22 Jul 2019

Irish Economy: NAMA releases Q1 results

NAMA released its Q119 financial results on Friday. 

The agency recorded a profit for the period of €41m, while total cash generated in Q1 amounted to €320m, the majority of which came from the disposal proceeds of property collateral and loan sales. Including a further €0.2bn generated in Q2 (to 21st June), total cash generation since inception now stands at €44.5bn. These cash flows have been utilised to redeem all senior debt, reduce subordinated debt balances to a little over €1bn and make significant investments in the agency’s assets. The fair value of debtor loans ended Q1 at €1.78bn, a €143m reduction since the end of the calendar year, while cash, cash equivalent, collateral and liquid asset balances totalled €3.3bn at the period-end. Retained earnings stood at €4.23bn at the end of Q1 and was little changed from end-2018.

These results show another quarter of progress from NAMA and we continue to expect the agency to post a lifetime surplus of €4.6bn.

Yew Grove REIT: A hat trick at Athlone Town 

Yew Grove (YEW) announced on Friday afternoon that it has agreed to acquire a further three buildings at IDA Ireland’s Business & Technology Park in the midlands town of Athlone. 

The consideration payable is €13m, which implies a net initial yield of 7.6% after accounting for purchase costs. There is a potential reversionary yield above 8% for the assets, which have a WAULT of 3.9 years to break and 12.5 years to expiry. The assets in question total 115k sq ft of modern space across the three buildings along with associated car parking. They are tenanted by PPD, KCI (an existing YEW tenant at the same business park) and Signature Ortho. The purchase costs are to be met through a combination of cash (including from the group’s debt facility) and the net proceeds from the recent placing. 

This is a sensible deal for YEW, adding well-located high quality assets at an attractive yield to its portfolio. YEW now owns 22 properties with a current annual rent roll of €7.9m (with significant reversionary potential) and a value of €102.4m. With €90m of capacity remaining under the group’s share issuance programme, YEW is well placed to pursue what management sees as a “significant opportunity” to grow through acquisition, a view we share.

AIB Group H119 Preview – Capital distribution up for discussion?

We publish a preview note this morning on AIB's H119 results due on Friday 26th July, with these likely to show a solid and stable operational performance, albeit one facing volume growth headwinds (net loans +1.3% h/h to €61.5bn) amid a sluggish mortgage market and sustained Brexit concerns in the SME sector. We look for flat margins (c.250bps) and a stable market share (32-33%), with progress on NPE reduction (falling to c.€4.5% or 7% of gross loans) and accompanying capital accretion (FLCET1 17.5%) likely taking more focus. 

An interesting development could be greater visibility and commentary on the potential for capital distribution in 2020 once NPEs achieve their benchmarks, with AIBG poised to become a strong income and capital return story, given the already significant levels of excess capital on the balance sheet. 

UK this week

By the end of the week, the UK is set to have a new Prime Minister. The likely sequence of events begins with the Conservative Party leadership election results being announced on Tuesday morning. 

The near universal expectation (including our own) is that Boris Johnson (BoJo) will beat Jeremy Hunt in the ballot, conducted across 160k (or so) party members. We then expect Theresa May to visit the Queen the following day after holding Prime Minister’s Questions in the Commons and for Mr. Johnson to be invited to become PM. It is unclear as to when BoJo will name his Cabinet but he may delay this until after Thursday when the House rises for its summer recess. While there will be interest in various aspects of the new PM’s policies, the biggest scrutiny will of course be devoted to his Brexit strategy.

Last week, sterling was under pressure as markets fretted about the greater risk of a no-deal Brexit on 31 October. We acknowledge this, but our baseline case remains that a revised deal will be struck between the UK and the EU, albeit with a further delay. Indeed Brussels may be more likely to grant the UK concessions in areas such as the Irish backstop if the government is following a ‘do or die’ strategy to depart from the EU on time, with or without a deal. This may encourage MPs to fall in line with the government, if and when a new deal is presented to Parliament. 

Over the remainder of the summer though, our guess is that Brexit uncertainty will put pressure on UK markets, including the pound, unless and until the investors consider there to be a more positive direction.

Europe this week

The ECB Governing Council (GC) meets on Thursday. Following Mario Draghi’s speech in Sintra last month and last week’s release of the ECB’s Account (i.e. minutes), it has seemed more likely that the central bank will ease. 

At this stage, we expect the GC to change its bias and stress that it expects key rates to be at current levels or lower through H1 2020. We expect a 10bp cut in the Deposit rate to -0.50% in September and a further 10bp reduction in March next year. We expect these moves to be accompanied by some sort of ‘tiering’ of the excess reserves held at the ECB on which banks are charged/remunerated. For now at least, we are not of the view that the ECB will restart QE. 

The most significant economic release from the Eurozone will be Wednesday’s flash PMIs for July. The Composite PMI in June strengthened by 0.4 pts to 52.2. Our forecast is that we will see a similar gain this time to 52.5.

US this week

In the US, first estimates of Q2 GDP are due on Friday and are likely to show a slowdown from Q1’s 3.1% annualised rate. A further 145 S&P500 companies report Q2 earnings next week, but we see nothing upsetting our view that the FOMC will cut the Fed funds target range by 25bps to 2.00%-2.25% on 31 July. 

There are relatively few scheduled economic events in China, but we will look out for news of any forthcoming dialogue between senior members of the US and Chinese trade negotiating teams. Upper House elections take place in Japan on Sunday. The IMF’s interim World Economic Outlook is due Tuesday.

Tory leadership wrap-up

Just to summarise that the Conservative Party is expected to announce the results of its leadership election mid-morning tomorrow. 

Boris Johnson remains the runaway favourite at 1/50 and he is likely to be invited to become Prime Minister by the Queen on Wednesday, after Theresa May takes her last PMQs and formally sees the Queen to stand down. The timing of the Cabinet appointments is not clear. 

The new PM (presumably Boris) may make one or two announcements on senior positions early on – Philip Hammond and David Gauke have signalled that they will resign their positions as they are refusing to agree to accepting a ‘no deal’ exit from the EU. 

The House of Commons rises for the summer recess on Thursday and while it is possible that Jeremy Corbyn calls a vote of no confidence in the government, we doubt that he will be able to attract Tory (or indeed DUP) dissidents, at least at this stage. 

Corbyn himself is under pressure as leader of his own party, with Labour peers holding a symbolic vote of confidence in his leadership this evening and a poll of Labour members suggesting that 40% of them want him to step down before the next election. 

Lastly, the Lib Dem leadership results are announced today. Jo Swinson seems set to beat Sir Ed Davey to replace Sir Vince Cable.

Economic Releases

13.30 US Chicago Fed National Activity