Anglo PWC report

[yoganmahew]

finance.gov.ie/documents/pub … glopwc.pdf
(44 pages out of the original 120 pages released)

and the minister’s statement:
finance.gov.ie/viewdoc.asp?DocID=5686

The document released this evening by the Minister for Finance, Mr. Brian Lenihan T.D., represents extracts from a series of reports on Anglo Irish Bank prepared by Pricewaterhouse Coopers for the Financial Regulator.

The Minister noted that this work together with advice and reports received from the Central Bank, Financial Regulator, NTMA, legal and financial advisors and others was a key input into policy making over the past months.

The Minister said that in view of the fact that Anglo Irish Bank is in public ownership, there is an important public interest in publishing this document. It contains as much information as possible given the legal constraints and the need to maintain client bank confidentiality, which is essential to maintain depositor confidence in the bank.

The Report clearly demonstrates the Government was correct to guarantee the financial system last September at a time when financial market liquidity conditions were under severe pressure.

The report deals with certain loan loss scenarios. These are not predictions but rather were intended to show how the bank’s loan book would perform under various stress conditions.

As the Minister stated when Anglo Irish Bank was nationalised: “The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate Government support within the EU Framework.”

[yoganmahew]

P.26 Liqidity - the runs:

As of 27 September 2008, Anglo was forecasting net negative cash of €12.0 billion by 17 October 2008. The principal
reason is a €10 billion reduction in corporate and retail deposits consistent with recent deterioration. There has been a
€5 billion deterioration in corporate deposits and €440 million deterioration in retail deposits in the last week. The
projections assume completion of a securitisation of part of the loan book for €2.2 billion and successful bidding for
ECB funds.
The Inter bank and debt capital markets are effectively closed at present and the projections assume a continuation of
these market conditions.

Security collateral p.29:

If the security on which some loans are secured was marked to market it is probable that significant shortfalls would
occur in line with the rest of the Irish and international banking sectors given current market conditions. Whilst the
Banks lending model/underwriting standards rely in the first instance on contractual cash flows, collateral values are a
key consideration in the event of default leading to a forced/distressed sale. In accordance with IFRS, Anglo amortises
these securities as IFRS does not permit a mark to market approach for such lending assets.

The Bank has exposures to a number of customers who also have significant exposures to other domestic and foreign
banks. There is a risk that (i) if other banks call in their loans customers may not have the resources to pay these and
Anglo’s loans or (ii) these other banks may not participate in new rounds of refinancing.

Mothballs p.32:

During our review, we have seen significant evidence of borrowers reacting to the downturn in the residential market
by effectively ‘mothballing’ development sites and land banks. These sites are not expected to be
developed/completed until there is a return in activity to the market. This is a short to medium term solution for many
developers. However, the ability to place facilities on hold may be restricted. It will be difficult for the Bank to permit
interest roll up on facilities where LTV is high, interest cannot be funded and further security is unavailable.

Top 20 p.32:

The Top 20 Investment lending exposures reviewed in our Phase II report had a combined value of €11.7
billion representing 15.7% of total advances as at 30 September 2008.
The Top 20 Land & Development exposures reviewed in our Phase II report had a combined value of €6.4
billion representing 9.0% of total advances as at 30 September 2008.
The Top 70 Land & Development exposures reviewed between Phases II and III of our review had a combined
value of €12.6 billion which represents some 63% of Anglo’s total Land & Development loan book as at 30
September 2008 and 17% of its total loan book.

[yoganmahew]

Stress test p.36

This was done by taking market forecasts for bank loan impairments published by independent analysts and brokers in
Ireland and the UK during October and November 2008 to arrive at two stress scenarios for impairment losses for
different categories of loans: residential mortgages, residential investment properties, commercial/corporate loans,
development land with planning permission, development land without planning permission, secured consumer lending
and unsecured consumer lending.

This gets my goat a bit - which independent analysts and brokers would that be? Who in Ireland is really independent?

[yoganmahew]

Stress test p.37:

The analysts’ forecasts were sense checked against impairment forecasts made by other banks. PwC took the worst
case in each loan category and applied our own view as to future trends to arrive at impairment loss scenarios that
were higher than those published by market analysts at that time.
We applied the impairment loss for each loan category, as estimated in the two scenarios, against the equivalent
category in Anglo’s loan book at 30 September 2008 to arrive at an estimated annual impairment loss. These annual
impairment charges were €2.3 billion and €3.0 billion respectively per annum under the two scenarios for the years
ended 30 September 2009 and 2010. The two PwC impairment loss scenarios exceeded Anglo’s worst case
impairment loss scenario.
The PwC stress scenarios suggests impairment losses greater than Anglo’s forecast operating profits before
impairment charges in 2009 and 2010. We applied the PwC scenario impairment losses against Anglo’s capital and
rolled this forward for financial years ended 30 September 2009 and 2010 without taking into account capital issues set
out in its own capital plans.
The capital base calculated under the PwC scenarios was compared to Anglo’s risk weighted assets of €85.8 billion as
at 30 September 2008 as adjusted for the impact of impairment losses to arrive at scenario capital ratios at 30
September 2009 and 2010.
Assumptions 1 to 5 set out on the previous page also apply to the PwC scenarios with the exception of assumption 2.
Under the PwC highest stress scenario, Anglo’s core equity and tier 1 ratios are projected to exceed regulatory
minima (Tier 1 – 4%) at 30 September 2010 after taking account of operating profits and stressed impairments.
It should be noted these scenarios were constructed by us at a point in time (17 November 2008) and may not be
applicable at any other date. If we constructed scenarios at today’s date or at any other point in time we may have
arrived at a different conclusion with respect to capital ratios. Further, the highest stress scenario represents a
downside risk but not necessarily a worst case scenario.

[yoganmahew]

Money markets p.40:

At 30 September 2008 the Bank had €9.9 billion of exposures across the top 10
Financial Institutions. All exposures are to EU banks with ratings of A- or above.

7,237.5 mn to IL&P
The other 9 counterparties amounting to some 2,600 mn names removed.

All of the money market exposures included in the top 10 matured
on or before the 3 October 2008. Money market exposures
continue to be held at very short dates predominantly one night.
This facilitates active daily management of credit lines and limits.

And the IL&P bit that we get to see:

The money market asset balance ‘Due from Banks’ includes an
amount of €7.2bn placed with Irish Life and Permanent plc. This
amount is balanced (though we believe there is no legal right of
set off) by an arrangement, whereby a non-bank subsidiary of ILP
placed a customer deposit with the Bank for a roughly similar
amount. The effect is to gross up the Bank’s balance sheet,
boosting customer deposit liabilities and interbank assets. The
arrangement reduced by approximately €6 billion within 3 days of
the year end.

[provost]

fair play YM, you read all of it?

[yoganmahew]

@provost

fair play YM, you read all of it?

Quick scan to see if there was anything juicy… I may have missed bits… I don’t have the reading skills of a minister

edit: there are not all that many words on a page! Under an hours work to go through what’s published.

[CaveCanem]

Good man YM. I’m on web-minor this evening, so I’m just looking at pin. Did they give any book strats that would allow a person do their own assessment? Anything on repayment type?

The paid 37 stress test reads like nonsense. What the hell is “our own view as to future trends”? Is this PWC or our unerring dept of finance?

[yoganmahew]

Loan book (I think this is what you mean dogbite?):

Development Loan Book - 30 September 2008
€ inmillions Unzoned Zoned Full PP WIP   Total  %of loan book
Ireland      934     4,142 2,255   5,512 12,843 17.3%
UK           489     1,032   924   3,052  5,497  7.4%
Sub-total  1,423     5,174 3,179   8,564 18,340 24.7%
US                                        1,339 1.8%
Total Development Lending                19,679 26.5%

Investment Loan Book - 30 September 2008
€ in millions Hotel Mixed Office Resi  Retail Other Total  %of loan book
Ireland       3,923 2,179  5,230 1,308 6,102  5,230 23,972 32.2%
UK            2,349 1,495  3,203   854 4,484  3,844 16,229 21.8%
US            1,224 1,318  2,165 1,129 1,412    565  7,813 10.5%
Sub-total     7,496 4,992 10,598 3,291 11,998 9,639
Total Investment Lending                            48,014 64.6%

[yoganmahew]

On repayment type, all I could see was this:

In common with other banks, Anglo provides interest roll up facilities when providing development facilities where
supported by expected future cash flows. The extent to which interest roll up is permitted in any case is determined by
policy limits, including the strength of the individual client, other cash flows and security and underlying asset values.
Management indicated that interest roll up is continually assessed by relevant lending directors and Group Risk
Management and may be extended where deemed appropriate, for example, as underlying asset values increase or to
reflect the strength of a borrower or as part of a restructuring. This would be consistent with our sample reviews of the
larger loans, particularly longer term Irish development land plays. The cumulative amount rolled up on any individual
facility can normally be identified. Interest roll up and capitalisation is permitted under IFRS.

In some cases Anglo lends on an interest only basis against cash generative investment properties depending on its
risk assessment. In certain cases capital repayments will be derived from asset sales or refinancing. The critical risk
assessment in management’s view is the robustness of the contractual cash flows derived from the subject property
which service and repay the debt facility.

Development loans are converted into investment loans when a development is completed and assets become
revenue earning (tenants in place) and in many cases, the loans are retained on the Bank’s books post development.
The Bank has a significant portfolio funding investment property lending in its Irish book. In the case of a client
engaged in the acquisition of overseas assets (mainly UK and Europe), such loans will typically be secured upon the
overseas asset and also cross collateralised on the borrower’s Irish security.

[The_Unwelcome_Guest]

A PricewaterhouseCoopers report has found that Anglo Irish Bank has a number of very large exposures, with 15 of the bank’s customers having loans of over €500m each.

The report also describes how the bank’s strategy was to deliberately develop deep relationships with its strongest customers and that a small number of customers are involved in a large number of transactions and represent a significant proportion of the Bank’s loan portfolio.

The consultants warned in November however, that there were a number of customers, all of whom exhibit potentially serious cash-flow difficulties who were not on the bank’s ‘watch or impairment’ lists.
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The report said Anglo had about 15 customers who owed more than €500m each and that the size of these exposures increased the risk profile of the bank.

The report warned that there were likely to be significant losses in store for individual property developers that would in turn result in significant losses for the bank.

It said that the bank was owed almost €12bn by just 20 customers who borrowed for investment purposes and another €6.4bn by its top 20development customers.

I suppose the_edge is still going to say this isn’t a resigning matter… Why the fuck wasn’t Bruton calling for Lenihan’s head tonight?!?

[grumpy]

Very sanitised report. Why am I not surprised.

Jones Lang are good guys but I would say they were over optimistic with their valuations.

I would not be surprised looking at the breakdown of exposures and the client base (ie personal guarantees largely worthless) that 20/30% is written off the loan book by the time this is over. This is based on deflation, if the ECB start printing money the outcome could be better but I would not bet on it.

You know for years Anglo got away with it - it was all presented as a perfect plan whereas a lot of the development was mick fuckbody with land “howrya lads, how about a mixed used development here?” meeting 10 paddy fuckbodys with a bit of cash going coming in going “howrya lads, any ideas for our cash?” No surveys for demand, no detailed interrogation. And it spun out. They present it more corporately in the report but that was the model.

Hard to see where the capital OR lending is going to come from to buy the developments. Capital inadequacy, declining earnings, retail collapse, net emigration and all that.

So thats the NTMA gone. Should we sell AIB to save BOI?

[kerrynorth]

Whats jumping off the page to me is the €7.5billion of hotel lending of which €4billion is in Ireland. That is a lot of hotels in Ireland - a sector that is about to go off the cliff. At least with office/retail space you can take lower rents or change the use pretty easily. But if no one is buying your bednights at an economic price your bunched and it is not as easy to convert to other uses.

[The_Unwelcome_Guest]

Should we sell AIB to save BOI?

Eh… Surely anyone interested would have bought at these prices already? You couldn’t give an Irish Bank away… If we could, we should definitely give anyway Anglo…

[grumpy]

Should we sell AIB to save BOI?

Eh… Surely anyone interested would have bought at these prices already? You couldn’t give an Irish Bank away… If we could, we should definitely give anyway Anglo…

It’s the bloody merlot. I convinced myself that with polish and us asset it might be worth something. Sorry.

[yoganmahew]

It’s the bloody merlot. I convinced myself that with polish and us asset it might be worth something. Sorry.

They are… unfortunately they’ll have a minus in front of them by the time this is finished.

You might also want to take a look at Bungaloid’s posts in the Anglo Accounts Published thread
viewtopic.php?f=46&t=18976
He’s a little worried about the derivatives book. Me too, but I know shit. He knows a fair bit (by the tone and tenor of his posts).

[CaveCanem]

YM,

Generally strats would break the loans by attributes. Though the piece confirming the practice of roll up is interesting. I’ve a suspicion that the valuations they refer to is a theoretical value when the project is completed. Far from ideal.

I’m fairly sure that the interest accruing on such loans is run through the interest income each year rather than when the money is actually paid. This opens the possibility that they’re declaring profits on loans that will never be repaid. Ponzi, when you need to increase deposits to do this. It’s hard to quantify given the information available, but could be very large and it’s annual. This problem isn’t limited to anglo.

[the_edge]

Meh

[xman]

From the Sydney Morning Herald

Probe reveals nasties in 'rotten burrow of Irish banking’

Anglo Irish Bank’s fortunes are tied to the fate of a small number of property developers, some of whom likely face major losses as the Irish property market keeps unravelling, auditors PricewaterhouseCoopers warned.

In extracts of a report published late on Friday, PwC painted a hair-raising picture of Ireland’s No. 3 lender, which was nationalised in January and has subsequently been described as the “rotten burrow of Irish banking” after a string of scandals.

business.smh.com.au/business/wor … -8dys.html

The story came from Reuters and presumably will be syndicated all over the world. Ireland’s reputation is in tatters.

[bodyofevidence]

shouldt it be “rotten burough”?