February 27, 2012
In the land of the blind, the one-eyed man is king.” So said Erasmus – and who are we to argue with the great man? Erasmus spent his life following his own independent path, eschewing the easy life of the tenured academic herd. Instead, he constantly questioned his own Church at a time when questioning the Church was a very dangerous thing to do.
Sometimes it feels like Ireland is the land of the blind, particularly when it comes to finance – although it has been a long time since questioning the finance industry was a dangerous thing to do. It is worth scrutinising the banks, particularly as they are being drip-fed huge quantities of cash by the ECB, yet precious little is reaching the real economy.
One of the pieces of accepted wisdom in Ireland these days is that, because Bank of Ireland is the least worst bank in Ireland, it is therefore the best.
Last week, it announced atrocious results, but the spin – accepted by the main media organs (from what I heard, but I am open to being corrected) – was that these were the smallest losses in a few years and therefore they were good results. Quite the leap, don’t you think?
The really useful thing about a bank report is that it gives you a snapshot of where we are. Let’s have a look at what they didn’t tell us in the press release.
Over 55 per cent of Bank of Ireland’s total mortgages are in negative equity. Instead of using the term billions, let’s describe the amount in millions of euro. Bank of Ireland’s mortgage lending book is â‚¬27 thousand million. This means that Bank of Ireland has lent out â‚¬27 thousand million to people to buy houses.
Of this figure, â‚¬15,384 million euro of loans are in negative equity. Take that in for a second.
It’s also revealing to examine the loan-to-value ratio of each mortgage. If, for example, the loan-to-value is less than 50 per cent, that is good. It means that the loan outstanding is less than 50 per cent. So if a house is worth â‚¬200,000, the loan is under â‚¬100,000.
The report shows that only 14 per cent of Bank of Ireland’s total owner-occupier mortgage book is in such a healthy situation. When we examine its buy-to-let portfolio, we see that only 6 per cent of these mortgages are in such a healthy situation. In total, 12 per cent of mortgage holders have a ratio of less than 50 per cent.
In all, just half of the Bank of Ireland’s residential owner-occupier mortgages are solvent. By solvent, I mean that the equity in the house covers the loans.
When you look at its buy-to-let book, only 31 per cent are solvent. So, taken together, if Bank of Ireland were to sell this stuff today, only 45 per cent of its total loan book or â‚¬12,470 million of loans, would be solvent.
Now, let’s look at the huge number of mortgages in negative equity. According to these results, 50 per cent of all houses are in negative equity – some worse than others.
For example, 11 per cent of all of the Bank of Ireland’s owner-occupied homes are worth less than half what people paid for them.
When it comes to buy-to-let, one in five properties are worth less than half what their “investors” paid for them. In total, just shy of 70 per cent of all buy-to-let mortgages are under water. This is extraordinary. This bank is insolvent. Yet its share price has trebled in the past few months.
If its share price has gone up, then the conclusion must be that, bad and all as the situation is, the bank must have made ample provisions to cover all these losses just in case.
After all, isn’t that why they were recapitalised with our money?
Then tucked away at the back of the report, hidden behind all the glossy bits, are the really scary details about just how exposed the bank is.
The table shows the provisions that the bank’s management has made against these huge potential losses on their mortgage book – half of which is technically insolvent.
The management of Bank of Ireland has set aside â‚¬1,000 million on a loan book where â‚¬15,384 million of the loans are in negative equity. The bank’s management must be working on the basis of a gradual fall in the number of people in arrears and a quick and dramatic rise in the price of houses.
But the opposite is the case.
The latest data on arrears shows an increasing number of people falling behind in their payments.
We also know that the pace of house price falls accelerated in the last few months of 2011. So if we stand back, we have the bank, which is being touted as the best of a bad lot, presiding over a loan book where 55 per cent of all mortgages are under water and it believes that only one in 15, or 6 per cent, of all of these will actually default. And this is the best of them.
The land of the blind indeed.