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

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Business review continuedBank owing NAMA approximately €24m in respect of valuationadjustments. This amount was accrued in full during the yearended 31 December 2011. The final overall loss on disposalwill only be determined when full due diligence and finalsettlement has been completed by NAMA on all the assetstransferred.During the year the Bank transferred €0.6bn of loans to NAMAat an average discount of 68%. As at 31 December 2011, theremaining eligible loans expected to transfer to NAMA amountto €0.1bn. NAMA has complete discretion as to which assetswill be acquired.NAMA bondsAs part of the AIB Transfer Order, on 24 February 2011, theBank’s entire NAMA senior bond holding of €12.2bn nominaltransferred to AIB at a price of 98.5%.Subsequently, following completion of due diligence by NAMAon certain loans which transferred in bulk during Novemberand December 2010 the Bank received new senior andsubordinated bonds which increase the original considerationpaid by NAMA for these assets. As a result, at31 December 2011 the Bank’s nominal holding of NAMAsenior bonds, which accounted for 95% of the improvedconsideration, totalled €950m. This figure includes €33mnominal of senior bonds received by the Bank under the INBSTransfer Order on 1 July 2011. The NAMA senior bonds had amaturity date of 1 March 2012.In February 2012, NAMA informed the Bank of its intention tophysically settle the senior bonds held on 1 March 2012 byissuing new senior bonds with a maturity of 1 March 2013.The Bank’s commercial preference was to receive cash inexchange for its holdings of senior bonds on 1 March 2012.However, bearing in mind the preferences expressed by bothNAMA and the Department of Finance and overall publicinterest considerations, the Bank agreed to accept physicalsettlement.In October 2011 the Central Bank of Ireland advised the Banknot to increase its usage of sale and repurchase facilitiesprovided under open market operations with the ECB. As aresult, at 31 December 2011 there were no senior bonds usedin sale and repurchase agreements under open marketoperations with central banks (2010: €12.3bn). At31 December 2011 senior bonds with a nominal value of€750m had been pledged under a Special Master RepurchaseAgreement with the Central Bank of Ireland.NAMA subordinated bonds of €49m nominal were receivedduring 2011, representing 5% of the improved considerationreceived for assets transferred to NAMA. On acquisition, thesebonds were recognised within available-for-sale assets at aninitial fair value of €10m, representing an average valuation of21%. The difference of €39m is included in the gain/(loss) ondisposal of assets to NAMA.Under the INBS Transfer Order, NAMA subordinated bondswith a nominal value of €154m and a carrying value of €47mtransferred to the Bank. The Bank’s nominal holding of NAMAsubordinated bonds at 31 December 2011 totals €843m, witha carrying value of €124m.Financial marketsFunding overviewThe Bank’s funding profile is primarily reliant on deposits fromcentral banks and monetary authorities, which at31 December 2011 totalled €42.2bn, representing 87% oftotal funding (2010: €45.0bn, 70% respectively). The Bankexpects its funding requirements to decrease as the overalldeleveraging process continues in accordance with the termsof the approved Restructuring Plan.In accordance with the INBS Transfer Order, borrowings fromthe Central Bank of Ireland under special funding facilitiestotalling €6.0bn and debt securities with a nominal value of€0.6bn transferred to the Bank on 1 July 2011.Due to the short term and concentrated nature of its fundingbase the Bank is not in full compliance with most of itsregulatory requirements.The Bank’s credit ratings were downgraded to sub-investmentgrade in late 2010 by Standard & Poor’s and Moody’s, and byFitch in February 2011.The Group became a participant institution in the CreditInstitutions (Eligible Liabilities Guarantee) Scheme 2009 (the‘ELG Scheme’) on 28 January 2010 and certain qualifyingdeposits and securities issued by the Group from this dateonwards are covered by the ELG Scheme. A cost of €77m(2010: €128m) is included within interest expense for the yearrelating to the Bank’s participation. The EC has approved theextension of the ELG Scheme for certain eligible liabilities to30 June 2012.Customer fundingCustomer funding decreased by €10.5bn to €0.6bn in theperiod, primarily as a result of the transfer of €8.3bn ofcustomer deposits to AIB and AIB UK under the AIB TransferOrder. Remaining deposits are primarily related to lending orNAMA facilities.Central bank fundingBorrowings from the Central Bank of Ireland under specialfunding facilities increased to €40.1bn (2010: €28.1bn). Thefacilities utilised were a Special Master Repurchase Agreement(‘SMRA’), a Master Loan Repurchase Agreement (‘MLRA’) anda Facility Deed from the Central Bank of Ireland. The majorityof the funds were advanced under the SMRA, involving thesale and repurchase of the promissory notes and the NAMAsenior bonds. Collateral assigned under the MLRA is derivedfrom the Bank's customer lending assets. The interest rate onthese facilities is set by the Central Bank of Ireland and advisedat each rollover and is currently linked to the ECB marginallending facility rate.Borrowings under open market operations decreased to€2.1bn (2010: €16.9bn). This decline is mainly due to thetransfer of €12.2bn of NAMA senior bonds to AIB pursuant tothe AIB Transfer Order.The total amount of loan assets assigned as collateral underrated securitisation programmes and secured central bankborrowings at 31 December 2011 was €8.7bn (2010:€13.5bn). This fall is mainly due to certain programmes nolonger qualifying as eligible collateral under open marketoperations.Debt securities in issueDebt securities in issue decreased by €1.5bn to €5.4bn largelydue to the maturity of €2.2bn of medium term notes, of which€1.9bn were unguaranteed but represented contractualcommitments for the Bank. The decrease is partially offset by€0.6bn of medium term notes issued by INBS whichtransferred to the Bank on 1 July 2011 under the INBS Transfer12
Business review continuedIrish Bank Resolution Corporation LimitedAnnual Report & Accounts 2011Order. Medium term notes scheduled to mature during 2012total €4.3bn of which €2.5bn is unguaranteed. The Bankcontinues to honour contractual repayment commitments ondebt securities.Loans and advances to banksPlacements with banks decreased by €1.2bn during the year.The total balance of €2.3bn at 31 December 2011 includes€2.0bn of cash collateral placed with interbank counterpartiesin relation to net derivative liability positions and €0.2bn ofprimarily short term placements with banks.Available-for-sale financial assetsThe Bank holds a portfolio of securities that are classified asavailable-for-sale (‘AFS’). This portfolio comprises sovereignbonds, debt issued by financial institutions and NAMAsubordinated bonds.During 2011, and in line with its overall strategic objective, theBank has sought to deleverage non core holdings of AFSassets.AFS assets total €1.3bn at 31 December 2011, a decrease of€0.9bn from 31 December 2010. During the year €0.5bn ofAFS securities matured and the Bank disposed of a further€0.6bn with a loss on disposal of €2m reported in otheroperating income/(expense). In addition the Bank acquired€0.2bn of bonds under the INBS Transfer Order.Senior bank bonds account for 64% of holdings, eurodenominated sovereign 26% and other bonds, includingNAMA subordinated bonds 10%. Of the total bank bondsincluded within the portfolio €0.5bn, or 36%, relate to bondsissued by Irish banks of which €0.4bn are covered under theELG Scheme. Sovereign holdings include Irish sovereign bondswith a carrying value of €0.3bn.All bonds are reviewed for impairment on an individual basis,with impairment charges reflected in the income statement.There has been no impairment of AFS securities during theyear.Promissory notesThe Minister for Finance, as the Bank’s sole shareholder, hasprovided the Bank with a promissory note to the value of€25.3bn comprising four tranches. The promissory note pays10% of the initial principal amount of each tranche annually.On 31 March 2011 the Bank received the first instalment of€2.53bn resulting in the promissory note having a revisedprincipal amount of €23.6bn from that date.In addition, the Minister for Finance had provided a promissorynote to INBS to the value of €5.3bn comprising two tranches.The terms of these tranches were the same as tranches oneand four of the Bank's promissory note. Following receipt byINBS of the first instalment payment on 31 March 2011, therevised principal amount was €4.9bn. On 1 July 2011 theprincipal and accrued interest as of that date transferred to theBank under the INBS Transfer Order.The promissory notes have resulted in the Group havingsignificant interest rate risk as they are fixed rate instruments.The Bank has hedged a total of €4.3bn of the nominal amountusing amortising interest rate swaps. A further €5.7bn ofeconomic hedges exist in the form of the Group’s capital andfixed rate debt issuance. However significant fixed interest rateexposure remains with limited capacity to hedge furtheramounts with market counterparties.The promissory notes are currently pledged as collateral forfunding under the SMRA with the Central Bank of Ireland.CapitalThe regulatory capital resources of the Group include €29.3bnof capital contributed by the Irish Government. Thesecontributions restored the levels of Core Tier 1 regulatorycapital following significant losses incurred. As at31 December 2011 the Group’s Tier 1 capital ratio is 15.1%and the Total capital ratio is 16.3%.On 1 July 2011, the assets and liabilities of INBS, with theexception of certain limited excluded liabilities, weretransferred to the Bank at carrying value, after adjusting forexisting differences in accounting policies and bases ofvaluation. On the date of transfer no cash consideration waspaid and settlement was made for the net assets through anincrease in the Group’s shareholders’ funds, increasing CoreTier 1 capital by €0.7bn.Regulatory capital ratios have improved since31 December 2010 due to a reduction in risk weighted assets(‘RWA’) during the year of €11.6bn or 32%. This reduction isprimarily related to lending assets where the disposal of USloans in the final quarter of the year had a significant impacton total RWA. Targeted client asset disposals, repaymentsacross loan portfolios, NAMA transfers and additional specificimpairment charges further reduced RWA during the year. Themerger with INBS on 1 July 2011 offset some of thesereductions as risk weighted assets increased by €1.9bn ontransfer.Due primarily to the promissory notes issued by the Ministerfor Finance, the Bank has €35bn of exposure to the IrishGovernment at 31 December 2011. Irish Government exposureis risk weighted at 0% in line with the requirements of theCapital Requirements Directive and guidance from the CentralBank of Ireland. The Group adopts the Basel II StandardisedApproach in calculating its minimum capital requirements.RestructuringPursuant to a direction order made by the Irish High Courtunder Section 9 of CISA on 8 February 2011 the Bank wasdirected to (a) reduce its net lending in line with forecastsderived from the Restructuring Plan, (b) formulate a detailedsteps plan for the rationalisation and, where appropriate,closure of the Bank’s UK offices and its branches in Dusseldorf,Vienna and Jersey and submit it to the NTMA (as the nomineefor the Minister for Finance) by 31 March 2011, (c) formulate adetailed steps plan for the disposal of the Bank’s WealthManagement business and submit it to the NTMA by31 March 2011, (d) formulate in conjunction with INBS adetailed steps plan for the Bank’s acquisition of/merger withINBS and submit it to the NTMA by 31 March 2011 and (e)transfer the remaining eligible loan assets (as defined in theNational Asset Management Agency Act 2009) to NAMA bythe later of 31 December 2011 or the completion of any ongoinglitigation delaying transfer of those loans. On31 March 2011, the Bank submitted the three steps plansreferred to at (b), (c) and (d) above to the NTMA.On 7 April 2011 the Minister for Finance issued certainrequirements to the Bank under Section 50 of CISA pursuant towhich the Bank was obliged to implement in all materialrespects, with the approval of the NTMA, the high level stepsplans appended thereto in relation to (i) the rationalisationand, where appropriate, closure of the Bank’s UK offices andits branches in Dusseldorf, Vienna and Jersey, (ii) the disposal13
Page 1 and 2: Irish Bank Resolution Corporation L
Page 3 and 4: ContentsIrish Bank Resolution Corpo
Page 5 and 6: Chairman’s statementIrish Bank Re
Page 7 and 8: Group Chief Executive’s reviewIri
Page 9 and 10: Group Chief Executive’s review co
Page 11 and 12: Business review continuedIrish Bank
Page 13: Business review continuedIrish Bank
Page 17 and 18: Board of DirectorsIrish Bank Resolu
Page 19 and 20: Corporate Responsibility continuedI
Page 21 and 22: Principal risks and uncertainties c
Page 23 and 24: Principal risks and uncertainties c
Page 25 and 26: Report of the DirectorsIrish Bank R
Page 27 and 28: Corporate governance statementIrish
Page 29 and 30: Corporate governance statement cont
Page 31 and 32: Corporate governance statement cont
Page 33 and 34: OpinionIn our opinion:• the Group
Page 35 and 36: Consolidated statement of comprehen
Page 37 and 38: Bank statement of financial positio
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Irish Bank ResolutionCorporation Li
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IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

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