30 Jan 2019

Irish banks: Central Bank and BPFI express concern over Sinn Fein anti-sale bill

We note comments released by both the Central Bank of Ireland (CBI) and the Banking & Payments Federation of Ireland (BPFI) in recent days in response to the proposed ‘No Consent, No Sale’ legislation being put forward by Sinn Fein.

The proposed legislation was unveiled by opposition party Sinn Fein last week in the Irish parliament, and if enacted would require the consent of borrowers before any mortgage could be transferred from or sold by a lending institution.


While such provisions are already in place in the CBI’s mortgage code of conduct, they are not legally binding, and some borrowers (both performing and non-performing) have seen their mortgages sold to non-bank lenders in recent years (aka ‘vulture’ funds). This was recently seen at PTSB, Ulster Bank and Danske Bank. The CBI and BPFI have both expressed concern that the proposed SF legislation could have unintended consequences such as increasing mortgage rates and shutting off the ability for banks to use securitisation or covered bond vehicles to refinance some of these mortgages. It may also hamper the ability of banks to sell loans as part of the resolution of NPLs, as well as diminish the potential for fresh competition to enter the Irish banking market.


We would view the proposed legislation as problematic for the banking sector given the widespread use of refinancing vehicles (SPV or ACS banks) and the use of loan collateral at the ECB repo window, these funding tools potentially closed off if the legislation was enacted as currently set out. Additionally, loan portfolio disposals have been a key element in allowing Irish banks to reduce their high level of NPLs given the particularly long and tortuous (as well as expensive and highly uncertain) nature of enforcing repossession or seeking borrower insolvency through the Irish court system. Any legislative measure that cut off the ability of the banks to dispose of NPEs in an expedited manner would likely lead to a regulatory response that would necessitate higher levels of capital and more onerous lending terms for new borrowers. Given the strong consumer protections already in place for borrowers whose loans are transferred to non-bank lenders, we also do not believe that the proposed legislation is necessary and may end up being counterproductive.



Irish Economy: NAMA Q3 Results


NAMA released its Q318 financial results yesterday afternoon. Key points below.


The agency enjoyed another strong quarter, with net income of €166m helped by a €131m gain on financial assets and €67m of disposal profits. Cashflow certainly caught the eye, with €484m of operating cash helping to lift the agency’s end-period cash and cash equivalents to €2.3bn (from an opening €1.8bn). The balance sheet is in great shape, with retained earnings at €3.9bn (€0.4bn ahead of the agency’s guidance on lifetime profits – an extraordinarily conservative projection, in our view). Loans and receivables finished the quarter at €2.4bn.


In the management commentary accompanying the results, NAMA said that it generated a further €1bn of cash in Q418, bringing total cash generation since inception to €43.8bn. These cashflows have extinguished all of the senior debt, pared subordinated debt to €1.1bn (from an initial €1.6bn) and facilitated large-scale investment in its asset base.


In all, there is nothing in this strong set of numbers to derail our view that the agency will deliver a surplus of at least €4.5bn (i.e. €1bn ahead of guidance) to the Exchequer before it is finally wound up.


‘No deal’ rejected


Last night the UK Parliament debated Prime Minister May’s intention on how to proceed with the UK’s exit from the EU (i.e. her intended ‘Plan B’), following her crushing ‘meaningful vote’ defeat a fortnight ago. Note this was not a second ‘meaningful vote’ – any new plan has not evolved formally and of course further agreement would need to be reached with the EU. Seven amendments to the motion were also debated and voted upon. The government defeated five of them, including key amendments G and B. G (Dominic Grieve) would have given MPs control of the Brexit agenda in the Commons on set days. Amendment B (Yvette Cooper) would have set up a Bill to establish a vote to request an Article 50 extension, had a deal not passed parliament by 26 February. However the government lost a vote on amendment I, which rejects a ‘no deal’ outturn. But in practice this is only symbolic. Meanwhile the Commons backed amendment N (Sir Graham Brady), which rejects the current backstop (to prevent a hard border on the island of Ireland) and insists on ‘alternative arrangements to avoid a hard border’. This will give the UK government a parliamentary mandate to move negotiations with Brussels in such a direction.


EU response


The EU has said, on countless occasions, that it is not open to renegotiating the Withdrawal Agreement. The UK government is hoping that in practice it might be more flexible, maybe with the use of a codicil. Perhaps more importantly though, it introduces a greater degree of unity in the Conservative Party and to a certain extent, with its ‘confidence and supply’ partners, the DUP. The government was taken to have won the vote on the main motion (i.e. the ‘Plan B’).  From here, it could be that the UK government now looks at what is termed the Malthouse compromise, which now seems to have a certain degree of traction across the Tory party. In short, this would involve a renegotiation of the backstop with a longer transition period. Sterling weakened out during last night’s proceedings mostly because the defeat of Amendment B (Cooper) was seen as increasing modestly the risks of a ‘no deal’. After the proceedings, European Council President Donald Tusk stated that ‘the Withdrawal Agreement is not open for re-negotiation'. We will listen closely to the mood music coming from the EU today as this will probably set the tone of the forthcoming talks between London and Brussels.


FOMC Preview


The Federal Open Market Committee (FOMC) meets tonight for its first policy meeting of 2019 with its policy decision due at 7pm (Irish time). Fed Chair Jerome Powell will give a press conference at 7.30pm, as he will after every meeting from now on. Note though that no updates to the economic projections will be published this time. The Fed will issue its annual ‘Longer-Run Goals and Policy Strategy’ document.


We would be very surprised to see any adjustment to the policy stance tonight with the Federal funds target rate range expected to be held at 2.25-2.50%, following the 25bp rise enacted in December. We also expect no change in QE redemption plans, with the Fed running down QE holdings on its balance sheet by allowing a maximum monthly amount of $50bn of assets to run off.

Economic releases 


13.15 US ADP Nonfarm Employment Change

13.30 US GDP

15.00 US Pending Home Sales

19.00 US FOMC Statement