At a minimum, there are suspicions. This entry will examine Anglo’s accounting for its non-NAMA loans and in particular its designation of loans as performing or impaired. Note that this entry is not about Anglo under-accounting for future losses on NAMA loans – at this stage we all know that Anglo is hiding behind IFRS 9 on that score and anyway the €25bn net bailout referred to by Anglo CEO, Mike Aynsley should cover the true NAMA losses at a 58% total average haircut. This entry deals with the non-NAMA loan portfolio at Anglo and will deal with the following questions:
(1) Given that Anglo presently has €37.7bn of non-NAMA loans which will remain with the bank after NAMA completes its transfers and has only designated €14bn as impaired then in the six month period to the end of June 2010 why was no capital paid down on approximately €24bn of unimpaired loans.
(2) Why should the level of impairment on non-NAMA loans be less than on NAMA loans?
(3) What would be Anglo’s additional losses if its non-NAMA loans suffered losses at an average of 58%?
Warning: there are a lot of numbers coming up but the upshot is that Anglo’s designation of non-NAMA loans as impaired, although conceivably valid, may be hiding a large loss of over €10bn. Loss provisions are largely at Anglo’s discretion but designation of loans as impaired should be objective, yet apparently no capital was paid down on non-NAMA loans for the first six months of 2010.
So where to start? Anglo published its interim report and accounts covering the six month period up to 30th June, 2010 earlier this week. The headline loss reported for the first six months of 2010 was €8.2bn but most commentators recognised that this represented an under-reporting of the future losses on the remaining NAMA-bound tranches because the haircut shown was 38%. After all Anglo had suffered an average haircut of 58% on its first two tranches – no-one seriously believes the haircuts on the remaining tranches will be much different but that didn’t stop Anglo maintaining a provision of 38% (34% if you deducted tranche 2 which attracted a 62% haircut) on future losses. Anglo is hiding behind the provisions of International Financial Reporting Standard (IFRS) 9 which allows Anglo to not recognise loan losses at their expected level. But it didn’t exercise commentators too much to work out that Anglo will probably suffer another €4.5-5bn of NAMA losses in the second half – importantly this didn’t really impact upon the suggested Anglo recap of €25bn as it seems that Anglo have been using realistic projections on NAMA losses in arriving at its bailout requirements. But all of this related to the NAMA-bound loans.
This entry deals with the non-NAMA loans. The top of this entry shows the overall summary of Anglo’s lending position at the end of December 2009 and movements on the loan account for the first six months of 2010. Interest receivable is shown under note 3 of page 38. New advances aren’t explicitly shown in the accounts but the management review on page 12 mentions loan advances at €1.1bn – Laura Noonan and Emmet Oliver at the Independent say that is the total for new advances, I’m not sure but let’s assume that interpretation is correct. The total balance of outstanding loans is shown on page 12 of the interim report. The repayments of interest and capital is a calculated number and bizarrely shows a negative, indicating no payment of interest or capital at all and indicates possibly rounding differences. There is nothing in the cashflow statement or elsewhere in the accounts that would seem to disprove the assertion that there were no capital repayments during the six month period. And yet, as the analysis below shows Anglo are claiming that €24bn of the €38bn of non-NAMA loans are unimpaired!
So on to the analysis of non-NAMA loans -on page 2 of the press release accompanying the recent interim report, Anglo say that the non-NAMA (“after NAMA”) loans are €38.4bn though they say in a footnote that this includes €0.8bn of lending associated with the Group’s assurance business and €0.7bn of loans classified as held for sale to third parties.
If one excludes this €0.7bn of loans classified as held for sale to third parties then you get the €37.7bn of non-NAMA loans and under note 35 on page 64 of the interim report there is an analysis of €37 749m in respect of loans and advances to customers which of course includes €766m (€0.8bn as shown in the statement above) of lending associated with the Group’s insurance company.
Anglo have only designated €13 957m of the €37 749m non-NAMA loans as impaired. What makes this look suspicious is that note 35 on page 68 goes on to show that €20 574m of the €26 592m of the remaining NAMA loans are designated as impaired. Why would 77% of NAMA loans be impaired versus only 37% of non-NAMA loans?
And this brings us on to the next aspect of the non-NAMA loans. Why should they have a different risk profile to the NAMA loans? After all these are loans by the same bank, the same lending officers adopting the same lending practices and it was lending to the same type of borrower for the same type of asset. This last point may puzzle some – after all aren’t NAMA loans supposed to be toxic land and development loans which as a class of property lending was supposed to have been most severely affected by the property crash? According to Savills development land has lost 75-90% of its peak value. Commercial property according to IPD has lost 60% of its peak value and according to Permanent/TSB residential property has lost 35% of its peak value. However take a look at the breakdown of the loans being taken over by NAMA in tranches 1 and 2 in the key tranche 1 and 2 data publication by NAMA (or you might find an entry on here from last week easier to follow). Tranches 1 and 2 had less than 30% land and development – the rest, “associated loans” one must assume, included hotels, investment property and completed residential property which should be representative of Anglo’s non-NAMA loans.
If one were to assume the same level of loss on non-NAMA loans as NAMA loans, then the additional loss would be over €10bn (ie a loss of €17 729m compared with an existing provision of €7 705m). The tables below show how the €10bn additional cost is derived – tables 1,2,5 and 6 are directly copied from note 35 on page 66 onwards. Unlike the NAMA loans being shown at a realistic level (with 58% haircuts), there would not be capital to absorb these non-NAMA loan losses and a further injection would be required. Which would bring the Anglo bailout up to €35bn net. That would ignore any seed capital for Anglo Newbank and any other short term recoupable injection. It would not be unrealistic to place the gross cost of Anglo at over €40bn.
Table 1 – Anglo’s NAMA bound loans before provision as at 30 June 2010
Table 2 – Provisions against NAMA bound loans as at 30 June 2010
Table 3 – Increasing the provisions to 58% – €m
Table 4 – Increasing the provisions to 58% – %
Table 5 – Anglo’s non-NAMA loans before provision as at 30 June 2010
Table 6 – Specific provisions against non-NAMA loans as at 30 June 2010
Table 7 – Allocating the general provision of €1.3bn pro-rata to the specific provisions
Table 8 – Provision %s after allocating the general provision
Table 9 – Increasing the provisions to be the same % as those for NAMA loans by sector and location
Hi NWL
Very good digging (as usual) . So S&P and NWL see (up to) €35 bn as the possible NET cost of Anger.
I would not trust the banks, especially AIB or Anger Irish, as far as I could throw their annual/interim reports even in these times. Q. Why? A. Highly visible failure to apply realistic discounts to Nama-bound loans is likley to be a symptom of other less visible trickery.
Keep up the good work.
I think S&P are talking about a gross cost of Anglo of €35bn whereas the suggestion from the entry above is the cost would be a net of €35bn. However detailing the figures would suggest a net cost of €31,995m being
State injections to 30 Jun 2010 – €22.88bn
Plus additional provn for NAMA – €5.417bn (being 58% provision on €26 592m of NAMA at 30/6 less the actual provn in the accounts €10 007m)
Plus additional provn for non-NAMA – €10 224m (being a reprovisioning to €17 729m less the 30/6 provn of €7 505m)
Less Capital at 30/6 – €6 526m
I assume that all other values in the balance sheet will be realised at their face value at 30/6 (big assumption).
Anglo had a policy of not looking for repayment of capital on investment loans. Their theory being “why seek capital repayments on a well secured loan that is meeting its interest obligations. We would only have to go back into the market to re-lend that money on an asset that might not be as good”.
I am not commenting on the quality of the policy thinking, just saying how it was.
That’s a fair point and indeed a policy of interest roll-up to a future date was also practice. However, even given that and Scarab’s comments above the repayments look low and would still prompt questions over Anglo’s designation of loans as performing or impaired.
BTW, this does not mean that I believe Anglo’s impairment figures – far from it.
I have always believed that Anglo’s losses would exceed €30 billion even when they were claiming that they would not exceed €4.5 billion and stated so to Peter Mathews at the time. There is no justifiable reason why the impairment provision on the retained loans should be any less than on those going into NAMA.
It’s the “salami slicer’ method of releasing bad news and just means that they are not ‘fessing up to the whole truth just yet.
St Augustine was not talking about Anglo Irish when he asked the Lord to delay making him virtuous. But the quote reflects the thinking – “We know we may have to tell them sometime but do we have to do it just yet?”
However, I prefer Douglas Adam’s analogy of “Somebody Else’s Problem” In his “Hitchhikers Guide to the Galaxy” series he described it thus:
“A strange object can be effectively hidden from view while out in plain sight, by an “SEP field”, which “relies on people’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.”
It’s a blind spot …. The Anglo brain just edits it out.
Or what the military tacticians call it – artichoke tactics, small steps which in themselves are not seen as demanding conclusion but accumulate to a position which in itself would demand conclusion but because of the accomplishment of previous steps deters conclusion.
Re the capital repayment amounts, i think there are a couple of things you are missing.
Firstly and most importantly the effect of foreign currency movements, assuming loan balances are translated at the exchange rate prevailing at the balance sheet date, if we convert opening loan balances at Dec 09 to June 09 rates we get nominal balances of 75.6bn. These differences generally do not make it to the p&l due to offsets against foreign currency borrowings and currency hedging
Secondly from reading the business review the 1.1bn does not seem to relate to new lending, but to the balance of lending which had been committed to but not drawn down (WIP) under the subscription agreement with the government. I believe maximum total lending in the period is 800m (1.9 at Dec less 1.1 at June) – this should be further reduced by “the reevaluation by both clients and the Bank of previously approved projects due to the changed economic environment and the expiry of previously approved facilities.”
Finally there is a line in the business review section on page 11 – “Net loan repayments and other movements during the six months contributed to an additional reduction in loan balances of €1.7bn. Repayments in the period were primarily in the UK division where market conditions are showing some signs of improvement.”
Excellent work on the non-NAMA provisions. One would hope that they are inflating the value of loans for the bank bank which may be wound down with some creditor loss sharing. Of course I doubt Anglo are that smart or bondholders that dumb.
Can’t argue with that – sterling and dollar appreciated 7-15% in the 6 months to 30 June (USD 1.4326 at 31/12 to 1.2233 at 30/6 and STG 0.8872 at 31/12 to 0.8185 at 30/6). There doesn’t seem to be an explicit statement on new lending – the €1.1bn is what it is, though that didn’t stop the Independent from interpreting it as new lending – your interpretation seems more credible but doesn’t exclude the possibility of additional new lending eg uncommitted. And “net loan repayments and OTHER MOVEMENTS [my emphasis] during the period” of €1.7bn also leaves some room for ambiguity.
However overall if you estimate exchange gains of €2bn approx (they only booked €37m only as a gain – note 31 to the accounts) and €0.8bn of additional advances (instead of €1.1bn) then that gives you repayments of €1.5bn. And that would be in the context of €24bn unimpaired non-NAMA loans and €6bn of unimpaired NAMA loans. And in the context of a commercial lending bank where the average term will be what? 3-5 years? And where the interest alone on €30bn of unimpaired loans would be say, 3% of €30bn for 6 months or €450m. Still feels low though not as extreme as the headline on the entry would suggest.
Thanks again, very useful comments.
Great analysis again!
I think the non NAMA loans are where the real accounted for losses are hiding. I did a similar analysis and came up with similar numbers.
It is also worth remembering that even the NAMA discounts include allowance for about 10% LTEV and property prices at Nov 9.
Removing these additional subsidies from the NAMA discounts would result in net losses of close to €40bn
Indeed DE, I saw your analysis on politics.ie/economy – link below. The analysis here is coming at the issue from the same angle. However I did note that in addition to the specific provision for losses on non-NAMA loans (€6 223m) there is a general provision of €1.3bn which I allocated pro-rata to augment the specific provision. I think our overall approach is the same though. It’s worth mentioning that the analysis above is based on a 58% average haircut. For every 1% that rises the additional losses are roughly €700m across the NAMA/non-NAMA portfolio.
Your point about LTEV and loan valuations backdated to 30th November 2009 which was 10% off current values (in Ireland) is well made.
http://www.politics.ie/economy/137071-estimate-anglo-losses.html
Hi NWL,
Their policy of rolling up interest on loans was confined to interest on “development” loans as opposed to “investment” loans. The development loan interest was charged at a higher rate than that charged when the loan became an investment.
To be fair to Anglo, they tried to keep these margins at a fuller level than the “Johnny-come-lately” banks, mainly AIB, who tried to emulate their lending policies and poach the business.
Anglo’s development loan margin was circa 3% and their investment loan margin around 2%. AIB and Bank of Ireland tried to buy the business with 100% plus loans and margins of sub 1% irrespective of whether the loan was for development or investment.
Anglo’s losses are the worst because they had the most business. But the bank that is peeling the artichoke more than the rest, and hiding the real losses, still in denial – is AIB.
BTW, an excellent analysis. There are still uncertainties, such as a probable fall in values over the next two years when NAMA starts to sell; a possible plus from future profits on some of the existing loans in the “good” book; the NAMA call if they lose money on the acquired loans (which, if history is a guide, is a racing certainty). I am sure that there are others, but accountancy and balance sheets…… zzzzzzz… zzz