Anglo takes risk to reassure its public doubters

Business Opinion: Banking stocks worldwide are taking a hammering and Irish banks are doing worse than most due to their exposure to the rapidly cooling Irish property market. But Anglo Irish Bank does seem to be being singled out for special treatment, with its share price suffering to a greater extent.

In a review of UK and Irish banks published on November 2nd, Goldman Sachs said AIB and Bank of Ireland were in the same boat. The main risks they faced were a sharper than expected housing slowdown, substantial deterioration of credit quality and more severe that expected dislocations on the global credit markets.

Anglo, they argued, faced a different and larger range of risks, including the macro environment in Ireland, UK and US, commercial property prices, unemployment, slower GDP growth and a faster than expected rise in funding costs.

Anglo is seen differently to the other banks as it is a very different bank. Anglo has built its whole business about being a different bank, with its can-do, relationship-based banking the perfect foil for the new breed of Irish businesses.

It is heavily exposed to the commercial property sector, some would argue uniquely exposed due to its penchant for funding developments and also involving its private clients in the deal as equity participants.

But above all what sets Anglo apart is its lack of a natural deposit base, because it has no retail business. And with wholesale markets difficult, this has become an issue.

But what does come as a surprise is that all this is being interpreted in some quarters as indicating there is something fundamentally wrong with Anglo's business that leaves it dangerously at risk.

So pervasive is this view that the bank's management have had to come out and publicly deny it faces a liquidity crisis. The vehicle by which they did this was a note last Tuesday from Dresdner Kleinwort that was bluntly titled "No liquidity or funding problems".

Dresdner said that Anglo's management, who are currently in a closed period, had clearly told them it had not sought emergency funding from the European Central Bank or the Bank of England. In fact, according to Anglo's management, via Dresdner, Anglo is a net inter-bank lender in the current market.

Dresdner also passed on to the market Anglo's assurances that its exposure to specialist investment vehicles is no worse than previously indicated and the bank has plenty of liquidity.

The bank was "now even more convinced that fundamentals are safe", saying approvingly that Anglo's management came across as "positive though cautionary".

While it is comforting to hear all of this, one should not lose sight of what this says about Anglo vulnerability to the sort of negative sentiment that has been building.

It is a very risky strategy for the senior management - even indirectly - to come out and tell the market that all the rumours floating around are not true. When you do that you put your credibility on the line and if it does not work, then you have lost your credibility.

It was a brave move by David Drumm, the chief executive. While he is well regarded he has been in the job for less than three years and many of the individuals who have been the face of the bank as far as capital markets are concerned have moved on. When you are all but asking the market to take you at your word, track record and relationships count. The biggest risk that Anglo faces is not that a vital flaw in their business will be exposed. The Dresdner Kleinwort note is a categorical statement that this is not the case. The biggest problem is lingering doubt.

It will be a while before we know whether Drumm's gamble succeeded in putting out the fire as the huge sell-off in shares last week will have pretty much obliterated any impact his message may have had.