The share price collapse at Anglo Irish Bank appears to mark end of the road
The continuing collapse in the Anglo Irish share price, now down by more than 98 per cent on its May 2007 peak, almost certainly marks the end of the road for Ireland's third largest bank.
With its share price now down to just 37 cent, Anglo looks set to disappear in the coming consolidation of the Irish banking system.
This week the share price of Anglo Irish Bank fell as low as 31 cent, down from a peak of €17.31 recorded on May 24, 2007.
This places Anglo in the unenviable position of being by far the worst-performing Irish bank share over the past 19 months.
While the index of Irish bank shares has fallen by "only" 94 per cent since May 2007, the Anglo share price has fallen more than 98 per cent over the same period.
At the current share price Anglo is valued at a mere €287m. This compares with its gross assets of €101bn, its loan book of €72bn and claimed shareholders funds of €4.1bn.
Only last week Anglo Irish published its results for the 12 months to the end of September.
These showed that, while pre-tax profits were down by 37 per cent, the bank still reported pre-tax profits of €748m for the year.
However, despite this apparently robust performance, the bank is now worth less than one third of last year's profits.
So why are investors valuing Anglo Irish at a mere fraction of what the bank's own management say it is worth? Simple. Investors have concluded that, with its heavy exposure to property lending, Anglo's management is being far too optimistic about the level of its bad debts.
Despite increasing its bad debt provision 16-fold to €500m last year investors reckons that the worst has yet to come at Anglo.
Just how bad could things get at Anglo? Unfortunately the bank does its cause no favours by refusing to publish a meaningful sectoral breakdown of its lending. However, reading between the lines of various announcements made by the bank, it is possible to make some rough estimates.
When Anglo published its half-year results in May its finance director Willie McAteer stated that: "all lending [is] secured, cross collateralised with personal recourse".
Translated into plain English this would seem to mean that virtually all of Anglo's lending is ultimately property-based. With Irish and UK property prices now in free fall there is no way that Anglo can avoid taking a haircut as many of these loans go bad.
In last week's full-year results announcement Anglo revealed that it expected to take a bad debt charge equivalent to between 0.8 per cent and 1.2 per cent of all of its loans every year for the next three years.
Assuming that Anglo's loan book doesn't grow over this period that would translate into another €1.7bn to €2.6bn of bad debts on top of the €500m already expected by September 2011.
As the woeful share price performance demonstrates, many investors suspect that even these increased bad debt forecasts are excessively optimistic.
By reducing Anglo to the status of a penny-stock they are effectively betting that the bank won't survive the looming consolidation of the Irish banking system.
Unfortunately for Anglo its problems are not confined to dodgy property loans. While all of the Irish-owned banks are up to their necks is bad property loans, Anglo Irish has a further set of problems all of its own.
Anglo's biggest shareholder is Sean Quinn, who before the current economic downturn was easily Ireland's richest man with an estimated net worth of more than €4bn.
Some time over the past year Quinn took a shine to Anglo and gradually accumulated a 15 per cent stake in the bank.
Bad move. At the current share price the Quinn stake is now worth just €35m.
This compares to the more than €1bn which he is estimated to have spent acquiring the shares. The Quinn shareholding in Anglo raises some disturbing questions.
How was his purchase of shares in Anglo funded? If the money was borrowed did any of the money come from Anglo?
How much do Sean Quinn and his companies owe Anglo? What security does Anglo hold over any money it has lent to Quinn?
Unfortunately, we haven't been provided with answers to any of these questions so far. One can only hope that the Financial Regulator is demanding answers from Anglo.
When Sean FitzPatrick took over as chief executive of what was then the City of Dublin Bank in 1986 it was a tiny private bank.
Over the next 18 years FitzPatrick transformed Anglo into the third largest Irish bank. Although he handed over as chief executive to David Drumm in 2005 he remains Anglo chairman.
Probably not for much longer. The likely demise of Anglo and the absorption of most of its assets into one of its larger rivals will mean the destruction of Sean FitzPatrick's life's work.