National Asset Management Agency

1. Oliver Gilvarry Dublin, 18th September 2009 National Asset Management Agency - All roads lead to NAMA

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 2

3. 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 Structure of NAMA 3

4. 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 4

5. Profile of Loans Transferred Loan amounts transferred as % of Loan Book: AIB 16% BOI 14% Anglo 42% Irish Nationwide 76% EBS 6% 5

6. Profile of Loans Transferred Customers: 2,000 Number of loans: 21,500 Average LTV: 77% 6

7. 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 NAMA Haircut 7

8. 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% What is the Haircut? 8

9. 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 What is the Haircut? 9

10. 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 Other Details from the Minister’s Speech 10

11. 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 Other Details from the Minister’s Speech 11

12. 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” Overall view of NAMA 12

13. 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 Impact on BOI & AIB 13

14. Number of alternatives have been put forward domestically and internationally Insurance Scheme Full Nationalisation Alternatives to NAMA 14

15. 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 Insurance Scheme 15

16. 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 Insurance Scheme 16

17. 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 Full Nationalisation 17

18. The extra cost of issuing Irish debt Vs German Debt 18

19. 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 Irish Banking system 19

20. 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 Summary 20

21. 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 Summary 21

22. 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 Economic Outlook 22

23. 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. Economic Outlook 23

24. 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. Economic Outlook 24

25. 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. Economic Outlook 25

26. 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 Economic Outlook 26

27. 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 27

28. Appendix 28

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