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?
NAMA Wine Lake 
“you would expect a substantially larger provision, but will that be reflected in the results at 11am today?”
Uhm, no.
Anglo is hiding behind IFRS 9 in not showing the likely future losses on NAMA tranches – that’s what you might conclude from reading the accounts.
Below is what Anglo say on page 36 of the report – in brief they have chosen not to adopt changes that have been made to IFRS 9 which would require loans to be shown at fair value not amortised value. They are entitled to do this because the change to IFRS won’t be mandatory until 2013 but given the present circumstances and timing of Anglo’s results you’d have the question the motivation of Anglo’s management. Here is the link to IFRS 9
http://www.iasplus.com/standard/ifrs09.htm
Here’s what Anglo say in their report
“A number of accounting developments which will apply in future years are described in the 2009 Annual Report and Accounts. The most significant is IFRS 9 – Financial Instruments: Classification and Measurement. Adoption of the standard is not mandatory until accounting periods beginning on or after 1 January 2013 and therefore the Group has not yet fully assessed the potential impact of this development. It is the first phase of a project to replace IAS 39 – Financial Instruments: Recognition and Measurement. Its aim is to reduce the complexity of accounting for financial assets and in so doing to aid investors’ and
other users’ understanding of financial information. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. It also requires a single impairment method to be used which replaces the various methods currently prescribed in IAS 39.”
[…] And it’s worse than they say. […]