Does selling Irish Life improve the capital position of IL&P?

The book value of Irish Life is around €800m. If the plc sells it for €800,, then the capital position ofthe PLC will not change, in effect.

If it sells it for more or less than €800m, then the capital will rise or fall accordingly.

This is what IL&P said in its press release on the stress testing.

The reviews have identified a gross capital requirement of some €4.0bn for the banking business of IL&PGH in order to meet the requirements ...


The Group has undertaken to seek to meet its increased capital requirement through an asset disposal programme which will include, but not be limited to, the sale of its life and pensions and investment management businesses [Irish Life Assurance and Irish Life Investment Managers] and through undertaking a liability management exercise in relation to the Tier 2 debt in the banking business. Together these exercises are expected to contribute incremental capital for the Group of a net €1.1bn.

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Surely the €800m will not improve the capital position of the group?

Compare this with a rights issue raising €900m. If the shareholders or the government puts in €900m in new equity, there is a real increase in the capital of the group.

Selling Irish Life will only improve the capital position of the banking business if the value of Irish Life is not currently available to PTSB as capital. But I believe that it does form part of the PTSB capital.


I gather that the €800m value at present is Tier 2 capital and the cash released will be Tier 1, so that is "better". But it's not worth trumpeting as one of the solutions to IL&P's problems.

It will have €800 m extra cash which is a help. But as it has a loan book of €37 billion, then it's not hugely significant either.

The same goes for Bank of Ireland and New Ireland. The sale will not generate new capital for the group.

I agree with the sale of the life businesses by both groups, but I don't think that it creates new capital.

Brendan

While the assets under management may be worth €800m, as a company Irish Life may be worth more. I thought I read somewhere an expected sale price of €1.5bn for Irish Life, but I can't find a reference to it.
I would agree though that selling assets will merely be a balance sheet transfer to Tier 1 capital.

Hi Chris

The assets under managment have nothing to do with it. They would be in the billions, but they are the property of the pension funds and the collective investments.

The only two relevant figures are the book value of Irish Life in the PLC's accounts and the sale price.

Brendan, you are right. It doesn't dramtically change the picture but as you correctly point out, it is the type of capital that it generates that is important. There is a minimum Tier 1 ratio that the regulator is looking for. If they don't sell the business, they would have to find the Tier 1 capital elsewhere either through a rights issue or through State funds.

The problem with having the €800m or whatever it is in it's current form of capital is that it could prove very difficult for the banking arm to access if it needed it. It's one of the great difficulties of bank capital and it is causing difficulties all over Europe. The definition of 'capital' is different in nearly Country.

Brendan Burgess said:

The only two relevant figures are the book value of Irish Life in the PLC's accounts and the sale price.

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Yes, I think you are right.

Sunny said:

It's one of the great difficulties of bank capital and it is causing difficulties all over Europe. The definition of 'capital' is different in nearly Country.

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Hey Sunny, I thought I read somewhere recently that the BIS was changing or had changed its definitions of different tier capital. I obviously wrongly assumed at the time that the same definition of tier capital was used at least throughout the Euro zone. Do you have any info on the specific Irish tier capital definitions?

Chris said:

Hey Sunny, I thought I read somewhere recently that the BIS was changing or had changed its definitions of different tier capital. I obviously wrongly assumed at the time that the same definition of tier capital was used at least throughout the Euro zone. Do you have any info on the specific Irish tier capital definitions?

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They are trying to standardise it. There are core definitions and requirements but individual regulators have discretion as to what they will allow to be included in Tier 1. For example, minortity interests are allowed by some regulators but not others. Banks got very creative over the years with hybrid instruments that would meet regulators approval. In Germany, they use something called 'silent participations' in Tier 1 (it is like contingent equity) but they are trying not to include it in current stress tests.

The Irish situation is pretty standard. I don't have anything up to date apart from this but there might be more updated material on the regulators website.
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