Banks and Provisions - One huge Black hole!

Over the past few weeks its become clearly obvious that many of our banks in Ireland are really struggling to work out how to deal with the ongoing property market collapse and banking crisis. Most at this stage have employed their own internal property, planning and accountancy professionals to gain a better understanding of where things are possibly heading, however their overall plan seems more and more flawed as each day passes.

 The reality in Ireland is that there is no bank lending going on, there won't be any lending in the short to medium term and banks are getting smaller, closing down branches all over the place. What does that tell us ? Well one thing it does tell us is that money is scarce and lending a thing of the past.

Today in Ireland apart from one of the banks who have told everyone they are exiting the country, and are taking a very commercial position regarding winding down their book, the rest are really struggling to work out how best to deal with the problems they face. Most are obsessed with putting their customers who on many occasions they lent the money willy nilly in years gone by through hoop after hoop after hoop. A trend of very late is that some of the banks are refusing to take offers which have been made on the properties, with the reason being, -- we have that on our books at a higher value!!!! So let me get to the point on that very note.

 

Provisions.... "A balance sheet item representing funds set aside by the bank to pay for losses that are anticipated to occur in the future. The actual losses for the earmarked funds have not yet occurred, but the general provisions account is counted as an asset on the balance sheet. For banks, a general provision is considered to be supplementary capital under the first Basel Accord." 

So generally banks are minded to not sell any property that does not fall within their provision threshold which is understandable - therein lies the problem and big problem I would suggest.  If an offer comes in lower than what the bank have provisioned for then they are inclined to knock back the offers. Very simply if the banks are doing their jobs correctly and valuations accurate, then the provisions on the loans would all in line with where the market really is, so when the customer tries to sell the property on the open market and an offer comes in on the property, the bank would be inclined to accept the bid right? Wrong actually.  The major issue affecting banks in Ireland today and becoming more and more evident is that the banks are not strong enough to take the losses that are heading their direction as a result of the property collapse and they're own provisions on the toxic loans are ambitious to say the least.  This is a huge problem and as the property market continues to fall for different reasons, the problems for the banks will continue to intensify  - in fact its the banks worst nightmare.  Recently the Financial Times reported that the British banks are looking at a £40billion black hole in their balance sheers  fro this very reason and to be honest, its looking more likely that there is a significant black hole on the balance sheets of the Irish banks - its just no one knows the extent of it which is worrying!

In 1998 I qualified in Estate Management and the definition of market value back then was; "

 

Market value is the price at which an asset would trade in a competitive auction setting price after an accepted marketing period."....  15 years later and this definition remains the same - in fact, It has never changed. So when a banker tells me that they are not prepared to accept the offer for an asset which has been on the market and marketed fully for an acceptable period of time, I know that they simply have not provisioned properly for that property loan.  The issue then being that in 18 months time the market value in a depressed marketplace will be less than that of today- a never ending spiral.

You see I understand property, I have been qualified for quite some time, I understand the markets and understand the risks. The issue is the people you speak to in the banks often do not have the same level of understanding and the decisions being made at credit level often do not make any commercial sense and it seems that they are gambling on the market returning to some kind of normality or in some cases it would appear they haven't really given their decision much thought at all.

The property market will continue to flounder along the seabed in Ireland for the next 5-10 years, in fact until credit returns.  Banks need to smell the coffee and sort themselves out, get their provisions in order and stop trying to dictate to the market what Market value is. If they continue on their current policy they're will only be one outcome for them all - more pain and potentially a fatal end to their business affairs on this island. 

 

 Conor Devine MRICS