Given the deterioration of the loanbook, we must ask whether the banks knew the situation, or were economical with the truth, writes SIMON CARSWELL

EIGHT MONTHS seems to be a long time in banking and the property market if the revised figures provided by the National Asset Management Agency (Nama) earlier this week are anything to go by. The financial picture on the €81 billion in loans to be bought by Nama has changed dramatically – or to put it more accurately, deteriorated sharply – between the agency’s draft business plan last October and the updated version published on Tuesday.

The first plan was based on incorrect information provided by the banks while the updated second plan was “grounded in reality” and based on Nama’s own analysis of the loans it has acquired.

This raises an awkward question for the institutions – were they aware of the true situation facing Nama last October or economical with their actual views on it?

Nama bought the first €15.3 billion in loans linked to the 10 biggest borrowers in property development at a 50 per cent discount and has based its updated projections on the same haircut being applied to the remaining loans.

This is a far cry from the 30 per cent average discount first estimated by the Government and Nama last autumn.

Nama has disclosed that only 25 per cent of the loans are now performing or generating income, compared with an estimate of 40 per cent in the draft plan. This changes the State agency’s profit projections sharply.

Where Nama expected a profit of €4.8 billion last October, it is now forecasting a profit of €1 billion, which may turn to a loss of €800 million under a worst-case scenario and a €3.9 billion profit under a best-case scenario based on gains or falls in the property values over the agency’s 10-year lifespan.

Nama laid the blame squarely at the door of the five participating institutions – Anglo Irish Bank, AIB, Bank of Ireland, EBS and Irish Nationwide Building Society – without differentiating between them.

Nama had relied on information from the institutions last October, while the updated plan contained information based on the agency’s own intrusive analysis of the 1,800 loans of the 10 biggest borrowers acquired between March and May.

Frank Daly, chairman of Nama, said the agency was “extremely disappointed and disturbed” that only months after it was led to believe by the financial institutions that 40 per cent of Nama-bound loans were income producing, the real figure is actually 25 per cent.

He said that the agency was “equally taken aback” to learn that the banks were not using the full range of legal options available to them to secure income in respect of their troubled property loans.

“There is a difference between ‘can’t pay’ and ‘won’t pay’ and Nama is certainly taking the view that we will not tolerate any situation in which people won’t pay,” Mr Daly said, adding that the agency would not be sentimentally or emotionally attached to borrowers like the banks have been.

“We don’t do sentiment in here,” he said.

The agency has said that it plans to pursue developers for any free cashflow available to them to be put towards servicing the loans.

Nama chief executive Brendan McDonagh said he didn’t believe lenders had misled them or withheld material information but that they had been in denial before and that economic circumstances had changed since last September.

He used an example of an office block which last year had three floors leased to tenants but now had only two floors leased, having lost a tenant in the recession.

“That is the reality. I regard that as acting in good faith. It is much different if the rent is coming in on the three floors and no rent is coming in to [the banks],” he said.

Mr McDonagh said that the banks had been “fighting for their lives” last year and had believed that the Nama discounts would be less than 30 per cent when they are now coming in at 50 per cent.

“There has been a reluctance for a long time. I think it has become more realistic that loans weren’t quite as good as what they thought themselves,” he said.

Mr McDonagh told an Oireachtas committee in April that 33 per cent of loans were generating income; this has fallen further as this estimate was given before Anglo had transferred the bank’s first €9.3 billion in loans to Nama.

There are considerably less income-generating loans at Anglo than in some of the other lenders.

The State-owned bank disclosed in its 2009 accounts that €25.1 billion of the €35.6 billion in loans – or 70 per cent of the loans heading into Nama – were impaired.

Nama applied a discount of 55 per cent to Anglo’s first loans.

Comparing this with the best Nama-bound loans, Bank of Ireland disclosed in its 2009 accounts that 44 per cent of €12.2 billion in loans it was selling to Nama were income generating. The agency applied a discount of 35 per cent to the bank’s first loans.

Mr McDonagh said there was “extraordinary surprise” at Nama that borrowers had free cashflow which the banks had not taken charge of to repay interest bills when they could have. Some of the 10 biggest borrowers had not even been asked by the banks, he said.

Asked if they were spending this to fund their lifestyles, Mr McDonagh said this was a good question and that the borrowers’ business plans, which they must submit to Nama, would identify what the money had been used for.

“The reality is that we cannot do anything before Nama has gotten hold of the loans – this is going to be part of the process to make sure this cashflow comes to Nama.”

The big developers had operated on a divide-and-conquer basis where they didn’t disclose the full level of free cashflow to each of their lenders, he said.

One senior banker said Nama and the institutions may have had differing interpretations of what constituted a performing loan last year. Some lenders regard a loan where the terms and conditions are being met as being performing or “not in default” even if there is no interest coming in on the loan.

This is the case for many land and development loans where the interest is rolled up until the project is completed and sales of the finished properties begin.

However, McDonagh was clear that income-generating loans related to the €30 billion in associated loans, which are primarily secured on investment properties, linked to the €50 billion in development loans the agency was buying.

Nama would attempt to take charge of more free cashflow that the banks had decided not to pursue borrowers for, he said.

“If you have got investment assets, then you have got some cashflow coming off them – our aim is to target cashflow at source and to ask for it and demand it.”

Mr McDonagh said the banks were now co-operating with Nama after a difficult start on the first tranche of loans but warned that there were issues for chief executives and chief financial officers at the institutions if material information is withheld from the agency.

“I don’t think there is too many people in banking who might want to have their reputations even more tarnished,” he said.

Mr McDonagh said some loans – on top of the 25 per cent that were generating income – were yielding some, if not all interest due, but Nama was still assessing this.

“Twenty-five per cent is cashflow generating – the rest has some cashflow generating,” he said.

The level of income-generating loans may also have fallen as a result of the sales of properties, according to banking sources.

Financial institutions have also taken advantage of an uplift in the UK property market and pressed borrowers to refinance or repay loans by selling the underlying properties in advance of the transfer of the loans to Nama.

For example, one institution said it had valued a property backing a Nama-bound loan for €70 million last November when loan values were assessed for the agency. The same property is now worth €110 million and the lender has said it is pushing for a sale before the loan moves to Nama.

Before the Nama loan transfers began last March, a large number of loans at Bank of Ireland earmarked for transfer were repaid, sold to third parties or refinanced to other lenders, many of which were investment property loans generating interest income.

Nama had initially planned to buy about €16 billion in loans from Bank of Ireland last September and this has since fallen to €12.2 billion. This would also have contributed to the lower level of income-generating loans being purchased than first estimated.

Some 30 per cent of the bank’s Nama loans are associated loans secured on investment properties, compared with 35 per cent under Nama’s draft plan last October.

Mr McDonagh said that he didn’t believe that the level of performing loans would decline further, contrary to suggestions by Opposition politicians and Nama critics that the new figures represented a fast deteriorating picture.

“The institutions themselves were in denial about the quality of their loan book – they didn’t want to admit that things were probably as bad as they were,” he said.