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

Business review continuedIrish Bank Resolution Corporation LimitedAnnual Report & Accounts 2011Lending impairment – charge for the yearIncome statement - lending impairment2011 2010€m €mSpecific charge - loansand advances to customers 2,107 4,956Specific charge - held for sale 34 2,683Total specific lendingimpairment 2,141 7,639Collective (release)/charge (597) 21Total lending impairment 1,544 7,660The specific lending impairment charge of €2.1bn for the yearto 31 December 2011 represents 6% of average loan balances.Of the total specific charge €2,107m relates to loans andadvances to customers with €34m relating to loans classifiedas held for sale. The loans and advances charge includesimpairment related to US loans prior to their designation asheld for sale at 30 June 2011.Impairment is calculated in accordance with IFRS and reflectslosses incurred in the period based on conditions existing at31 December 2011. Losses expected as a result of futureevents, no matter how likely, are not recognised under IFRS. Inline with the Bank’s credit risk management process, thespecific charge was determined following a detailedassessment by Group Risk. This process also includedconsideration of the new impairment provisioning guidelinesissued by the Central Bank of Ireland in December 2011.The collective impairment provision reflects an allowance forloan losses existing in the performing loan book where there iscurrently no specific evidence of impairment on individualloans. The provision has been calculated based on historicalloss experience supplemented by observable market evidenceand management’s judgement relating to market conditions at31 December 2011. In 2011 there has been a release of€597m in the collective impairment provision resulting in aremaining balance sheet provision of €773m, or 7% of thetotal performing loan book, at 31 December 2011. This releaseis principally attributable to the significant decrease in theperforming loan book, on which the Incurred But NotReported provision is assessed. At 31 December 2011 theperforming portfolio totalled €11.4bn compared to €19.4bn at31 December 2010.Income statement - specific lending impairment2011 2010€m €mIreland 1,557 5,813UK 574 737US 10 1,089Total 2,141 7,639On a sector basis, €1.4bn (66%) of the specific charge of€2.1bn relates to investment property assets. The remainingcharge is attributable to business banking (€0.2bn), personallending (€0.2bn), development loan assets (€0.2bn) andresidential mortgages (€0.1bn).Of the residential mortgage charge €46m is attributable to theowner occupier portfolio with the balance of €16m relating tothe buy to let portfolio. At 31 December 2011 balance sheetspecific and collective provisions in respect of the owneroccupier portfolio totalled €326m (23% on €1.4bn of grossloan balances) and on the buy to let portfolio totalled €170m(39% on €0.4bn of gross loan balances).Ireland continues to be the worst affected market, accountingfor 73% of the overall specific impairment charge. Consumerand business sentiment along with spending have beennegatively impacted by the weak global backdrop, eurozoneconcerns and the ongoing fiscal austerity measures. Conditionswithin both the commercial and residential property marketsremain very difficult. High unemployment and a continueddecline in disposable income have impacted credit quality,particularly across the residential mortgage portfolio. Propertyprices have continued to decline during 2011 and transactionalvolumes remain low. The stressed economic conditions and thecontinued decline in values have been the primary drivers ofthe increase in specific provisions across all sectors of the loanbook.In the UK the overall macro environment remains weak andgovernment spending cuts are starting to have an impactacross most sectors of the economy. Within the commercialreal estate market prices and yields for prime properties inexcellent locations have stabilised and in a small number ofareas have increased. However for secondary and tertiaryproperties market conditions have weakened significantly,particularly over the second half of 2011, with decreasing rentsand an increase in vacancy rates resulting in a fall in assetvalues. In addition, deleveraging by UK and European bankshas meant that there has been a material decrease in fundingavailability for real estate transactions, which has had a knockon impact on liquidity and prices. These items have been thesignificant contributing factors to the specific impairmentcharge of €574m in the period.Due to the reduction in the total loan book in 2010 and 2011through loan sales and considerable NAMA transfers, alongwith decreases in interest rates, customer interest income forthe year ended 31 December 2011 has reduced to €0.9bn, adecline of 45% compared to the year ended31 December 2010 (€1.6bn).As advised in the 2010 Annual Report and Accounts, the Bankis undertaking an internal review of historical interest ratesettings as applied to certain customer loan accounts for theperiod prior to January 2005, to determine whether interestrates applied were consistent with the terms of the associatedcustomer loan documentation. An additional provision of€12m was charged in the year to cover the amount of anyliability to customers who may have been adversely affected,taking the total provision to €54m at 31 December 2011.NAMAThe overall reduction in the cumulative loss on disposal ofassets to NAMA for the year ended 31 December 2011 totalled€0.8bn. This primarily results from settled valuationadjustments relating to the completion of full due diligence byNAMA on assets previously transferred.In the current year, NAMA has completed full due diligence on€14.8bn of previously transferred IBRC assets. At31 December 2011, work was ongoing by NAMA to completefull due diligence on the remaining €7.8bn of loans, €7.5bn ofwhich transferred to NAMA in 2010 and €0.3bn whichtransferred in October 2011. This due diligence work wassubstantially completed in March 2012 and resulted in the11