Anglo Irish Bank Corporation (Executive Summary)
Perhaps the institution which best characterised the growth and subsequent collapse of the Celtic Tiger is Anglo Irish Bank. Masters students in a leading Dublin postgraduate business school recently mistook quotes relating to Global Crossing and Enron, attributing them instead to the bank colloquially known as “Anglo.
Anglo Irish Bank Corporation is a commercial bank based in Ireland which, at its peak, had operations in Austria, Germany, the UK, the US, Jersey and the Isle of Man.
Compared with Ireland’s four major retail banks and indeed Ireland’s building societies, its retail presence in its main domestic Irish market was minimal as it predominantly operated in the business and commercial banking marketplace.
‘Anglo’, as it is often referred to in Ireland, was founded in 1963 and was controlled by a Manchester based Kennedy family for many years. It listed on the Dublin Stock Exchange in 1971 and was acquired by City of Dublin Bank in 1978.
It remained one of Ireland’s smallest banks, primarily providing instalment credit, accumulating losses of £300,000 between 1972 and 1976. In 1977 it had deposits of £2 million, cash and government securities of £1.2 million and net assets of £100,000. By 1980 Anglo had made a profit of £100,000.
Over the next two decades Anglo Irish Bank became synonymous with Seán FitzPatrick who was to spend around thirty years with the bank. Having already been a manager for half a dozen years, he held the position of CEO from 1986 before becoming chairman in January 2005. He held this role for a further four years until his resignation in December 2008.
During FitzPatrick’s tenure as CEO, Anglo grew from being a small, fringe operator with a net worth of €5m in 1985 to the third largest bank in Ireland with a peak market capitalization mid- 2007 of €13.3bn. The only banks with higher market capitalisation were Allied Irish Banks (AIB) and Bank of Ireland, both with strong retail and commercial presences. Ulster Bank and National Irish Bank are the other members of the ‘Big Four’ retail and commercial banks, both owned by overseas parents and not listed on the Irish Stock Exchange.
‘Niche Lending’ and Property Development
Anglo Irish Bank’s rapid growth over the last decade was typified by “niche lending”. Its specialisms included property based projects which its more conservative competitors previously predominantly shied away from.
It became known as the “builders’ bank” or “developers’ bank” and commanded continuing loyalty amongst property developers and entrepreneurs, even when all the other banks became more active in development projects.
This loyalty, allied to its less risk averse nature (and perhaps the ‘allure’ of doing business with Anglo), resulted in it attracting business despite having a reputation for being more expensive – charging higher fees and perhaps 1% higher interest than its competitors, often justified as a ‘risk premium’. This term would transpire to be particularly apt.
Anglo was particularly successful over the period since the mid-1990s. This time has often been referred to as Ireland’s ‘Celtic Tiger’ – characterised by high economic growth, export led, strong retail demand, good commercial profitability, low interest rates, readily available international credit, high employment, a rising property market with good yields and a huge growth in the volume and value of both commercial and residential property developments.
Anglo funded many of these developments, not only in Ireland but also around the globe. When a businessperson was considering a development at home or abroad, invariably the advice amongst Ireland’s business elite was “talk to Seánie”.
Indeed the other main banks, some of whom were quite recent entrants to the Irish market attracted by the high returns available during the ‘Celtic Tiger’, saw themselves as being in Anglo’s territory when funding developments.
On occasions these competitors went to extreme lengths to ‘poach’ developments from under the nose of Anglo – seen as ‘victories’ in a rising property market and competitive marketplace. Even the more conservative and traditional Building Societies got in on the lucrative, but riskier, property development bandwagon.
Not unique to Ireland and as with RBS and other banks in the UK, growth of the loan book or loan portfolio appeared to become the primary driving force in a rising property market with strong profitability for both lenders and developers.
Property Market – the invisible bubble
Developers were literally having a ‘field day’, with many of the green fields for which Ireland is appreciated being transformed into housing and commercial developments. Demand was high with many properties sold ‘off the plans’.
The banks were having their own ‘field day’, busy lending to both participants in the property market – developers and homeowners – many of whom were also buying additional properties as an investment.
Many of the rental tenants were migrant workers attracted to Ireland, particularly from Eastern Europe, one of the most significant positives to arise from the ‘Celtic Tiger’ economy.
Not only were Irish householders buying investment properties in Ireland, many availed of the equity in their Irish home(s) to acquire investment properties abroad, not just in the traditional Continental European markets but also in the ‘newer’ markets of Eastern Europe.
Some Irish financial institutions even started offering residential customers 100% mortgages, assuming that the market could only continue in one direction – upwards.
Collectively their managements appeared to have short memories. The previous booms and busts of property cycles seemed to become a very distant memory as growth, market share and profitability became the main business drivers.
Previously risk averse institutions became risk takers.
The “success” in terms of financial return for both the financial institutions, property developers and investors was conditional on a number factors continuing to prevail, including the availability of relatively cheap credit and a consistent rise in Irish and European property markets. The assumption also appeared to be that ‘confidence’ amongst both the public and the business community would remain ‘sky high’.
Retail spending was strong and many businesses had never done better, notably the banks who were hitting previously unheard of levels of profitability.
Anglo’s profits were €3m in 1988 and €9m in 1993 but by 1998 had risen to €57 million, €89 million by 1999 and €195 million by 2001, about a third generated overseas. Annual increases in net profit before tax were regularly in the region of 40% to 50%.
When FitzPatrick became Anglo’s chairman in 2005, replaced as CEO by the former head of its USA division, David Drumm, Anglo was recording annual profits of over €500 million. Profits for the year to September 2005 had risen by 36 per cent to €685 million as deposits reached €41.7 billion. On January 27th 2006 it was reported that Anglo had ‘emerged as the world’s top performing bank over the past five years’.
By September 2006, Anglo profits had broken €1 billion for the first time as net lending reached €67.1 billion. Anglo subsequently reported €1.243 billion in the financial year to September 2007.
Anglo was even rumoured to be on the acquisition trail of a rival financial institution – Irish Nationwide Building Society – with which it would soon become inextricably linked for posterity for quite different reasons.
The nightmare begins
The utopian dream, though, was soon to be transformed into a nightmare – almost overnight.
Anglo suffered a considerable turnaround in its performance during 2008, reflected in a dramatic drop in its share price. Factors contributing to Anglo’s rapid decline included:
1. Heavy exposure to property lending. With much of Anglo’s €72bn loan book being advanced to builders and property developers, it was badly affected by the downturn in the Irish property market during 2008.
2. Reliance on wholesale funding, the availability of which dried up when credit markets slowed to a snailspace following the sub-prime crisis and the onset of global recession.
3. Corporate Governance issues, which can only be described as self-inflicted “own goals”, led to a rapid loss of trust and a shattered reputation.
Lehmans, the global financial crisis and the ‘bank guarantee’
At its most fundamental, the global financial crisis centred around banks suffering significant shortages of liquidity. The likelihood of the world’s banks running short of the cash they needed to meet their day-to-day requirements was increasing daily.
Banks globally were struggling for their very survival, with higher profile strugglers including Bear Stearns in the US and Northern Rock in the UK.
On September 15th 2008 Lehman Brothers filed for bankruptcy in New York, leading to further panic in the financial markets.
The European banking system was also in deep crisis. Four banks were supported – Bradford Bingley in the UK, German property bank Hypo Real Estate (including its Dublin based Depfa bank), Fortis in Belgium and Glitnir in Iceland. Irish banks, particularly Anglo, appeared vulnerable and their share prices were in freefall.
Anglo started losing large deposits. Ranging between €50 and €200 million and sourced mostly from the money markets, Anglo was returning around €1 billion a day to its depositors.
Nor was it just the larger depositors who were nervous.
Individual depositors were withdrawing their savings from the banks, in Ireland often in favour of government backed investment schemes for smaller amounts.
Mattresses began to serve a dual purpose - not just providing rest by way of sleep on top of them but also temporary ‘peace of mind’ as funds were ‘deposited’ under them.
The Irish government increased its guarantee of deposits from €20,000 to €100,000, yet anxiety persisted.
The deposit haemorrhage led Anglo to breaches of its regulatory liquidity ratios. Assuming further deposit withdrawals, the regulator was approached for a special line of liquidity to allow for with Anglo offering some of its €70+ billion loan book as collateral to draw emergency funding from the Central Bank of Ireland.
Yet on 18th September Anglo made a presentation to the Department of Finance, saying it would be “highly profitable” in 2009, with bad debts of just €300 million.
However it was subsequently reported that during September Anglo approached Irish Life & Permanent on the 15th (the day Lehman’s collapsed) and both Bank of Ireland and AIB on the 29th to request merger and takeover talks, but was rebuffed by all three.
That same night the government (Taoiseach/Prime Minister Brian Cowen and Brian Lenihan, the previous and present Finance Ministers) with senior public servants met the CEO’s and Chairmen of AIB and Bank of Ireland, at the request of the bankers.
Whatever was discussed that night at Government buildings, amidst uncertainty in global and domestic financial markets and rumours concerning the liquidity and solvency of both Irish and international banks, led Finance Minister Lenihan to announce the following morning, 30th September 2008, that the Irish government would guarantee all deposits and borrowings in the Irish banking system for a two year period.
The short term effect was as desired – the ‘mini-run’ on deposits stopped.
Indeed the six Irish-owned financial institutions which benefited from the government guarantee started taking deposits from overseas, notably the UK, leading to complaints from Gordon Brown.
Whilst the shorter term impact of the guarantee was deemed to be a success, the longer term implications have transpired to be of critical concern.
As a consequence of the details of what was discussed during that now infamous late night meeting on 29th September 2008 not having been made public, it is unclear whether the degree of disclosure made by the bankers to the government officials was as full as it might have been.
Not only concerning the true extent of potential bank losses and future capital requirements, but also whether officials were made aware that Anglo’s FitzPatrick and Drumm had apparently approached Irish Life & Permanent, Bank of Ireland and AIB with a view to merger and takeover talks.
Robert Louis Stevenson’s counsel may be apposite. “To tell the truth, rightly understood, is not just to state the true facts, but to convey a true impression.”
Management the world over have often been criticized for putting their own interests before those of the organisation they manage. Rarely, though, have they been accused of putting the national interest before their own or that of their organization. The fiduciary duty of Bank of Ireland and AIB’s most senior management was obviously to their own institutions and it would appear that their then shareholders should have been indebted to them for their efforts that night on their behalf.
However it is somewhat ironic that the Irish State is now a significant shareholder in both institutions and it is possible that, with the benefit of hindsight, their efforts devoted to self-preservation of their own institutions during the night of 29th September 2008 may transpire to have contributed to substantially increasing Ireland’s indebtedness as a nation.
The Anglo share price peaked at €17.60 in May 2007, an increase from under €1.00 ten years previously. At this peak, Anglo was valued at nearly €13 billion and FitzPatrick’s 4.5 million shares were worth nearly €80 million.
FitzPatrick resigned in disgrace in December 2008, by which time the Anglo share price had already dropped to €0.32, a drop of 98%, with the entire bank valued at a measly €242 million (despite a multi-billion euro loan book) and FitzPatrick’s stake reduced in value to €1.5 million.
Anglo was nationalised on 20th January 2009 as a result of an Irish State investment of €3 billion. At the time its market capitalization was negligible.
Profitability – from world’s best to worst
On January 27th 2006 it was reported that Anglo had ‘emerged as the world’s top performing bank over the past five years’.
Only 40 months later – on May 27th 2009 – Anglo had reported the then worst loss in Irish history. In only the first half of its financial year, it reported a €4.1bn loss to the end of March 2009, largely caused by loan impairment charges of €3.7bn. The bank warned its losses on loans could rise to €7.5bn for the three years to the end of September 2011. The government increased its investment to €4bn.
Yet on March 30th 2010 Anglo reported a loss of €12.7 billion – the largest in Irish corporate history – for the 15 months to the end of December 2009 after writing off €15.1 billion on impaired loans. Some €10.1 billion of the write-offs were on loans of €35.6 billion – half the bank’s loan book – moving into the National Asset Management Agency (NAMA is the State vehicle for transferring loans over €5m). The government injected a further €8.3 billion to replenish Anglo’s capital after the 15-month loss wiped out the bank’s reserves, bringing the capital injections to €12.3 billion. This was followed by a further investment of €2 billion on May 30th 2010.
The bank which between 2001 and 2005 had ‘emerged as the world’s top performing bank over the past five years’ was now hitting the headlines again, but at the other end of the spectrum.
By July 1st 2010 the industry magazine ‘The Banker’ reported that the losses reported by Anglo were the worst by any bank in the world. Anglo’s 2009 loss of €12.7 billion was far greater than those of large US, Japanese and German banks. The survey revealed Royal Bank of Scotland, one of the largest banks in the world, lost only a quarter of what Anglo lost in 2009. US lender Citigroup, once the world’s largest bank, only lost half of what Anglo lost in 2009. Most of the losses of the 25 banks surveyed were due to the subprime crisis, whereas Anglo’s losses were as a result of … property lending.
Following further losses of €8.2bn for the first half of 2010, by September 2010 the Irish Government had invested a total of €22.9 billion in Anglo. Financial Regulator estimates of the final cost vary from €29bn to €34bn.