Friday, February 20, 2009

Anglo Irish Bank Annual Report
The link to the most wanted publication - the Anglo's annual report for 2008.

Let anyone reading this while posessing knowledge in corporate finance and balance sheet analysis (I have none) comment on this and any other findings relating to the report.

So... guess what? The report is a hog wash, containing no real information on
  • the impairments outlook,
  • the reclassification of the loans,
  • loans under 'watch'
  • roll-overs of loans, and so on.
The IL&P loan/deposit scheme is there for all to see, but what it implies is not. It implies that short of IL&P intervention, Anglo had a negative core capital reserves at the time of the announced guarantee scheme. Do the math: Core Tier 1 Capital for 2008: €5,068mln. Per page 4 of report: "At 30 September 2008 the Group’s balance sheet includes €7.5 billion of short term interbank placements with Irish Life & Permanent plc and €7.3 billion of non-retail customer deposits with Irish Life Assurance plc". Oh, my...

Other notables:
  • page 6: Ireland lending up from €37bn in 2007 to €42.8bn in 2008. Given lack of demand for new loans and tight credit finance, is a part of this growth due to the rollover of non-performing loans with interest charges absorbed into 'new' loans? The report says: "In keeping with the Bank’s relationship based banking model, lending activity during the year was targeted solely towards the Bank’s longstanding customer base." Should we read this as 'the long-term developers reclassifying and rolling over loans'?
  • page 7: Impairment charge on the loan book went from 0.5% in 2007 to 1.31% in 2008. Again, no guidance on future impairment charges, but should we agree with my/analysts numbers produced in December (here), we are looking at 4-5.3% impairment on property-linked loans or 3.5-4.6% on loan book. Some distance to travel yet.
  • page 70 §12: total provisions for impairment were up from €149mln in 2007 to €879mln in 2008. Again, applying this dynamic to the 2008 figures and projecting into 2009, expected impairment charge for 2009 should be around 5%. Even assuming away the counterparty risk under the investment securities impairment (which might be unlikely to remain as high in 2009 as in 2008), we have a consolidated projected loan impairment charge for 2009 of 5.1% - higher than my 4.6% moderate risk scenario forecast.
  • page 74 §20: serious fall off in financial assets held, with a rise in unlisted financial assets - is this again showing some financial engineering on the existent loans side? Unlisted assets against customers' liabilities up over 10% y-o-y, listed - down by ca 60%... losing the 'house' while accumulating the 'rubble'?
  • page 81 §22: serious deterioration in the quality of loans and advances to banks. AAA/AA rateds down by more than 1/2, A rateds up by a factor of 3+. And this is to September 30, 2008, since when things went even further South globally. Ouch...
  • page 82 §24: assets available for sale securities are ramped up in 2007 and unwound in 2008, potentially depleting the assets risk cushion? Per table below, one has to have a laugh at the AAA/AA classification of a lion's share of Mortgage Securities and ABS. Take
  1. the financial institutions downgrades across Ireland (assume 10% moves to BBB and 20% to A),
  2. the mortgage securities at 15% negative equity (corresponding to the estimated 120,000 households) to BBB level and
  3. ABS at 25% (US-level) downgrade to Sub-investment Grade and further 25% downgrade to BBB and
you get: AAA/AA total drops to €5,751mln from €6,742mln in 2008, while BBB and lower rises from €197mln to €579mln. All sub-AA classed available-for-sale assets fall from €1,993mln in 2007 to €1,410mln per Report (despite the fact that the quality of may underlying asset classes has been deteriorating during 2008 worldwide, although, apparently not on Anglo's books), but rises to €2,212mln in 2008 terms under my assumptions. What is more plausible, folks?
  • page 84 §25: total loans and advances to customers per Bank itself were up €12.5bn in 2008;
  • page 86 §25: Lower quality, but not past due nor impaired loans: up from €363mln in 2007 to €2,736mln in 2008, past due but not impaired: up from €1,621 in 2007 to €1,782mln in 2008, impaired up from €335mln in 2007 to €957mln. In the mean time, satisfactory quality loans amounts moved from €322ml in 2007 to €6,302mln in 2008. So in common parlance terms, Anglo's 'slury' loans creek has swell from ca €2,641mln in 2007 to €11,777mln in 2008, an increase of 359% - all in the year when impairement charge officially went up by only 162%. Now, taking 2008 impairment ratio at this rate of deterioration in the quality of loans implies 2009 impairment charge of 4.5% across the entire book (see the second bullet point above)... Hmmmm, someone is foolin here?
  • pages 148-149 show loans to Directors and related parties. No new skeletons here - Sean Fitzpatrick is the only name on the list, with the rest of Directors names missing next to loans amounts. Anglo issued loans against its own shares as underlying collateral guarantee funds, and held no impairment provisions for Directors loans.
  • page 150: a small goodie: "During 2008 close family members of Sean FitzPatrick received rental income from the Group of €31,500 (2007: €35,500) in respect of a UK property that, rather than hotels, is actively used to accommodate Group employees working in the UK on a temporary basis. Total future minimum payments under the tenancy agreement are €7,600 (2007: €8,600)." So buy-to-let UK markets are alive and kicking then...
Ah, I might as well stop at this point. Let anyone reading this while posessing knowledge in corporate finance and balance sheet analysis (I have none) comment on this and any other findings relating to the report.

I am staying off Anglo case for now, having done more than our wonderous Minister for Finance, who could not be bothered to read the entire PWC report on banks he was generously recapitalizing with the taxpayers' money.

1 comment:

Jon Ihle said...

I believe the increase in net lending is due to roll-overs, as you speculate, but also lines of credit committed in 2007 but drawn-down in 2008.