Allied Irish Banks Plc, recipient of a 21 billion-euro ($27 billion) government bailout, will step up the pace of mortgage write-offs next year before it tries to attract private investors in 2014.
“We’re going to move through the portfolio at speed,” Garry Stran, head of a team at the Dublin-based lender reviewing mortgages in arrears, said in an interview. The bank will tackle problem loans “in a more industrialized fashion than we’ve seen before,” he said.
The lender has “appropriate” capital to allow it to increase its home-loan restructurings, Jim O’Keeffe, head of the bank’s home mortgage business, said in the interview.
After being battered by the collapse of the country’s real-estate bubble, Irish banks are under pressure from regulators to clean up their balance sheets by recognizing that some mortgages extended in the boom years may never be repaid. The government is urging lenders to avoid repossessions while at the same time trying to return them to private ownership.
The government owns 99.8 percent of Allied Irish, and has said it intends to reduce that stake, though it hasn’t given a time frame. Last month, the bank sold its first bond to public investors since 2010, when Ireland and its financial firms were frozen out of global capital markets.
“The banks have got to get back to profitability, and giving away houses to people is not how you make money,” said John Fitzgerald, a research professor at the Economic & Social Research Institute in Dublin. “They have got to maximize their return on assets, which may be politically difficult.”
‘Extend and Pretends’
Some 18.5 percent of Allied Irish’s home loans by value were at least three months in arrears at the end of June. Almost 13 percent of owner-occupiers and 37 percent of buy-to-let borrowers were more than three months behind in payments at the end of the first half, company filings show.
Lenders have so far relied on temporary measures, such as switching borrowers to interest-only payments and lengthening the term of loans, to avoid recognizing losses.
Fiona Muldoon, the central bank’s head supervisor for lenders and insurers, criticized banks in October for “too many ‘extends and pretends’ masking as solutions.” While Irish banks have made about 6.4 billion euros of provisions for bad loans, actual write-offs in the 30 months through June totalled 250 million euros, according to Dublin-based Goodbody Stockbrokers.
That may change as the government introduces rules next year letting some borrowers secure debt forgiveness in out-of-court settlements. Regulators are also preparing for a fourth round of stress tests next year to determine whether they have enough capital to withstand further losses.
“What we absolutely will not have in a year’s time is people who haven’t paid us for a considerable number of years being pushed around the machine again,” Stran said. “Writing off debt where people are doing the very best they can is absolutely appropriate,” he said, though he ruled out “wholesale debt forgiveness.”
The bank may have to step up repossessions, even if the bank’s strategy “is not possession-led,” Stran said. Any loan restructurings will be based on a borrower’s ability to pay while letting them keep to a “reasonable” living standard, he added.
“Given the scale of the problem, do we really want to be having emotive conversations with people” about satellite-TV subscriptions, gym memberships and cigarette habits, he said. “No, we don’t,” he said. “If someone’s a member of a country club at 500 euros a month and in the scheme of their life that looks to be completely unreasonable, then of course we’ll have a conversation,” he said.
Stran said that while more than 70 percent of borrowers that have had their loans modified to date are meeting monthly repayments, the rest are a “rump” whose loans need to be restructured and may have part of their loans written off.
The lender “will need to have stabilized the situation by the end of next year if the bank is to attract investors in 2014,” said Eamonn Hughes, an banking analyst at Goodbody. “We don’t think Allied or the other banks will need to raise more capital as a result of the next set of stress tests, though elevated mortgage losses over the medium-term will be a drag on their profits and capital generation.”
The bank has earmarked 3.1 billion euros for a worst-case scenario of mortgage losses over three years, equal to 9.9 percent of its portfolio, and a further 1.4 billion euros for EBS, a business it was ordered to acquire by the state, accounting for 8.7 percent of its home-loan book. In addition, the group was directed to hold 3.1 billion euros of so-called buffer capital to absorb further unexpected losses.
Some 18 percent of Ireland’s 144 billion-euro mortgage market, including buy-to-let loans, were at least three months in arrears at the end of June, central bank data show, with a further 6.3 percent of portfolios modified and not in arrears.
“The only place we can resolve this for customers on a long-term basis is frankly -- where they’re doing their best -- to share the pain with them, and restructure in some sort of commercially sensible way,” Stran said.