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Archive for August 31st, 2010

Yesterday in a preview of the Anglo report, five NAMA-related issues were outlined. Here’s what we found out from the report itself today.

1. NAMA-bound loans. Although it is quite convoluted to work out, the following would appear to be the present position for NAMA-bound loans though before the reclassification of the €1.2bn of loans to which Anglo claim NAMA has agreed (Page 10 of the report).

Anglo is accounting for a 34.3% provision for losses on tranches 3 onwards which compared to the experience of the first two tranches which saw an average discount of 58% looks like fantasy. Anglo state clearly in several places that “iIt should be noted that impairment provisions under IFRS are not a predictor of NAMA valuation discounts on transfers”. Effectively Anglo are hiding behind IFRS 9 and avoiding the recognition now of likely losses on the remainder of the NAMA tranches.

There is some interesting detail on the tranches transferred upto June 30th (all of tranche 1 and a fraction of tranche 2) on page 11 which shows, for example, that 6% of the loans transferred to NAMA received nil consideration.

2. Non-NAMA-bound loans. For the first time there is a considerable amount of detail on the non-NAMA loans contained in note 35 on page 66 of the report. It should be noted that the majority of loans transferred by Anglo in tranches 1 and 2 were associated property loans (ie non land and development). Given the 58% average haircut I would suggest that the Anglo provision on commercial property of 14% is utterly inadequate. I am sure others will work through the detail of the loans shown and the provisions but it seems to me that if the provisions on commercial property were to be increased to 40%, then along with the increased losses on NAMA loans that will need to be recognised in the next half year, Anglo will need a cumulative net bailout in excess of €30bn.

3.Reclassification of NAMA loans: Whilst Anglo CEO Mike Aynsley was talking about €2-4bn of NAMA-bound loans being reclassified two weeks ago, it would appear from the Anglo press release today that the figure is €1.2bn (footnote one on page one of the release). No further detail appears.

4. Redemption of NAMA-bound loans. There would appear to have been nil redemptions which is partly re-assuring as it means that Anglo has not been selling loans for less than par. The mystery of Bank of Ireland’s €4bn redemption between late 2009 and early 2010 remains and should be dealt with by NAMA’s audit of the banks later this year to ensure all eligible assets have been transferred.

5. Paddy McKillen’s loans : Incredibly Anglo’s dispute with NAMA about the eligibility of Paddy’s loans doesn’t get a mention at all. Incredible because Paddy’s loans should be financially significant to Anglo given that they’re supposed to be performing and of good quality.They could have made nearly 10% of the Newbank loan portfolio. Strange indeed that there is no mention of the dispute. Remember you can find the background and all the latest news on the Paddy McKillen judicial review proceedings under the Paddy McKillen v NAMA tab.

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Page 1 of the Anglo half year report issued today has a table of contents. Page 2 has some contact information for Anglo. And it was when I got to page 3 today that I started to suspect that we were in for a grand display of spin. For the first item and graph on page 3 shows the commercial property capital values graphs for Ireland, the UK and the US. They chose the IPD index for Ireland which had a 5% drop in H2, 2010 as opposed to the Jones Lang Lasalle graph which would have shown a 6.7% decline – a small difference to be sure but representative of the approach taken many times in the report. The second graph on page 3 shows the spread between 10-year government bonds (Ireland versus Germany) and despite the report being signed yesterday the 31st August, 2010, no mention is made of recent record spreads and the supposed cause for the record high yield spreads  : Anglo!

Anglo’s new-ish Chairman, Alan Dukes who took over from Donal O’Connor on 14th June, 2010 is first off to bat for Anglo from page 4. His second and third sentences “I am acutely aware of the Board’s mandate to run the Bank in the public interest and in a manner that minimises the cost to the taxpayer. Everything that we do is with that objective in mind and it is the overriding priority of all parties involved.” blithely ignores the deliberate non-co-operation of Anglo with the Office of Corporate Enforcement and Anglo’s attempts to stop NAMA taking over badly-needed performing loans – both events taking place or continuing after Mr Dukes took up his post.

Next up we have the loss for the six months itself – €8.2bn. We don’t know if that is an Irish record. Anglo’s report in 2009 was for 15 months – the six months from Oct 2008 – March 2009 produced a loss of €4.1bn and the subsequent nine months threw up a loss of €8.6bn to give an overall loss for the 15 months of €12.7bn – but we can guess that €8.2bn is a record. However if we examine the level of provision made against both NAMA and non-NAMA loans, then it wouldn’t be unreasonable to add another €5-10bn to that loss figure (see below). Truly frightening.

We are then treated to some spiel on the preferred restructuring option for Anglo and surprise, surprise the €250,000 chairman (who to be fair apparently volunteered a €100,000 reduction to bring his annual fees to €150,000) and the reputedly-paid €0.5m CEO argue for a perpetuation of Anglo through a Newbank (capital “N” because that’s what the new bank has been called in the recent submission to the EU for restructuring). Now the restructuring finances are commercially confidential, dontchaknow but it seems that they seek to justify their Newbank split on a number of grounds including on the basis that “it offers the prospect of participation in the reconstruction of the banking sector while safeguarding the stability of the Irish financial system and it provides credible options for the Government to exit by way of a future sale with a potential return for the taxpayer” – the financial impact of these features wouldn’t be commercially confidential and I would dearly love to see the workings.

Next the Chairman’s report tells us that the Minister for Finance upped the promissory note last week but later on we learn that he gave a commitment to Anglo on 30th June 2010 to shore up its capital. That letter on June 30th, 2010 was of course unlawful absent EU approval of additional State-aid. However we wouldn’t expect anything as vulgar as that little peccadillo to be highlighted in a report that constantly refers to the “Shareholder” ie the State as if it were a deity.

The Chairman does tell us that with respect to the accounts “it is important to remember that impairment provisions under IFRS are not intended to predict loan discounts on transfer, which are calculated on a different basis”. Fair enough, compliance with IFRS 9 on loan impairments is not mandatory until 2013 but Anglo fails to include any up to date estimate of overall losses. And at this stage, Anglo is not fooling anyone. We’re like the patient with some new exotic but fatal disease and we’ve researched the disease to the extent that we know about as much as the doctors – in other words, if Anglo won’t use its expertise and experience to project its future loan losses, there’s no shortage of people who will do just that.

The CEO’s review is remarkable for completely omitting the shambles that was the first Anglo restructuring plan submitted to the EU in November 2009 during which time, the CEO Mike Aynsley was in charge. Mr Aynsley tells us that commercial property values have dropped by “more than 50%” – indeed they have – almost 58% to the end of June 2010 according to the IPD index with falls accelerating in the second quarter. He tells us that the UK commercial has improved  “having risen by 15% from the mid 2009 nadir” – that statement is spot-on accurate but take a look at the IPD press release which confirms the 15%, it goes onto say “UK commercial property capital appreciation has eased to its slowest quarterly growth since Q3 last year” and the outlook in the near term in the UK is not good – the recent EU bank stress test base scenario was that commercial prices in the UK would grow by 2% in the 12 months of 2010. However such qualification would only interfere with the Anglo optimism. At least Mr Aynsley does confirm “on 30 June 2010 the Minister wrote to the Chairman to confirm his commitment to increase the principal amount of the promissory note to ensure the Bank had sufficient capital to continue to meet its regulatory capital requirements.” though again it would have been vulgar to point out that the Minister did give the commitment without EU sanction. He concludes with an overview of the options for Anglo’s future and he argues for the Newbank split – well, he would, wouldn’t he?

There is an interesting footnote to the CEO’s review with respect to “legacy” matters and “as part of the review the Bank will have to examine a substantial amount of historical customer loan documentation before it can reliably estimate the amount of any liability that arises to customers who may have been adversely affected.” So some Anglo customers might be getting demands for under-calculated interest. The review deals with the period “period prior to July 2004” so there might be some shocks in store. UPDATE. 1st September, 2009. Simon Carswell at the Irish Times interprets this “legacy”matter to mean that Anglo customers may have been overcharged and may be due a refund and indeed a further aticle by Simon Carswell today seems to confirm that it is Anglo who might face a bill of €50m for overcharging interest on loans.

Overall though, the CEO and Chairman duo put in a Trojan effort in portraying Anglo in its best light and to be fair to them they are in their posts for a relatively short time trying to sort out a catastrophe that they had no hand in creating. But they are hardly the most independent participants in the Anglo saga and so we certainly shouldn’t rely on their recommendations for Anglo’s future. As Upton Sinclair once said “It’s hard to make a man understand something when his livelihood depends on him not understanding it”

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Having perused the Anglo first half year report, you could be forgiven for concluding that now that Mike Aynsley has taken over, Anglo has cast off its old practices and is now a paragon of good management with a clear and accurate assessment of its finances and prospects. This is the same Mike Aynsley who became CEO in September 2009 and oversaw the submission in November 2009 of a restructuring plan to the European Commission. In returning the plan to Anglo in March 2010 requiring a re-submission in May 2010, the Commission described Mike Aynsley’s plan as lacking detail and prompting doubt in its credibility and wrote off as overly optimistic the claim that Anglo Newbank could be generating €1.2bn per annum in profits by 2014!

Having quickly reviewed the half year report (press release is here and the report itself is here), there would appear to be a lack of detail and credibility in some statements including financial statements. There will be a detailed report here later today on the significance to NAMA of the Anglo half year report but for the time being it appears that Anglo is maintaining a 34.3% provision for losses on the €19.582bn of NAMA-bound loans after tranche 2 (note the €19.582bn may decrease by €1.2bn as a result of reclassification but that doesn’t detract from the provision %).

It would appear that if Anglo were to maintain a 58% provision on tranches 3 onwards (see earlier entry today for the derivation of 58%) then that would require an additional loss at this point of €4.6bn. Anglo appear to be hiding behind the International Financial Reporting Standards (IFRS) for valuing loans though I can’t see anywhere (including management commentaries) where they project losses using their best estimates. The implication is that the bail-out costs will be several billion in excess of €25bn.

Here are the NAMA numbers (there is an assumption that the new “collective provision” for all losses on both NAMA and non-NAMA loans is allocated on a pro-rata basis by reference to the face values of the NAMA and non-NAMA loans)

There will be a more considered and detailed update here later today.

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It seems that Anglo will be releasing its first half 2010 results at 11am this morning. The speculation in the Irish press is that a loss of over €4.1bn will be announced. This entry examines why the losses should be over €10bn, but are unlikely to be reported at that level.

Yesterday we got a flavour through a Freedom of Information request (which was subject to an appeal to the Information Commissioner) made by the Irish Times of the attitudes and machinations at the Department of Finance in April 2009 when the IMF was examining the condition of the Irish banking system. “I’m not sure that it would be helpful to have Anglo talk up their capital requirements. Perhaps a word with DOC [Anglo’s then chairman Donal O’Connor] could temper this” is what one Department official wrote in an email reported by the Irish Times. A year and a half later with the EU wavering over its decision on the future of Anglo, it is likely that the new Anglo chairman, Alan Dukes together with Anglo’s CEO, Mike Aynsley will be more acutely aware than ever of the consequences of “talking up their capital requirements”.

Remember the bloodbath that was the 2009 Anglo report (for the 15 month period to the end of December 2009) which saw losses of €12.7bn and a State injection of capital of €12.3bn? Well those results, horrendous as they were, only booked losses on Anglo’s loans at what now appears to be fantasy levels.

At the end of 2009, Anglo reported €35.6bn of NAMA-bound loans at face value against which Anglo booked a cumulative provision for losses of €10.1bn (28%). Anglo’s first tranche of loans was transferred to NAMA in May 2010 with a gross value of €9.25bn and a loss of €5.1bn (a 55% haircut). Anglo’s second tranche was transferred only last week (and therefore after the half year cut-off of 30 June 2010 but you would have thought it was a material post period event). The second tranche had a gross value of €6.75bn and a loss of €4.18bn (a haircut of 62%). The average haircut in tranches 1 and 2 was 58%. In the absence of argument to the contrary shouldn’t the provision on the remaining tranches, totaling €19.582bn also be set at 58%? That being the case, Anglo will need book losses of €10.52bn on the NAMA loans alone.

The non-NAMA loan book is even more interesting than the NAMA stuff because it has not been subjected to the rigour of a partial valuation exercise by a third party (not to mention the EU) as has been the case with NAMA loans. The Financial Regulator, Matthew Elderfield, had some strong words at the start of this year about banks recognizing the reality of the recoverability of its loans. Sadly it would seem that there has been little practical effort to force banks to confront the true scale of losses on their non-NAMA portfolio and this lack of application may sow seeds of doubt in the financial standing of our banks. At the end of 2009 Anglo had €36.5bn of non-NAMA loans against which it had booked a cumulative provision of €4.9bn (13.4%). If the paperwork, lending practices, security and decline in asset values of these loans are similar to the NAMA loans you would expect a substantially larger provision, but will that be reflected in the results at 11am today?

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