Tuesday 22 May 2018

Anglo Irish Bank's share price dropped by nearly half day after summary of 2008 results released, trial hears

Former CEO of the Anglo Irish Bank, David Drumm. Photo: Collins Courts
Former CEO of the Anglo Irish Bank, David Drumm. Photo: Collins Courts

Andrew Phelan

ANGLO Irish Bank’s share price dropped by nearly half the day after it released a summary of its 2008 financial results to the stock market, a trial has heard.

The price went down 28pc on the day the bank's preliminary year-end figures were published, but went on to drop by 48pc.

A stockbroker asked to analyse the results said if €7.2bn were taken from Anglo’s customer deposits, it would have affected the bank's loan to deposit ratio - a “key metric” for investors.

Financial analyst Eamonn Hughes was giving evidence in the trial of Anglo’s former CEO David Drumm, who is accused of taking part in a multi-billion euro plot to defraud during the 2008 financial crisis.

Mr Drumm (51) denies conspiring to dishonestly create the impression that Anglo's customer deposits were €7.2bn larger than they were in September 2008.

The case at Dublin Circuit Criminal Court centres on a series of interbank deposits which circulated between Anglo and ILP.

The transfers were routed through Irish Life Assurance (ILA), returning to Anglo where they were then treated as customer deposits, which are a better indicator of a bank’s health.

Mr Drumm also denies false accounting, by providing misleading information to the market.

Mr Hughes, of Goodbody Stockbrokers, told Paul O’Higgins SC, prosecuting, that Anglo’s preliminary results were published and released to the stock market at 7am on December 3. His firm produced a “first glance” analysis for investors which was released at around 8am, before a presentation of the figures given by a team of bank executives including David Drumm.

The presentation provided an “important input into how we think about the company,” Mr Hughes said.

The jury was shown the “first glance” which gave Anglo’s closing share price from the previous day at 94c. The year on year deposit growth figures were down 2pc, while loan growth was up 9pc.

Mr Hughes explained that a loan to deposit ratio (LDR) was the number of loans divided by the deposit figure and this had gone up in the results from 127pc to 140pc following a €3bn decline in deposits.

A section on “thoughts on results” stated: “we would be a little bit nervous on the upswing in the loan to the deposit ratio… this may dominate sentiment towards the results today. Anglo’s objective is to get this down to 100pc within three years.”

Mr Hughes said the government bank guarantee scheme, which was introduced on September 30, “would have provided comfort to deposit holders” but “came very late.”

A second analysis was produced a day later and had “more meat on it.”

This had a closing share price from the previous day of 67c, with a target of 70c.

The analysis stated that “progress must be made on the loan to deposit ratio” which was “higher than anticipated though we acknowledge that Anglo’s September reporting… coincided with extremely stressful global financial markets.”

“Anglo indicated that deposit flows in FY09 have been positive and the target LDR outlined by management is 100pc within three years. Our revised estimates get there, targeting 127pc at the end of this year, but any slippage would be unwelcome and the market will be looking to see progress here at the end of H1 09.”

Mr O’Higgins asked Mr Hughes what the effect on the LDR would have been if you took €7.2bn from the deposits figure.

“It would make the ratio go up,” he replied. “That ratio would go up by 23pc points to 163pc.”

Mr O’Higgins asked what the significance of such a change would be.

“A key focus point for investors in the stock market would be capital adequacy and funding,” he said.

The LDR was a key metric investors used to analyse banks and “neatly encapsulates the relative stickiness of funding,” he said.

The jury has heard “stickiness” in funding refers to its likelihood to stay in place. Any expansion in the ratio was “a little bit more of a concern to the market.”

The second analysis put loan growth at 9.4pc, with a -2.3pc drop in deposits.

In cross examination, Mr Hughes agreed with Bernard Condon SC, defending, that Anglo’s share price dropped from 94c to 67c over the course of December 3 and that was a “very significant loss over the day.”

This represented a 28pc drop, he said.

Anglo had also come in with a lower profit estimate than had been expected - from €1.221bn to €784m, which was down 36pc.

Mr Condon said the issue was solvency and there were worries about “whether the bank would survive at all.”

The market continued on a “downward spiral” for the rest of the month and it was reported in the media that Anglo’s shares slumped to their lowest level in 11 years.

“It was very traumatic,” Mr Hughes agreed.

“The papers were noticing” this and Mr Condon asked Mr Hughes if he would disagree that they were “disappointing results.”

“No, they were behind expectations,” he said.

The jury was shown a graph in which Anglo’s share price was on a “negative trajectory” in 2008.

On December 4, it dropped to 48c, which was just short of a 50pc fall.

Mr Hughes agreed that this was “very big.”

Mr Condon asked would it be an inappropriate phrase to say the share price was ravaged.

“It was very significant,” Mr Hughes said.

The “earnings per share” was also down, and Mr Hughes said this was “regarded as a headline figure.”

Mr Condon asked if it was an important metric and Mr Hughes said investors looked equally at funding and capital.

Mr Condon said there were a number of metrics investors looked at and sentiment drove the market. At the time there “wasn’t much sentiment” for banks in Ireland.

“Negative sentiment,” Mr Hughes said.

He had not been aware that Anglo breached its liquidity ratio in September, and Mr Condon said the Central Bank had decided not to take regulatory action against Anglo for that.

Mr Condon referred to Mr Hughes’ statement to the gardai in which he said there was no optimum loan to deposit ratio, and that it represented “just one variable.”

“It is not possible to accurately determine how the market would have reacted to a pro-forma figure in isolation,” he told the gardai.

However, he had said it would be a “possible indication of stress” on the balance sheet.

This afternoon, another analyst Ciaran Callaghan from NCB stockbrokers said he also attended the presentation of Anglo’s preliminary results on December 3, 2008.

There were simultaneous video-linked presentations in Dublin and London. In Dublin were David Drumm, Anglo’s Finance Director Willie McAteer, Head of Capital Markets John Bowe, Managing Director of lending Pat Whelan and head of the US division Tony Campbell, while the London team was led by Chief Financial Officer Matt Moran.

NCB sent out a flash note that morning and another analysis the next day. The stock recommendation was “Hold”, which Mr Callaghan said was a “neutral view.”

The flash note stated that Anglo’s loan to deposit ratio increased from 125pc at 30/03/08 to 140pc at 30/09/08.

“Deposits declined on a headline basis by 2pc year-on-year and by 6pc since March 2008 to €51.5bn. We await any update from management as to whether any improvement has been seen in the ratio since the introduction of the Government Guarantee Scheme,” the note said.

“Overall, we believe the outlook for Anglo Irish remains challenging and we expect continued pressure on the share price.”

Mr Callaghan told Mr O’Higgins the LDR was “one metric that measures the liquidity of a bank.”

“The closer that is to 100pc or below, the better,” he said, adding that it would indicate a “safer or stronger funding profile.”

“A higher loan to deposit ratio would be perceived more negatively by the market,” he said. “It wouldn’t be considered as safe as a bank with a more matched loan to deposit ratio.”

Mr Callaghan said customer deposits were “stickier” and cheaper to access.

The second analysis was released the following day, updating the market with new estimates.

Mr Callaghan said if you subtracted €7.2bn from the deposits, the LDR “would increase to 165pc.”

“It would have been a warning sign that deposits were under pressure or loans were growing faster,” he said. “That would have added to the uncertainty of the stock and would have been taken as a negative sign.”

In cross examination, he agreed with Mr Condon that there were “hundreds” of other metrics in a bank’s performance, and things like earning per share were very important.

He said a lot of focus in the market at the time was on loan losses and Anglo was the biggest development lender in Ireland and had a concentration of property loans.

There was no commentary about the LDR in NCB’s December 4 analysis, Mr Condon said.

Mr Condon asked if there were fears about Anglo going bankrupt.

“There were a lot of fears about the institution, it was getting progressively worse by the day,” Mr Callaghan said.

He said if he had known about Anglo being in breach of Central Bank liquidity requirements in September, “it would have been newsworthy, and negative.”

In re-examination, Mr O’Higgins asked if there was any connection between customer deposits and a liquidity situation.

“Customer deposits would be part of a bank’s liquidity,” Mr Callaghan said. “Customer deposits would be a form of liquidity, they would be a form of cash for the bank that they would fund their assets with.”

Judge Karen O’Connor told the jury the prosecution’s case was “very close to conclusion.”

The trial continues.

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