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

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