IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

Business reviewThis business review covers the year to 31 December 2011 andincludes commentary on key areas of financial and operatingperformance of the Group during that period.On 24 February 2011 the majority of the Bank’s Irish and UKdeposit books, certain National Asset Management Agency(‘NAMA’) bonds and the Bank’s shares in its deposit-taking Isleof Man subsidiary were transferred to Allied Irish Banks, p.l.c.(‘AIB’) and its UK subsidiary AIB Group (UK) p.l.c. (‘AIB UK’)pursuant to a transfer order made by the Irish High Courtunder Section 34 of the Credit Institutions (Stabilisation) Act2010 (‘CISA’) (the ‘AIB Transfer Order’).On 29 June 2011 the European Commission (‘EC’) approved,under EU State aid rules, the joint restructuring and work-outplan for the Bank and Irish Nationwide Building Society (‘INBS’)(the ‘Restructuring Plan’) which had been submitted by theIrish Government to the EC on 31 January 2011. Pursuant tothe Restructuring Plan, the Bank and INBS were to becombined and then resolved over a period of up to ten years.On 1 July 2011 all of the assets and liabilities (with theexception of certain limited excluded liabilities) of INBStransferred to the Bank by way of a further transfer ordermade by the Irish High Court under Section 34 of CISA (the‘INBS Transfer Order’) and on that date the Bank announced itsintention to change its name to Irish Bank ResolutionCorporation Limited (‘IBRC’). This change became effective on14 October 2011.IBRC is a Government-owned banking entity which, inaccordance with the commitments made by the State to theEC, will not be active in new lending or deposit markets. AMonitoring Trustee was approved by the EC on8 December 2011 to report on the Group's adherence to theseRestructuring Plan commitments. The strategic objective of theBank is to work out its assets in an orderly process over aperiod of up to ten years, securing the best outcome for thetaxpayer. IBRC will continue to operate as a regulated entity,bound by the Capital Requirements Directive and thereforesubject to an 8% minimum capital requirement.Financial performanceThe results for the year ended 31 December 2011 includeamounts relating to INBS from 1 July 2011. Further informationrelating to the INBS integration is contained in notes 1 and 2.The Bank reports a loss before taxation for the year of €873m.This loss arises primarily due to net impairment charges of€1,644m, a loss of €214m on the transfer of the majority ofthe Bank’s Irish and UK deposit books, certain NAMA bondsand the Bank’s shares in its deposit-taking Isle of Mansubsidiary to AIB and AIB UK, and a loss of €426m on otherdisposals. These losses were offset to an extent by anoperating profit of €620m and a favourable adjustment of€776m to the cumulative loss on transfer to NAMA. Interestincome on the promissory notes of €1,447m is a keycontributor to operating profit in the year.The transfer of the majority of the Bank’s customer depositspursuant to the AIB Transfer Order increased the Bank’sreliance on central bank and monetary authority supportmechanisms for funding. This represented 87% of totalfunding (€42.2bn) at 31 December 2011 (2010: 70%,€45.0bn), with €40.1bn borrowed under special fundingfacilities (2010: €28.1bn).Total assets at 31 December 2011 amounted to €55.5bn, adecrease of €17.4bn or 24% on a constant currency basis.These reductions demonstrate the Bank’s commitment todeleverage the balance sheet in line with the objective ofminimising losses for the taxpayer. The principal drivers of thisreduction were the transfer of NAMA senior bonds to AIBpursuant to the AIB Transfer Order, the sale of the majority ofthe US loan book, the ongoing deleveraging of the loanportfolio and receipt from the Minister for Finance, the Bank’ssole shareholder, of the first scheduled annual payment on thepromissory note. The Government promissory notes represent54% of the Bank’s total assets as at 31 December 2011.Gross customer lending at 31 December 2011 totals €29.1bn 1 .Impaired loans amount to €17.8bn, with cumulativeimpairment provisions of €10.4bn. During the year, the Bankrecognised a specific lending impairment charge of €2.1bn,driven primarily by the continued significant decline in prices inboth residential and commercial markets in Ireland and the UK,offset by a release of €0.6bn of the collective impairmentprovision.Total capital support provided by the Minister for Financeremains at €29.3bn. The Total capital ratio at31 December 2011 is 16.3% with a Core Tier 1 ratio of 15.1%.Customer lending and asset qualityThe Bank’s primary focus remains the orderly work-out of theloan book and the achievement of maximum recovery in theinterest of the Bank, the Shareholder and the Irish taxpayer.The Bank is required to report to the Department of Finance ona monthly basis on the progress in respect of these objectives.Total lendingAnalysis of customer lending 1Held for saleLoans and advancesto customers2011 2010 2011 2010€m €m €m €mIreland 102 862 19,157 16,198UK - 618 8,977 10,849US 277 723 618 7,643Total 379 2,203 28,752 34,690Provisions for impairment (103) (565) (10,339) (9,577)Customer lending net of impairment 276 1,638 18,413 25,113Provisions as a % of loan balances 27% 26% 36% 28%8