Annual Report & Accounts 2009 - Anglo Irish Bank

Business review continued
€1.5 billion of cash collateral placed with counterparties
to offset credit risk arising from derivative contracts. At
30 September 2008 placements with banks included
€7.5 billion of short term placements with Irish Life &
Permanent plc.
During the period the Group increased the amount of
assets eligible for open market repo transactions through
the expansion of the Bank’s covered bond and commercial
mortgage backed security programmes as well as the
establishment of Anglo Irish Mortgage Bank in October 2008.
The total amount of loan assets assigned as collateral under
rated securitisation programmes and secured central bank
borrowings as at 31 December 2009 was €29.7 billion
(30 September 2008: €11.8 billion).
Yen financing structure
Included within foreign exchange contracts is the impact
of a non-trading Japanese Yen financing arrangement, which
was first entered into in May 2008 and ended during
December 2008 and January 2009. The financing arrangement
was intended to reduce the Group’s overall net cost
of funding and was structured in a manner which was
anticipated to result in no net after tax loss for the Group
arising from currency fluctuations. In the six months to
31 March 2009 the arrangement resulted in a pre-tax loss of
€181 million and an after tax benefit of €17 million. However,
because of the significant operating losses incurred by the
Group in the nine months to 31 December 2009, €97 million
of taxation benefit has not been recognised resulting in a
pre-tax loss for the fifteen month period to 31 December
2009 of €181 million (2008: €31 million) and an after tax
cost of €80 million (2008: gain of €6 million).
Treasury assets
The Bank maintains a portfolio of debt securities that are
held for investment purposes or liquidity reasons. Most debt
securities are classified as available-for-sale (‘AFS’) though
certain investments with embedded derivatives are included
within Financial assets at fair value through profit or loss.
The debt securities portfolio comprises sovereign investments,
debt issued by financial institutions, residential mortgage
backed securities and other asset backed securities.
Debt securities are marked to market using independent
prices obtained from external pricing sources including
brokers/dealers and other independent third parties. The
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Bank does not use internal models to value its debt securities
for financial reporting purposes.
The Group recognised gains of €25 million on the sale of
€0.8 billion of government bonds during the period. Capital
gains were offset by capital losses of €20 million on the
disposal of asset backed securities (‘ABS’) and investments in
bank subordinated debt. A net capital gain of €5 million is
reported in Other operating income.
Available-for-sale financial assets - €m
31 December
2009
30 September
2008
AAA / AA 6,228 6,742
A 1,346 1,213
BBB+ / BBB / BBB- 206 153
Sub investment grade 105 37
Unrated 5 7
Total 7,890 8,152
Of the Bank’s holdings of AFS securities 79% are graded AA
or above, with 96% graded A and above, and €110 million
being sub investment grade or unrated. These ratings are
from independent third party agencies. High quality euro
denominated sovereign bonds account for 41% of holdings,
bank bonds another 43%, residential mortgage backed
securities 10% and asset backed securities 6%. All bonds
are reviewed for impairment on an individual basis, with
any appropriate charge reflected in the income statement.
In the 15 months to 31 December 2009 the Bank has not
elected to reclassify securities from available-for-sale to loans
and receivables. The option to reclassify, which is available
under IFRS, would avoid the marking to market of assets
being presented through reserves and affecting the amount
of reported Shareholders’ funds. It has no impact on the
requirement to review and charge any impairment to the
income statement.