.
66
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
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SECTION 6: BUDGET 2012
67
Budget not as severe as previous three years: fiscal drag is lessening
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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• 2012 Consolidation will amount to approximately €3.8bn� Fiscal drag is lessening
68
Table 1: Annual Gross fiscal consolidation (€bn and % GDP)
2009 7.6 (4.7%)
2010 6.4 (4.1%)
2011 6.1 (3.9%)
2012E 3.8 (2.4%)
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Budget 2012 breakdown
• The 2012 package of budget measures were announced by
the Government in December 2011
• €3.8bn 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 €0.6bnprevious consolidations totalling €0.6bn
69
Table 2: Split of Budget 2012 €3.8bn gross consolidation (€bn)
Capital expenditure 0.75
Current expenditure 1.4
Revenue 1.7
- of which carryover 0.6
Source: Department of Finance
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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 -0.48
70
Health -0.54
Education -0.13
Other -0.30
Source: Department of Public Expenditure and Reform
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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 • Exemption limit of Universal Social Charge raised to take lower paid
workers out of tax net
71
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
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SECTION 7: FISCAL
72
Fiscal trends improving: further three-year challenge to reach debt
sustainability
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Gains from bubble period given back, but living
standards (GDP per capita) higher than 15 years ago
25000
30000
35000
40000
This is one key reason
that fiscal austerity has
been accepted, although
GNI per capita has fallen
back even further
73
0
5000
10000
15000
20000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: CSO
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Tax revenue beginning to recover from trough: at
about mid-2004 levels now
40000
45000
50000
Note that tax revenue
accounts for about 60%
of General Govt. revenue
Source: Department of Finance
74
25000
30000
35000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Swing in primary balance required to stabilise debt
ratio another 8pp of GDP from end-2011
0.0
2.0
4.0
6.0
8.0
Debt stabilising primary
balance reached in 2014
75
Source: Department of Finance; CSO
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F
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Ireland’s fiscal challenge made easier by rate cuts
Years
Turnaround required
in Primary Balance
(% of GDP) GDP (% chg. real) GDP (% chg. nom)
Belgium (1981-1990) 9 12.3 2.3 5.8
Denmark (1982-1986) 4 14.1 3.9 9.2
Finland (1993-2000) 7 13.5 4.5 6.7
Sweden (1993-2000) 7 12.6 3.7 5.4
Ireland (1982-1991) 9 12.0 3.6 8.2
Ireland (2009-2014F)* 5 10.7 1.5 1.3
76
Source: NTMA
Ireland is halfway through the
process, but it remains politically
difficult anywhere to consolidate
when inflation is low
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Rollovers of bonds light in 2012 and 2013
15.0
20.0
25.0
Government fully funded to
end-2013, so €12bn in 2014
is first challenging year
77
Source: NTMA
0.0
5.0
10.0
2012 2013 2014 2015 2016 2017 2018 2019 2020
Ireland govt. bonds Troika loans
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Gross Government debt stabilises at 119% of GDP in
2013
80.0
100.0
120.0
Debt is reported gross and does
not take account of offsetting
financial resources
78
Source: Department of Finance
0.0
20.0
40.0
60.0
1990 1993 1996 1999 2002 2005 2008 2011F 2014F
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APPENDIX
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September 2008
Bank Guarantee Scheme
introduced (CIFS)
January 2009
Nationalisation of Anglo
Irish Bank
September 2010
Estimates for fiscal costs
associated with support
measures for the banking
sector were raised to
c. EUR 45bn
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
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
March and May 2009
NPRF investment by way of preference shares of EUR
3.5bn each in BOI (March) and AIB (May)
Timeline of banking sector developments
80
2008 2009 2010 2011
NPRF investment of EUR 3.7bn in AIB
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 2013
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
31 December 2011
BoI complete
remaining €0.4bn
recap
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Loan book analysis
Total loans (€bn) AIB BOI ILP EBS Total
Residential mortgages 31 60 34 16 141
Corporate 21 23 0 0 44
SME 19 17 0 0 37
CRE 17 20 2 1 40
other 6 5 2 0 13
Total (Dec 2010) 94 126 38 17 274
Source: PCAR 2011
Mortgage analysis (€bn) AIB BOI ILP EBS Total
Irish owner occupier 20 21 19 14 74
Irish Buy-to-let 7 7 7 2 23
Total Irish 28 28 26 16 98
UK owner occupier 3 20 0 0 24
UK Buy-to-let 0 12 7 0 19
Total UK 3 32 8 0 43
Total residential mortgages (Dec 2010) 31 60 34 16 141
Source: PCAR 2011
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Central bank 2011 - 2013 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 3 2.4 2.7 1.4 9.5
Corporate 1 1.1 0 0 2.1
SME 2.7 1.8 0 0 4.5
CRE 4.5 3.9 0.4 0.2 9.0
other 1.4 0.9 0.3 0 2.6
Total 12.6 10.1 3.4 1.6 27.7
% 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%
• 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)
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
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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 4,908
(15.8%)
4,286
(7.2%)
5,209
(15.4%)
2,495
(15.7%)
9,925
(7.1%)
16,898
(12%)
CB three-year projected
losses3,066
(9.9%)
2,366
(3.9%)
2,679
(7.9%)
1,380
(8.7%)
5,838
(4.1%)
9,491
(6.7%)
Corporate BlackRock lifetime loan
losses post-deleveraging 1,133
(5.5%)
1,379
(6%)
0
(0%)
0
(0%)
1,608
(3.7%)
2,512
(5.8%)
CB three-year projected
losses972
(4.7%)
1,179
(5.2%)
0
(0%)
0
(0%)
1,362
(3.1%)
2,151
(4.9%)
SME BlackRock lifetime loan
losses post-deleveraging 4,085
(21.2%)
2,871
(16.6%)
0
(0%)
0
(0%)
5,398
(14.8%)
6,956
(19%)
CB three-year projected 2,674 1,837 0 0 3,603 4,511CB three-year projected
losses2,674
(13.9%)
1,837
(10.6%)
0
(0%)
0
(0%)
3,603
(9.9%)
4,511
(12.3%)
CRE BlackRock lifetime loan
losses post-deleveraging 4,717
(27.5%)
4,950
(24.2%)
411
(20.1%)
225
(26.7%)
8,114
(20.1%)
10,303
(25.5%)
CB three-year projected
losses4,490
(26.2%)
3,847
(18.8%)
400
(19.5%)
197
(23.4%)
7,159
(17.7%)
8,934
(22.1%)
Non-mortgage Consumer
and Other
BlackRock lifetime loan
losses post-deleveraging 1,674
(29.8%)
1,332
(24.5%)
444
(26.8%)
0
(0%)
2,477
(19.5%)
3,450
(27.1%)
CB three-year projected
losses1,403
(25%)
891
(16.4%)
342
(20.7%)
0
(0%)
2,052
(16.1%)
2,635
(20.7%)
Total BlackRock lifetime loan
losses post-deleveraging 16,517
(17.6%)14,819
(11.8%)
6,064
(16.1%)
2,719
(16.3%)
27,522
(10%)
40,119
(14.6%)
CB three-year projected
losses12,604
(13.4%)
10,119
(8%)
3,421
(9.1%)
1,577
(9.4%)
20,014
(7.3%)
27,722
(10.1%)
Source: PCAR 2011
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Projected adverse case mortgage book losses used for
capital purposes derived from BlackRock
AIB BOI ILP EBS Total
Ireland
BlackRock lifetime loan losses post-
deleveraging
4,846
(17.6%)
3,836
(13.7%)
5,103
(19.4%)
2,495
(15.7%)
16,280
(16.7%)
CB three-year projected losses3,007
(10.9%)
2,016
(7.2%)
2,594
(9.9%)
1,380
(8.7%)
8,997
(9.2%)
Owner Occupier
BlackRock lifetime loan losses post-
deleveraging
2,968
(14.7%)
2,075
(9.9%)
2,975
(15.3%)
2,164
(15.5%)
10,181
(13.7%)
CB three-year projected losses1,791
(8.9%)
1,115
(5.3%)
1,598
(8.2%)
1,164
(8.3%)
5,668
(7.6%)
Buy-to-Let
BlackRock lifetime loan losses post-
deleveraging
1,879
(25.5%)
1,761
(24.9%)
2,128
(30.8%)
331
(17.1%)
6,099
(26.2%)
CB three-year projected losses1,216
(16.5%)
901
(12.7%)
996
(14.4%)
216
(11.2%)
3,330
(14.3%)
BlackRock lifetime loan losses post- 62 451 106 0 619
Source: PCAR 2011
UK
BlackRock lifetime loan losses post-
deleveraging
62
(1.8%)
451
(1.4%)
106
(1.4%)
0
(-)
619
(1.4%)
CB three-year projected losses59
(1.7%)
350
(1.1%)
85
(1.1%)
0
(-)
494
(1.1%)
Owner Occupier
BlackRock lifetime loan losses post-
deleveraging
37
(1.2%)
112
(0.6%)
6
(1.3%)
0
(-)
156
(0.7%)
CB three-year projected losses34
(1.1%)
92
(0.5%)
5
(1.1%)
0
(-)
131
(0.6%)
Buy-to-Let
BlackRock lifetime loan losses post-
deleveraging
25
(5.2%)
338
(2.9%)
100
(1.4%)
0
(-)
462
(2.4%)
CB three-year projected losses25
(5.3%)
259
(2.2%)
79
(1.1%)
0
(-)
363
(1.9%)
Total
Residential
Mortgages
BlackRock lifetime loan losses post-
deleveraging
4,908
(15.8%)
4,286
(7.2%)
5,209
(15.4%)
2,495
(15.7%)
16,898
(12.0%)
CB three-year projected losses3,066
(9.9%)
2,366
(3.9%)
2,679
(7.9%)
1,380
(8.7%)
9,491
(6.7%)
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Stress loss projections in 2011-2013 of €27.7bn; total
lifetime stress economic loss projections of €43.1bn
50
40
30
2043.1
3.0
40.1
12.4
5.9
€ Billions
Non-disposed book
10
0
BRS lifetime
economic
losses base
scenario
29.5
BRS total
lifetime
economic
losses
permanent
stress
Lifetime economic
loss of disposed
book
Lifetime stress
economic loss
projections of
non-disposed
Stress default
post 2013
Stress loss
projections
2011-2013
27.7
Stress default
but not
crystallised
Crystallised
stress losses in
period
21.8
Source: PCAR 2011
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Residential mortgage loans: total universe and
loss assumptions
Projected losses by bank, including the impact of deleveragingBaseline Adverse
Figures in €m Total notional
balanceProjected lifetime
losses %Projected lifetime
losses %
AIB 31,014 3,100 10.0% 4,908 15.8%
BOI 59,941 2,388 4.0% 4,286 7.2%
EBS 15,891 1,411 8.9% 2,495 15.7%
ILP 33,872 3,026 8.9% 5,209 15.4%
Total 140,718 9,925 7.1% 16,898 12.0%Total 140,718 9,925 7.1% 16,898 12.0%
• 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 and expense 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
Source: PCAR 2011
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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 20,723 683 3.3% 1,133 5.5%
BOI 22,815 926 4.1% 1,379 6.0%
Total 43,538 1,608 2,512
• Loan loss forecasts for Corporate loans were based upon a combination of manual loan file reviews and a more statistical PD/ LGDapproach
• 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
Total 43,538 1,608 3.7% 2,512 5.8%
Source: PCAR 2011
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SME loans: total universe and loss assumptions
Projected losses by bank, including the impact of deleveraging
Baseline Adverse
Figures in €mTotal notional
balanceProjected lifetime
losses %Projected lifetime
losses %
AlB 19,229 3,224 16.8% 4,085 21.2%
BOI 17,305 2,175 12.6% 2,871 16.6%
Total 36,534 5,398 14.8% 6,956 19.0%
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 and downward
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
Source: PCAR 2011
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CRE loans: Total universe and loss assumptions
Projected losses by bank, including the impact of deleveragingBaseline Adverse
Figures in €mTotal notional
balanceProjected lifetime
losses %Projected lifetime
losses %
AlB 17,124 3,843 22.4% 4,717 27.5%
BOI 20,414 3,879 19.0% 4,950 24.2%
EBS 841 152 18.1% 225 26.7%
ILP 2,049 240 11.7% 411 20.1%
Total 40,428 8,114 20.1% 10,303 25.5%
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
Source: PCAR 2011
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Non-mortgage consumer and other: total universe
and loss assumptions
Projected losses by bank, including the impact of deleveragingBaseline Adverse
Figures in €m Total notional
balanceProjected lifetime
losses %Projected lifetime
losses %
AlB 5,621 1,326 23.6% 1,674 29.8%
BOI 5,444 825 15.2% 1,332 24.5%
ILP 1,655 326 19.7% 444 26.8%
Total 12,721 2,477 19.5% 3,450 27.1%
• 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
Source: PCAR 2011
Total 12,721 2,477 19.5% 3,450 27.1%
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Irish “covered” banks: Summary balance sheets
€m AIB BOI ILP EBS Anglo INBS *
Summary balance sheet as at 30 June 2011 30 June 2011 30 June 2011 31 Dec 2010 30 June 2011 31 Dec 2009 Total
Assets
Loans and advances to customers* 73,097 100,686 34,982 16,473 15,471 2,400 243,109
Promissory notes - - - 251 23,804 - 24,055
NAMA notes 19,549 4,872 - 306 259 - 24,986
Loans and advances to banks 5,992 6,911 675 181 2,030 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 7,657 51 3,930 3,853 52,283
Cash 3,269 531 218 250 255 133 4,656
Total assets 126,875 155,438 75,257 20,087 54,081 13,315 445,053
Liabilities
Deposits from banks 36,294 38,720 18,417 5,756 41,225 804 141,216
Customer accounts 63,932 65,143 14,968 9,421 689 5,340 159,493
Debt securities in issue 14,374 22,140 8,245 3,568 5,684 5,395 59,406
Subordinated liabilities 126 2,663 304 218 475 184 3,970
Other liabilities 5,288 20,198 31,369 432 2,604 242 60,133
Total liabilities 120,014 148,864 73,303 19,395 50,677 11,965 424,218
Total equity 6,861 6,574 1,954 692 3,404 1,350 20,835
Total liabilities and equity 126,875 155,438 75,257 20,087 54,081 13,315 445,053
• 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 2010
Source: Company data
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