Friday, September 9, 2011

Getting money back from Anglo?

On the release of Anglo Irish Bank’s half-year results to the end of June 2011, chief executive Mike Aynsley said the following:

"I would be cautiously confident that we are going to get a better result then we had previously expected," chief executive Mike Aynsley told reporters on Friday.

The nationalised lender expects to have shut down by 2020 and Aynsley said he believed the final capital bill for the bank would come in a range of 25-28 billion euros.

"I think it is going to be towards the end (bottom) of that range," Aynsley said.

This all seems ok but note the focus on the “final capital bill for the bank”.  We have provided €29.3 billion of capital to Anglo; Aynsley reckons they will need €25 to €28 billion (with the hope that it will be closer to €25 billion); so there will be a “capital surplus” to be returned to the State.  Good news? Maybe not if we take a closer look at the “total bill for the bank”.

It would be good news if we were “only” providing €29.3 billion to Anglo.  As it is we will be providing much more.  The outstanding balance on the Promissory Notes earn interest for Anglo which must be paid by the State.  As we saw previously the interest rate on some of these notes is very high.  Here is a table from earlier.

Promissory Notes Interest Rates

The annual interest rate ranges from just over 4% for Tranche 1 to nearly 9% for Tranche 4 when the 2011/12 “interest holiday” is factored in.  The accumulated interest bill over the lifetime of the  Promissory Notes is anticipated by the Department of Finance to be over €13 billion as shown in this Information Note.  We can expect that almost €11 billion of this interest will accrue to Anglo.

This €11 billion is interest income for Anglo and is not capital so is counted as operating income.  Mike Aynsley expects the nationalised Anglo to have an operating loss of €25 to €28 billion in its lifetime.  We can use the June 2011 Income Statement (page 22) to see the huge role of the Promissory Note Interest in determining this loss.  Here is an abbreviated version of the income statement

Anglo Income Statement

Anglo reported a loss of €105 million for the first six months of the year, but the largest single income item for Anglo is the €644 million of interest it received from the State for the Promissory Notes.  Without this inflow Anglo’s losses would be much higher.  If this is true for this six month period, it is also true for the remainder of Anglo’s lifetime.

Mike Aynsley might feel that while nationalised that Anglo will generate a loss of €25 t0 €28 billion and will therefore be in a position to return some of the €29.3 billion capital poured into the bank.  But this loss is only possible because of the €11 billion of interest that the State is providing to Anglo.  

The fact the the State must pay interest to Anglo as a result of putting in capital through the device of a Promissory Note is in contrast to some of the capital injections into the functioning banks which see the banks pay an interest rate to the State.

It is clear that without this Promissory Note interest income Anglo losses would be greater than Aynsley’s assessment and would probably be around the €29.3 billion we have provided or, depending on interest rates, even closer to the €34 billion “worst case scenario” that was suggested at the time the Promissory Notes were provided to Anglo. 

To say there may be a “capital surplus” to be returned to the State is technically true.  To say it is because losses are lower than expected is not. 

UPDATE: Here is a table that summarises a discussion in the comments.  The interest totals used here are just the cumulative totals from the Department of Finance Information Note.  All numbers are in billions of euro.

Anglo-INBS Cost

The €13.1 billion interest is based on the assumption that the Promissory Notes and interest will be repaid on a linear basis of €3.1 billion per year until 2025. The €18.4 billion interest cost on the money used to fund the Promissory Notes is based on an interest rate of 4.7% for the period to 2025.  Both of these assumptions are subject to change.

7 comments:

  1. Thanks Seamus, looks the real bill for Anglo + INBS could be close to €50bn including the interest.

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  2. It could be closer to €60 billion!.

    The DoF Information Note sees €43.3 billion injected into them through capital and interest. It also indicates that we are set to pay €18.35 billion interest on the money we borrow to make these injections.

    We're up to €61.65 billion by 2025 and the meter will still be running.

    ReplyDelete
  3. And there was also €4.1 billion of cash we pumped directly into Anglo and INBS in 2009. Add that it and we're north of €65 billion.

    €48 billion into Anglo and INBS and €18 billion plus of interest on the money money to fund all this.

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  4. Bloody hell!!

    Almost 50% of GNP into 2 hopelessly insolvent banks, that must break all records.

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  5. Based on the DoF note it will be 2025 before the full €48 billion has been poured into them. It is hard to judge what proportion of 2025 GNP the €48 billion will be.

    I also think the IBRC has plans to be fully wound down before then. The €18 billion interest bill is a cost to the State but it in not going into Anglo or INBS.

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  6. If we had had 30bn or so on hand - and injeced the entire value of the promissory notes into Anglo/INBS in one swoop (rather than doing it bit-by-bit each year) would this have saved us money in the long-term?

    Would we still be paying the same level of promissory note interest?

    ReplyDelete
  7. Seamus:

    The logic of your analysis is that the figure of €63 billion 'gone into' the banks per recent commentary [SBP Sept 4th, Cliff Taylor, table] must now be increased by approx 31.4 (13.1+18.4 above) bringing the total to €94 billion approx.
    One can further add the interest on funds borrowed to 'bail-out' AIB, EBS,BOI ILP.

    So the real bill for the banks based on the contributions to date plus the interest cost to the State on those contributions will come to approx 100 billion.

    ReplyDelete

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