Government to inject up to €4 billion in Anglo Irish

The Government is to seek EU approval to inject up to €4 billion of capital into the nationalised Anglo Irish Bank after it reported a loss of €4.1 billion and warned these could reach €7.5 billion over the next three years.

Anglo today reported a €4.1 billion pretax loss for the six month period to March 31st, mainly as a result of loan losses of €3.7 billion. The €4.1 billion loss is equivalent to 5.6 per cent of its loan book.

A recent review of the asset quality of the bank’s loans found that losses were likely to reach €7.5 billion by the end of September 2011, the bank said, adding that under certain stress scenarios this could rise by a further €1.5 to €3.5 billion.

Donal O’Connor, executive chairman of Anglo Irish Bank said the loss followed significant impairment charges in the bank’s loan portfolio and he noted that the funding position of the bank had weakened significantly since last September.

The option of winding down the bank had been examined he said but this would have been “very costly for the Irish taxpayer”.

Despite the weakened capital position of the bank its customer lending increased by €1.3 billion to €72.3 billion over the period. This was due to the issuing of previously committed loans and the rolling-up of interest on some loans.

The bank said it would continue to provide “roll-up facilities” to customers where it believed this will ensure the best economic outcome for the bank.

The bank said it had €17.7 billion in development loans, accounting for 24 per cent of its loan book, two-thirds of which is based in Ireland, and €10.6million relates to land bank assets.

Impaired loans were €724 million, or 1 per cent of all loans in September.

Since September the size of impaired loans have increased from €900 million to €10.7 billion (about 14.8 per cent of the loan book), with a further €12.9 billion in loans that are past due but not impaired.

Mr O’Connor said: “Clearly the bank made mistakes in some of the lending decisions taken in recent years, particularly in relation to property lending in Ireland."

“Our rate of growth and risk appetite at the top of the economic cycle was imprudent and the stark evidence of this is seen in the figures announced today.”

Following the losses announced today he said the bank “undoubtedly” requires additional capital and added that the Financial Regulator had granted certain temporary derogations with regard to some capital requirement.

This is because the bank’s core tier 1 capital has fallen from 5.9 per cent in September to 1.4 per cent. Anglo said it would rise to 6.4 per cent following the recapitalisation.

“There's been a widespread belief that resolving the banking crisis is going to be expensive and most people expected that Government borrowing would increase substantially over the next few years," said Dermot O'Leary, chief economist with Goodbody Stockbrokers. "(But) the scale of it may come as somewhat of a surprise and the speed being required."

The bank will also buy back some outstanding subordinated debt to generate additional capital, matching a similar move by larger rival Bank of Ireland to take advantage of deeply discounted secondary prices.

Shares in Bank of Ireland and Allied Irish Banks initially fell after 11am when the Anglo report was released but they later recovered and at 2pm both were trading up 3 per cent at €1.61 and €1.31 respectively.

Following nationalisation business deposits in the bank dropped by €9 billion resulting in an increased reliance on borrowings from central banks which increased from €7.6 billion at the end of September to €23.5 billion at the end of March.

Customer accounts have fallen by €13.7 billion over the period.

Anglo Irish said it has made a provision of a loss for €308 million “ten longstanding clients of the bank” who borrowed from the bank to buy shares in it.

A further €31 million in losses has been reported for loans to former directors who had stepped down over the last six months. These directors are not named in the report.

Mr O’Connor said Anglo’s ability to raise funding had been hit by reports of “governance weaknesses” which had eroded confidence and led to a significant decline in non-retail deposits across all geographies.

The losses did not impact on banking shares on the Irish market, with the Iseq shrugging off the news. One broker described it as a "confident reaction to disappointing results".

In a statement Mr Lenihan said the results were the Anglo results were “extremely disappointing” and showed a “marked deterioration in asset quality at the bank since it was nationalised”.

The Minister said if Anglo collapsed the taxpayer could face "wider losses" and the Government was seeking to protect the €64 billion of customer and interbank deposits in the bank" and Anglo from becoming a systemic threat to the Irish financial system.

Mr Lenihan said the “full and frank” disclosure of the problems faced by Anglo was an important step and would allow its problems to be “addressed in an orderly fashion”.

Anglo was in a “position to generate further capital of its own by buying back certain outstanding subordinated loans from bondholders at a significant discount to par value”, he added.

Mr Lenihan also said Anglo's results “don’t give rise to any reconsideration” on the capital requirements of Bank of Ireland or AIB. He has asked the board of Anglo to deliver a new business plan “as a matter of urgency”, as part of which the bank will reduce costs and restructure.

He said the National Asset Management Agency would help to secure the stability of Anglo Irish.

Mr Lenihan said the assessment of loan losses was based on an analysis by Anglo which was “subsequently reviewed independently by PWC”.

Richard Bruton, Fine Gael deputy leader and finance spokesman called for the bank to be wound up with every household in the country facing an investment of €2,500 into the bank.

“Fine Gael has consistently said that an orderly wind-up of Anglo Irish is the only sensible approach for the taxpayer.”