National Asset Management Agency - All roads lead to NAMA

Oliver Gilvarry

Dublin, 18th September 2009

2

Background to NAMA

Funding difficulties for Irish banks

Restricting the flow of credit into Irish economy

Banks are unwilling to lend in order to preserve capital

“Liquidity more difficult and costly to attract” Minster for Finance

Banking system needs to be capable of providing credit to viable businesses and households as recovery kicks in

Main priority for NAMA is to restore liquidity into the Irish Banking system and in turn provide a flow of credit into the economy

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Structure of NAMA

NAMA involves removing development loans from eligible banks along with a certain amount of performing investment loans

The mix of loans allows for NAMA to receive an income flow which can be used to pay coupons on the NAMA bonds and costs of the agency

Minister for Finance had stated the nominal value of the loans transferred into NAMA will be €77bn

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For Irish banks, NAMA bonds can be used to raise cash from ECB on Repo Irish banks sell NAMA bonds to the ECB with promise to buy them back

at a future date at an agreed price Provides cash for the Irish banking system

Structure of NAMA

NAMA BANK

BORROWERNAMA

To pay for loans, NAMA hands over Government

Bonds

Bank sells loans to NAMA

Borrower continues to make repayments as agreed with bank

previously. Payments are now made to NAMA instead, but

terms and conditions of the loan remain the same

Payments received by NAMA from performing loans are used to pay

coupons on bonds issued to pay for loans from

participating banks.

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Profile of Loans Transferred

Loan amounts transferred as % of Loan Book:

AIB 16%

BOI 14%

Anglo 42%

Irish Nationwide 76%

EBS 6%

Loan breakdown per bank

AIB €24 billion

Bank of Ireland €16 billion

Anglo Irish Bank €28 billion

EBS €1 billion

INBS €8 billion

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Profile of Loans Transferred

Sectoral breakdown

Land 36%

Development 28%

Associated 36%

Geographical breakdown

Ireland 66%

Northern Ireland 6%

UK 21%

USA 3%

Europe 4%

Customers: 2,000

Number of loans: 21,500

Average LTV: 77%

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NAMA Haircut

Relates to the discount the Government will pay for the bank loans from the banks

NAMA will not pay the face value of the loans, but a lower value

The difference is the haircut

Size of the haircut is key to the banks

The larger the discount paid for the loan, the larger the losses the banks will suffer

The greater the losses taken by the banks, the increased requirement for new capital to be injected into the banks

Must also factor in coupons on NAMA bonds Low coupons will lower the pre-provision profits of the banks

Reducing the ability of the banks to absorb losses from the residual loan book through profit generation

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What is the Haircut?

Minister for Finance released details of overall haircut on 16th September

Total Loans transferred is €77bn €68bn of loans €9bn of interest roll-up

Haircut applied was 30% with banks receiving NAMA bonds of €54bn Current market Value of loans is estimated at €47bn

Five percent of payment will be in subordinated NAMA bonds Payment on these bonds will be dependent on performance of NAMA

Individual haircuts for each bank were not released at the same time AIB have guided their Haircut will be less than 30% average BOI have guided their haircut will be substantially below 30%

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What is the Haircut?

Valuation of loans will be on a case by case basis

Valuation will be based on current price and “Long-Term Economic Value”

Adjustment over the current value will be done by: Difference between current yields & yields over

relevant periods Correlation between

– Land prices & demographic variables– Land prices & interest rates– Land prices & GDP

Therefore, valuations will be subjective

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Other Details from the Minister’s Speech

Guarantee on Bank liabilities to be extended

New scheme called Eligible Liabilities Guarantee (ELG)

Enables banks to issue debt beyond Sept 2010

Liabilities cannot have maturity greater than 5 years

Scheme will operate up to Sept 2010

Customer deposits to be covered under scheme

Banks will have option to issue debt and take deposits without

guarantee

Dated subordinated debt will not be covered under ELG

Current scheme remains in place until Sept 2010

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Other Details from the Minister’s Speech

Institutions participating in the scheme will have to restructure its operations The shape of the new system has not been outlined, but will be a focus

over the coming weeks

Promotion of Lending Comments the structure of NAMA will improve liquidity Removal of problem loans will allow focus on new lending No set target for lending as part of NAMA, but will be examined

Economic & Social benefits of NAMA Facilitate Department of Education & Environment to improve areas by

offering land banks in the control of NAMA Use certain properties for social and affordable housing

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Overall view of NAMA

Passes significant risk onto the Irish taxpayer

Any losses made by NAMA could be paid for by the Taxpayer

The Agency will remove the problem loans from banks balance sheets quickly

It will be a catalyst for the recapitalisation of some banks if required

NAMA will also be a catalyst for consolidation within the Irish banking sector

Allows a way for Ireland to solve the banking and property crisis without losing “Economic Sovereignty”

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Impact on BOI & AIB

Estimate capital shortfall in AIB of over €2.5bn Potential capital raising through sale of US or Polish operations Rights issue Strategic investment

BOI We believe BOI may not need to raise equity Any equity raise will focus on repayment of preference shares

In Irish Banking sector our preference remains Irish Life & Permanent, followed by BOI

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Alternatives to NAMA

Number of alternatives have been put forward domestically and internationally

Insurance Scheme

Full Nationalisation

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Insurance Scheme

An insurance scheme is where the Government insures certain assets on a bank’s balance sheet

The assets remain on the bank’s balance sheet and continue to be managed by the bank who lent the money in the first place No need to create a new agency to manage the loans

Government imposes a “First Loss” piece (similar to excess on an insurance policy) Losses the bank suffers on the insured loans above a certain amount

are covered by the Government A fee or “Insurance Premium” is charged by the Government

More equity friendly than Asset Purchase Agency Shareholders will continue to benefit if assets covered under scheme

increase in value

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Insurance Scheme

Allows banks to use pre-provision profits to absorb the losses over time

May not result in banks lending into the economy No direct liquidity benefit Banks will try and retain capital Management focus will be on minimising the use of the “First Loss”

Similar to risk sharing proposal being examined by the Minister

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Full Nationalisation

Irish banks are fully nationalised for a short period of time

Tax-payer can get all of the upside on the flotation of the banks in the future

Makes it easier to restructure the banks and clean up their balance sheets

Government don’t have to pay to take loans off the banks

Government takes over all responsibility for funding of the balance sheet

Not only have to provide capital to the bank, must continue to fund the

bank

Can result in outflow of deposits from banking system Even with a Government guarantee, Irish banks suffered outflows of

deposits in Jan after the nationalisation of Anglo Irish Bank Similar result once the revelations over the deposits between Anglo and

Irish Life & Permanent became public

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The extra cost of issuing Irish debt Vs German Debt

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Irish Banking system

Number of domestic banks to fall to three

AIB & BOI to remain with IN, EBS & banking arm of Irish Life & Permanent merged to create a Super Mutual

High interest rates paid on deposit by Irish banks to reverse

Liquidity to improve in the banks

Uncertain if significant credit will be released into the economy, but will be better than current situation

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Summary

We see NAMA as the best solution compared to other alternatives

Provides liquidity to the Irish system via the ECB

Removes the bad loans from the banks’ balance sheets, with the aim to make it easier to attract liquidity and capital

It allows the country to stabilise the banks in a way Ireland can afford

With ordinary equity required after transfer of loans into NAMA

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Summary

NAMA is the best option for the Irish Economy

No sustainable recovery unless the banking system is repaired

Will have a cost to the taxpayer

Can’t be examined just on whether it will make a profit or loss

The benefits of stabilising the Irish banks and reducing the length of the current recession must also be taken into account

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Economic Outlook

Key part of NAMA is to ensure Ireland is in a position to benefit from economic recovery in the global economy

Next number of slides outline our economic outlook for next number of months

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Economic Outlook

Economic growth will return to the major economies in 2010, but at levels below long-term potential.

Unemployment in the US and UK will only peak in the first half of the year, with Europe following later in the year due to employment subsidies and more inflexible labour laws within the Euro-Zone.

GDP 2009(e) 2010(e)Ireland -8.00% -2.60%Euro Zone -4.00% 0.40%UK -4.00% 1.00%US -2.00% 2.00%

Unemployment in Major Economies

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2006 2007 2008 2009(E) 2010(E)

Ireland

UK

US

Euro-Zone

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Economic Outlook

Due to weak growth and higher unemployment rates, precautionary savings by consumers will continue. Savings ratios in the UK and US will continue to rise as consumers re-structure their own balance sheets after the excesses of the last number of years.

Interest rates will remain accommodative, but rates will start to rise in the US followed by the UK. Europe will be slower to move on increasing its base rate, but the reduction of a number of Repos will reduce liquidity within the Euro-Zone and bring one month EURIBOR closer to base rate.

Central Bank Interest Rates Current 2009(e) 2010(e)Euro Zone 1.00% 1.00% 1.00%UK 0.50% 0.50% 1.25%US 0.00% 0.00% 1.00%

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Economic Outlook

Higher interest rates and better growth outlooks will see the Dollar and Sterling appreciate against the Euro over the course of the next year.

UK and US bond yields will move higher next year, but the greatest move is expected in gilts as the removal of QE and large government deficits drive yields higher.

10 Year Bond Yields Current 2009(e) 2010(e)Euro Zone 3.29% 3.20% 3.00%UK 3.61% 3.15% 4.00%US 3.49% 3.30% 3.75%

Exchange Rates Current 2009(e) 2010(e)EUR/GBP 0.86 0.85 0.80EUR/USD 1.42 1.40 1.30GBP/USD 1.65 1.64 1.62

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Economic Outlook

Property to remain under pressure in Ireland Recovery in Commercial Property in the UK US Commercial Real Estate to remain subdued due to lack of financing

Office markets with the highest vacancy rates, 2009 Q2, %

0

5

10

15

20

25

Dublin Frankfurt Amsterdam Heksinki Brussels

Two-year office development pipelines, 2009 Q1, % of stock

0

2

4

6

8

10

12

14

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Hambu

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Berlin

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Contact Details

Oliver Gilvarry Will Sparks

Head of Research Stockbroker

Dolmen Securities

75 St. Stephen’s Green,

Dublin 2

Tel: 01 633 3609

Fax: 01 633 3856

Website: www.dsl.ie

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Appendix

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Dolmen Securities Overview

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and related advice Wealth Management Advice____________________________Clients: High net worth investors Companies Institutions Non-profit organisations

Products: Fundraising M&A advice Strategic re-structuring

______________________

Clients: Corporates Semi-states and

Government organisations

Dolmen Corporate Finance

Dolmen Securities Limited BoardRonan Reid: Chairman Gerardine Jones: MD

Directors: Paul McGowan, Michael Jacob, Garrett Kelleher, Martin Scully

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Why Dolmen?

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Introduction to Dolmen Divisions

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Dolmen Wealth Management

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We manage monies directly in a range of markets – equity, bond or derivative

markets, either directly in markets or via our specialist funds.

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Disclaimer

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