Government sweeteners key for Irish bank loans sell-off

By Steve Slater

LONDON (BestGrowthStock) – Ireland’s ailing banks must raise capital and sell billions in loans, but the government is likely to have to cap potential losses to attract wary buyers, and could end up footing much of the bill itself.

About 50 billion euros ($66 billion) of British mortgages held by Bank of Ireland (BKIR.I: ) and Allied Irish Banks (ALBK.I: ) are among the loans up for grabs, perhaps the most attractive assets as new UK lenders look to bulk up.

The IMF and European Union have laid out tough demands for Ireland’s banks as part of an 85 billion euro rescue plan, including recapitalizing and cutting them down to size to slash day-to-day funding costs.

“They will be on a plane (to the Irish government) and looking for the restructuring to be getting more aggressive,” one banker said of the IMF and EU delegations.

But few buyers are showing an appetite to invest in the Irish banks themselves, or to take on their troubled loan portfolios. And predators can be choosy on cut-price euro zone banking assets, bankers and analysts said.

Lloyds (LLOY.L: ) is pulling out of Ireland, bankers say Danske (DANSKE.CO: ) and KBC (KBC.BR: ) are also keen to scale back, and Royal Bank of Scotland (RBS.L: ) is shrinking its loss-making Ulster Bank.

Financial buyers — more likely to be lured by the Irish assets than rival banks — do not abound either.

Dublin-based Cardinal Asset Management, backed by U.S. investor Wilbur Ross, is in talks to buy building society EBS (EBSBS.UL: ), and could bolt on more portfolios.

But U.S. private equity firm J.C. Flowers’s eponymous boss — who is also looking at Spain and Britain — has said an investor in Ireland or Spain would need to be “pretty brave” to move now.

Private equity or other turnaround firms would struggle to get the returns they need, with limited scope to leverage any deal. One banker said Asia sovereign wealth funds saw little strategic or know-how benefit from an Irish deal.

CARROT AND STICK

Ireland has a couple of sweeteners to attract buyers. It has earmarked 2 billion euros for “credit enhancement” to help banks get rid of loans, that could see it agree to share future losses or take any losses beyond a certain amount.

Selling assets at below book value may be a problem for banks, however, because they risk losing the capital benefit from shrinking the balance sheet.

“The big question is whether they will be able to sell the assets at book value or if it will be a big discount,” said Ciaran Callaghan, analyst at NCB in Dublin.

If the carrot fails to work, the stick could be used. Ireland’s Central Bank has its own advisors to identify disposal or securitization measures to get the banks down to size.

And bankers reckon the IMF and EU will get more involved in the restructuring in the coming weeks.

The numbers are massive.

The asset disposal plans of the main banks need to be in by the end of April, and add to about 80 billion euros of commercial real estate assets being transferred to Ireland’s “bad bank,” known as NAMA.

BoI is looking to sell 43 billion euros of assets beyond its NAMA transfers to cut its loan book to about 80 billion euros. AIB also has 20 billion euros of British mortgages on the block, after scrapping a sale last month.

British banking start-up NBNK, Virgin Money or J.C. Flowers are all looking to bulk up in Britain, although there are other British assets they may prefer to wait for.

(Additional reporting by Simon Meads and Victoria Howley. Editing by Jane Merriman)

($1 = 0.7541 euro)

Government sweeteners key for Irish bank loans sell-off