Morning Equity Briefing |
Banks
KBC's Irish NPLs continue to rise
Emer Lang
FACTS: KBC has reported that non-performing loans in its €17.2bn Irish loan book had risen from 9% at the end of September 2010 to 10.3% by the end of the year. NPLs stood at 7.3% of its SME/corporate loan book of €2.3bn (up from 5.5% at end-September), 7.4% (6.9%) of its owner-occupied mortgage book of €9.8bn and 10.9% (9.5%) of its buy-to-let (BTL) mortgage book of €3.3bn.
ANALYSIS: The bank had issued a warning on January 6th noting that its results would be influenced by a €300m pre-tax boost to Irish impairment provisions. Today's statement explains that 'the changing economic situation in Ireland after the financial aid package was given the green light by the EU and IMF' prompted it to take the additional impairment charges. The incremental provisions took its NPL coverage ratio from 29% at the end of September to 42% by year-end. KBC defines a non-performing loan as 'a loan for which principal repayments or interest payments are more than ninety days in arrears or overdrawn'. Hence its NPL figures are comparable with the mortgage arrears figures reported by the Irish Regulator. The latter reported that 5.1% of owner-occupied mortgages were 90 days-plus in arrears at the end of September (versus KBC's 6.9% at that date), a level that will undoubtedly have increased since.
DAVY VIEW: KBC's release clearly highlights the deteriorating trend in the owner-occupied category but also gives us some useful insight into the BTL category, which is not included in the Irish Regulator's arrears data and which may account for one- quarter of the mortgage market. At 10.9%, arrears in this category are running well ahead of its owner-occupied arrears. Of course, arrears do not necessarily translate into losses, but the deteriorating trend begs the question whether the 5% loss rate (includes BTL) used by the Regulator in his severe stress test in the original March 2010 PCAR is stressful enough (media reports suggest that the EU/IMF assumed 6.5%/10% for owner-occupied/BTL in their review). On the combined mortgage book of the covered banks of around €100bn, the incremental hit would be €2.4bn.