Anglo Annual Report 2011

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Caring for the environmentAt Irish Bank Resolution Corporation Limited we take a responsible approach to environmental issues and have worked with our printpartner to minimise the environmental impact of our Annual Report & Accounts 2011 publication.

The paper selected for this report comes from certied well managed forests, accredited by the PEFC to a standard known as Chainof Custody. These certied forests are managed to ensure long term timber supplies while protecting the environment and the lives ofthe forest dependent people. The Annual Report is a CarbonNeutral publication. This was achieved by selecting a print partner who isalready a CarbonNeutral company and by offsetting the unavoidable emissions associated with the production of this Annual Report.Irish Bank Resolution Corporation Limited is pleased to be able to add both the CarbonNeutral and the PEFC logos as evidence ofachieving these standards.


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Contents

Economic backdrop 2

Chairmans statement 3

Group Chief Executives review 5

Business review 8

Board of Directors 15

Corporate Responsibility 16

Principal risks and uncertainties 18

Report of the Directors 23

Statement of Directors responsibilities 24

Corporate governance statement 25

Independent Auditors report 30

Consolidated income statement 32

Consolidated statement of comprehensive income 33

Consolidated statement of financial position 34

Bank statement of financial position 35

Consolidated statement of changes in equity 36

Bank statement of changes in equity 38

Statement of cash flows 40

Notes to the financial statements 42

Supplementary information (unaudited) 169

Acronyms and abbreviations 176

Irish Bank Resolution Corporation Limited Annual Report & Accounts 2011

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Economic backdrop

Commercial property markets Sovereign yieldsProperty prices in developed markets remain below their2006/07 peaks. Commercial property prices in Irelandcontinue to fall with some signs of stabilisation, the UKmarket was flat in 2011, while the US has shown tentativerecovery. (Indices rebased to 100)

Fear around the stability of the eurozone and theeurosystem contributed to the increased spread of IrishGovernment bonds over their German equivalents in thefirst half of 2011. Spreads narrowed in the second half ofthe year due to improved international sentiment as Irelandcontinued to deliver on its EU/IMF Programmecommitments.

Irish residential property market Stock marketsIrish residential property market prices fell heavily again in2011 bringing the cumulative fall from peak to 50%.

Both the ISEQ and FTSE Eurofirst posted losses in the secondhalf of 2011 before recovering slightly into year-end.(Indices rebased to 1000)

Trade surplus Currency marketsIrelands trade surplus continued to improve in 2011. Netexports remain the primary driver of GDP growth.

The euro was relatively stable against the US dollar andsterling in the period.

40

60

80

100

120

140

160

Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

Property price index

Ireland IPD All Property UK IPD All Property US IPD All Property

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

Dec 10 Mar 11 Jun 11 Sep 11 Dec 11

Yield

Ireland Vs Germany 9 yr

60

80

100

120

140


Irish residential property

Irish House Price Index National All Residential Properties

750

800

850

900

9501,000

1,050

1,100


Index

ISEQ FTSE E300

1,200

2,050

2,900

3,750

4,600


Irish trade surplus

Ireland trade surplus m

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5


Currency

EUR/USD EUR/GBP

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Chairmans statement

Overview

This is the first Annual Report and Accounts for Irish BankResolution Corporation Limited, trading as IBRC. The membersof the Board of Directors and senior management of IBRCremain committed to operating to the mandate given by theBanks Shareholder, which is to run the Bank in the publicinterest and in a manner that minimises the cost to the Stateand, by extension, the taxpayer.

The twelve months to 31 December 2011 was an eventfulperiod for the Bank. A number of large scale restructuringdevelopments took place during this time, including thetransfer of the majority of the Banks deposits to AIB, themerger with Irish Nationwide Building Society (INBS) and thesubsequent organisation redesign and renaming of this newlycombined entity. In addition, the Bank achieved furthersignificant reductions in its balance sheet through the sale ofthe majority of its US loan portfolio, together with ongoingloan repayments and redemptions in Ireland and the UnitedKingdom. 2011 also saw a progressive scaling down of the

Banks operations with the closure of a number of offices andfurther reductions in staffing levels through the launch of asecond voluntary redundancy scheme.

In financial terms, despite recording an operating profit of620m and a favourable adjustment of 776m to thecumulative loss on transfer to NAMA, the Bank reports a lossfor the year of 885m. Total assets at 31 December 2011amounted to 55.5bn, a decrease of 17.4bn or 24% on aconstant currency basis. These reductions demonstrate theBanks commitment to deleveraging its balance sheet in linewith the objectives agreed in the Banks restructuring plan andto minimising further losses for the taxpayer.

Total capital support provided by the Minister for Financeremains at 29.3bn, resulting in a Total capital ratio at31 December 2011 of 16.3% and a Core Tier 1 ratio of 15.1%.

Further details in respect of the Banks financial and non-financial performance for the year are provided in the GroupChief Executives review and in the Business review.

IBRC as a new organisation

On 29 June 2011 the European Commission (EC) approvedthe joint restructuring and work-out plan for the Bank andINBS (the Restructuring Plan) which had been submitted tothe EC by the Irish Government on 31 January 2011. Thispaved the way for a newly combined entity, the primary focusof which is the orderly work-out of the loan book over aplanned period of up to 10 years.

Following the merger on 1 July 2011, a number oforganisation changes were approved by the Board, andimplemented in the latter half of 2011, to position the Bank todeliver its objectives. These changes included a new GroupExecutive Committee, new or confirmed roles for staff acrossthe organisation and a regrettable but inevitable requirementfor a reduction in staffing numbers.

As part of the restructuring process, the Bank changed itsname to Irish Bank Resolution Corporation Limited (IBRC) inOctober 2011. The Board believes that this is an importantdevelopment for the Bank as the management and staff moveon from the past and deal with the updated mandate of the

new entity.

Changes to the Board of Directors

Two new Directors were appointed to the Board of the Bank in2011.

Oliver Ellingham was appointed on 14 October 2011. Mr.Ellingham has a broad range of international financialexperience and a particular knowledge of the UK marketplaceand regulatory environment.

Roger McGreal was appointed on 15 November 2011. MrMcGreal has considerable expertise in banking, credit and riskmanagement.

Both Mr. Ellingham and Mr. McGreal are strong additions toour Board.

Legacy matters, disclosures andexceptional expenses

The Bank continues to co-operate fully with ongoinginvestigations by the various Authorities. In this regard it hascontinued to disclose its activities and financial position in afully transparent manner, as required by legislation and marketregulation, in the public interest.

Underlying staff costs fell by 8% in the year to31 December 2011 compared with the prior period. Averageheadcount declined by 11%. Other administrative costs of108m are in line with the previous year as significantprofessional fees continue to be incurred in relation to loanbook asset recovery and other matters.

The Bank incurred total exceptional costs of 82m during theyear. These primarily relate to professional fees associated with

the Banks restructuring, significant non-recurring transactionsand costs related to certain legacy matters. In addition, theBank continues to be engaged in a number of significantongoing legal proceedings, each of which is being vigorouslypursued, albeit at considerable cost and with the risk of furthercost to the Bank and therefore to the Irish taxpayer.

Future of IBRC

The Board and management of IBRC are working to generateoptions for the efficient work-out of the loan books inaccordance with the Banks approved mandate. This includesexamining accelerated disposal where this makes economicsense. Following the timely and successful sale of the majority

of the Banks US loan portfolios, the Bank will now continuewith further detailed analysis of the remaining loan books inIreland and the UK. This analysis will further inform the Boardand management team on the timing of the next phases ofdeleveraging.

The final cost of resolving the former institutions of Anglo IrishBank and INBS will depend crucially on the evolution of theproperty markets in Ireland and the UK together with theavailability of counterparty liquidity to enable further disposalsby way of recoveries, repayments and sales. It will also dependon the outcome of negotiations on the promissory notesbetween the Government and the EU. The estimatedtimeframe for the resolution of the institution is currently nineyears as detailed in the Banks approved Restructuring Plan.


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Chairmans statement continued

Conclusion

The Bank has made significant and welcome progressthroughout 2011. The integration of INBS is well advanced anda fit for purpose organisation is now in place for the nextphases of the Banks wind-down. With the prevailinguncertainty in European debt markets looking likely tocontinue for much of 2012, IBRC will no doubt be presentedwith further challenges as it delivers on its objectives in thecoming year. The management and staff of the Bank will havethe full support and confidence of the Board in meeting thesechallenges.

On behalf of the Board, I sincerely thank the management andstaff of the Bank for their continued professionalism and hardwork which contributed to the progress achieved in 2011. Inaddition, I thank the Minister for Finance and the staff of theDepartment of Finance and the Central Bank of Ireland forworking closely with the Bank throughout the year.

Alan Dukes Chairman28 March 2012

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Group Chief Executives review

The twelve months to 31 December 2011 saw a period ofsignificant change and welcome progress for the organisation.Following the focus on stabilising and de-risking Anglo IrishBank in 2010, and the development of a restructuring plan forits future, a number of major initiatives were successfullyconcluded throughout 2011.

Key restructuring events

European Commission approval of the Banksrestructuring plan

A joint restructuring and work-out plan for the Bank and IrishNationwide Building Society (INBS) (the Restructuring Plan)was submitted to the European Commission (EC) on31 January 2011. This Restructuring Plan provided for themerger of the Bank and INBS following the transfer of themajority of the deposit books and NAMA senior bonds of bothentities to other Irish financial institutions. Those transfers tookplace on 24 February 2011 and the EC, under EU State aid

rules, approved the Restructuring Plan on 29 June 2011. Thisapproval cleared the way for the planned merger to proceedwith the subsequent work-out of the combined entity over aperiod of up to ten years. A number of commitments were alsomade to the EC as part of the Restructuring Plan in relation tothe State aid provided to the Bank. A Monitoring Trustee wasapproved by the EC on 8 December 2011 to report on theGroup's adherence to these Restructuring Plan commitments.

Transfer of the Banks deposits to Allied Irish Banks,p.l.c. and AIB Group (UK) p.l.c.

Following a Direction Order made by the Irish High Court on8 February 2011 under the Credit Institutions (Stabilisation) Act2010 (CISA) and pursuant to a Transfer Order made by theHigh Court under CISA on 24 February 2011, the Banktransferred the vast majority of its Irish and UK customerdeposits to Allied Irish Banks, p.l.c. (AIB) and AIB Group (UK)p.l.c. (AIB UK), together with its NAMA senior bonds and itsIsle of Man subsidiary. This was a significant and complexproject for the Bank to manage in a short timeframe. It had theeffect of reducing the balance sheet of the Bank byapproximately 11bn and over 200 staff transferred to AIB andAIB UK as part of this process.

Merger with INBS and subsequent name change

On 1 July 2011, pursuant to the Restructuring Plan, all of theassets and liabilities (with the exception of certain limitedexcluded liabilities) of INBS transferred to the Bank. This wasunder a further transfer order made by the Irish High Court

under Section 34 of CISA (the INBS Transfer Order).

Upon successful completion of the merger with INBS, the Bankwas renamed on 14 October 2011 as Irish Bank ResolutionCorporation Limited, and now trades as IBRC. With effect fromthe same date, the names of the Banks two key Irish regulatedsubsidiaries were also changed, with Anglo Irish MortgageBank becoming IBRC Mortgage Bank and Anglo IrishAssurance Company Limited becoming IBRC AssuranceCompany Limited.

This name change is significant as we move on from the past.As the infamous names of Anglo Irish Bank and IrishNationwide Building Society have now been consigned tohistory, the Board, management and staff of IBRC are nowactively working with focus and determination to deal with thesignificant problems created for the State by both of theseformer institutions. Material progress has been made in thisregard as IBRC continues to take all necessary actions toachieve the mandated objectives of the new entity.

Disposal of the Banks Wealth Management business

The above mentioned Direction Order also contained arequirement for the Bank to formulate a detailed plan for thedisposal of its Wealth Management business. The Bankcomplied with this requirement and submitted a detailed plan

to the National Treasury Management Agency (NTMA). Incompliance with requirements issued by the Minister forFinance under Section 50 of CISA on 7 April 2011 (theMinisterial Requirements) the Bank commenced a process toevaluate all of the alternatives available for the disposal of thisbusiness.

On 30 January 2012 the Bank announced that the Board hadapproved a strategy and direction put forward by managementto wind down its Wealth Management business in an orderlyfashion. This process is currently underway and may include aco-sourcing arrangement.

Developments in the organisation

IBRC as an asset recovery organisation

Since the completion of the merger, the former Anglo IrishBank and INBS have now been reshaped into a fully integrated,fit for purpose, asset recovery organisation trading as IBRC.The Banks Group Executive Committee has been charged tolead the key asset recovery and support functions through thenext phases of work-out. In addition, a detailed top downprocess of organisation redesign to the level of individual rolesacross the Bank has also been completed.

The Banks former Lending Division has been reshaped andsubstantially restructured into an asset recovery platformincorporating front office Recovery Management, SpecialisedAsset Management and Market Solutions teams. These teamslead the development and execution of recovery strategies forthe overall loan portfolio in order to promote timely andfocused asset resolution. They work proactively with bothdistressed and performing customers in all of the Bankslocations to manage loans with the aims of minimising lossesto the taxpayer and winding down the portfolios of the Bank.

The Bank has and will continue to support viable businessesand restructure distressed loans to strengthen and improveasset quality and achieve optimum recovery values. Recoveryvalues are optimised through an array of structuredrepayments, restructuring and corporate finance techniques.

Reduction in loan books across all geographies

The primary focus of IBRC continues to be the deleveraging ofits lending portfolio while maximising the return for thetaxpayer. Total gross customer loan balances declined in 2011by 10.8bn or 29% (excluding INBS additions) and amountedto 29.1bn at 31 December 2011. This material reduction inthe loan book has been primarily driven by disposals andrepayments in the US of 7.0bn and in the UK of 1.9bn.

The Bank successfully disposed of the majority of its US loanbook during 2011. This process which was begun in late 2010involved individual loan sales early in 2011 combined with abulk sale of loans which was completed in a number oftranches during the final quarter of the year. This bulk loan salewas the largest transaction in the US commercial real estatemarket in 2011 which, following a competitive biddingprocess, saw three successful counterparties purchasing5.8bn of gross assets. Reductions in the UK loan book werealso successfully executed through a combination of workingwith borrowing clients to achieve orderly repayments and aportfolio sale of the Banks Scottish loan book.


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Group Chief Executives review continued

The Bank is now engaged in further detailed analysis of theremaining loan books in Ireland and the UK and this analysiswill further inform the Board and management team on thetiming and possible composition of future deleveraging. Whilethere have been indications of stabilisation in some sectors, thedisposal of the remaining Irish and UK portfolios at acceptable

prices remains challenging.

Further downsizing of the Banks infrastructure

Pursuant to the Direction Order and the MinisterialRequirements, the Banks branches in Austria and Jersey wereclosed in June 2011 and its branch in Germany closed inAugust 2011. In addition, and as a result of the disposal of themajority of the US loan book, the Banks representative officein New York closed in January 2012. The Bank has also put theproperties of the former INBS branch network on the marketfor sale.

Close to 13% of roles in the Bank became redundant as aresult of the redesign of the organisation and those affectedhave left or are in the process of leaving under an agreedvoluntary redundancy scheme or are being redeployed acrossthe Bank. A significant number of additional staff will alsodepart this year through natural attrition, maturing contractsand potentially through outsourcing. Notwithstanding the factthat headcount numbers will reduce further in time as wework through the phases of the Restructuring Plan, IBRC willcontinue to need all of the key skills and experience of itsremaining employees to deliver upon its approved plan. Theretention of a relevant, committed and qualified workforce iscentral to the ongoing success of the Banks wind-downactivities.

Mortgages

Separately, as part of the merger with INBS, the Bank acquired

a residential mortgage book which, albeit small in relative sizecompared to the market, demonstrates a growing mortgagearrears problem. Resolving this problem, given the currenteconomic context, is extremely challenging and will take time.

The Bank remains fully committed however to ensuring that itengages with customers experiencing genuine financialdifficulty to develop a range of appropriate solutions whichultimately assist borrowers to meet their obligations and repaytheir outstanding debt.

Financial performance

The results for the year ended 31 December 2011, which

include amounts relating to INBS from 1 July 2011, reflect thecontinued challenging economic environment in all of theBanks markets.

Economic backdrop

Ireland continues to be the worst affected of the Banksmarkets, accounting for the majority of the overall specificimpairment charge. Consumer and business sentiment alongwith spending have been negatively impacted by the weakglobal backdrop and the ongoing fiscal austerity measures.

Conditions within both the commercial and residential Irishproperty markets remain very difficult. High unemploymentand a continued decline in disposable income have impactedcredit quality particularly across the residential mortgageportfolio. Property prices have declined further during 2011and transactional volumes remain low. The stressed economicconditions and the decline in prices have been the primary

drivers of the increase in specific provisions across all sectors ofthe loan book.

The overall macro environment in the UK remains weak andgovernment spending cuts are starting to have an impactacross most sectors of the economy. Prices and yields for prime

commercial real estate properties in prime locations havestabilised, while a small number of areas have reported priceincreases. The markets for secondary and tertiary propertieshowever have weakened significantly, particularly over thesecond half of 2011, with decreasing rents and an increase invacancy rates resulting in a fall in asset values. In addition,stress in the financial markets has resulted in a materialdecrease in funding availability for real estate transactionswhich has had a knock on impact on liquidity and prices.

Operating performance

Despite recording an operating profit of 620m and afavourable adjustment of 776m to the cumulative loss ontransfer to NAMA, the Bank reports a loss for the year of885m.

This loss arises primarily due to net impairment charges of1,644m, a loss of 214m on the transfer of the majority ofthe Banks Irish and UK deposit books, certain NAMA bondsand the Banks investment in its deposit-taking Isle of Mansubsidiary to AIB and its UK subsidiary, AIB UK, and a loss of426m on other disposals.

Total operating income for the year of 940m includes netinterest income of 944m. The overall net interest incomefigure has increased by 202m in 2011 compared with 2010and is primarily a function of interest earned on performingcustomer loan balances and government promissory notes, netof associated funding costs. Following the transfer of depositsto AIB in February 2011, total funding costs of 1,525m largely

relate to facilities provided by the Central Bank of Ireland.

Balance sheet performance

Total assets at 31 December 2011 amounted to 55.5bn,representing a decrease of 17.4bn or 24% on a constantcurrency basis. These reductions demonstrate the Bankscommitment to deleverage the balance sheet in l ine with theobjective of minimising losses for the taxpayer. The principalitems driving this reduction were the transfer of NAMA seniorbonds to AIB pursuant to the AIB Transfer Order, the sale ofthe majority of the US loan book, ongoing recoveries in Irelandand the UK and the receipt from the Minister for Finance, theBanks sole shareholder, of the first scheduled annual paymenton the promissory note. The Government promissory notesrepresent 54% of the Banks total assets as at31 December 2011.

The transfer of the majority of the Banks customer depositspursuant to the AIB Transfer Order increased the Banksreliance on central bank and monetary authority supportmechanisms for funding. This represented 87% of totalfunding (42.2bn) at 31 December 2011 (2010: 70%,45.0bn), with 40.1bn borrowed under special fundingfacilities (2010: 28.1bn).

Gross customer lending at 31 December 2011 totals 29.1bn.Impaired loans amount to 17.8bn, with cumulativeimpairment provisions of 10.4bn. A specific lendingimpairment charge of 2.1bn was incurred during the yearwhich was partially offset by a release of 0.6bn of the

collective impairment provision.

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Group Chief Executives review continued

Costs

Staff costs have fallen by 18% in the year to31 December 2011 compared with the prior period. Thisincludes the effect of a 13m pension credit representing aonce off past service gain arising from approved amendments

to the Banks two defined benefit pension schemes. Adjustingfor this, staff costs fell by 8% driven by an 11% reduction inaverage employees (2011: 1,186; 2010: 1,332). This isprimarily due to 210 staff transferring out of the Bank underthe AIB Transfer Order and reduced US staffing following theloan book sales. This was partially offset by the gain of 212additional staff under the INBS Transfer Order.

The Group headcount at 31 December 2011 is 1,219 whichincludes 183 people working directly in the Bank's NAMA unit.

Other administrative costs of 108m are in line with theprevious year as significant loan book asset quality relatedprofessional fees continue to be incurred, principally in relationto ongoing asset recovery matters.

Exceptional costs of 82m were incurred during the year andprimarily relate to professional fees associated with the Banksrestructuring, significant non-recurring transactions and costsrelated to certain legacy and legal matters.

Capital

The Bank did not require any additional capital injectionsduring the year. As at 31 December 2011 the Group reportedtotal capital support provided by the Shareholder at 29.3bn,resulting in a Total Capital ratio at 31 December 2011 of16.3% and a Core Tier 1 ratio of 15.1%.

Future strategy

The Irish Authorities have agreed a plan with the EC to disposeof the assets of the Bank in an orderly fashion, minimise capitallosses and distribute the residual net assets to the Shareholderon completion of the wind-down.

The residual net asset position on completion of the wind-down will be driven by actual recovery rates achieved forassets which in turn depend on factors such as theperformance of the domestic and global economies and theperformance of property and other asset markets, as well asprevailing interest rates in the Euro area over the duration ofthe plan. Given the complexities and timescales involved indeleveraging and the risks inherent in the deleveragingprocess, the final residual net asset position is subject tomaterial uncertainty.

I would like to join the Chairman in expressing a sincere thankyou to our management, staff and other stakeholders for alltheir support and consistent hard work throughout the year.

A.M.R. (Mike) AynsleyGroup Chief Executive28 March 2012


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Business review

This business review covers the year to 31 December 2011 andincludes commentary on key areas of financial and operatingperformance of the Group during that period.

On 24 February 2011 the majority of the Banks Irish and UKdeposit books, certain National Asset Management Agency

(NAMA) bonds and the Banks shares in its deposit-taking Isleof Man subsidiary were transferred to Allied Irish Banks, p.l.c.(AIB) and its UK subsidiary AIB Group (UK) p.l.c. (AIB UK)pursuant to a transfer order made by the Irish High Courtunder Section 34 of the Credit Institutions (Stabilisation) Act2010 (CISA) (the AIB Transfer Order).

On 29 June 2011 the European Commission (EC) approved,under EU State aid rules, the joint restructuring and work-outplan for the Bank and Irish Nationwide Building Society (INBS)(the Restructuring Plan) which had been submitted by theIrish Government to the EC on 31 January 2011. Pursuant tothe Restructuring Plan, the Bank and INBS were to becombined and then resolved over a period of up to ten years.On 1 July 2011 all of the assets and liabilities (with theexception of certain limited excluded liabilities) of INBStransferred to the Bank by way of a further transfer ordermade by the Irish High Court under Section 34 of CISA (theINBS Transfer Order) and on that date the Bank announced itsintention to change its name to Irish Bank ResolutionCorporation Limited (IBRC). This change became effective on14 October 2011.

IBRC is a Government-owned banking entity which, inaccordance with the commitments made by the State to theEC, will not be active in new lending or deposit markets. AMonitoring Trustee was approved by the EC on8 December 2011 to report on the Group's adherence to theseRestructuring Plan commitments. The strategic objective of theBank is to work out its assets in an orderly process over aperiod of up to ten years, securing the best outcome for the

taxpayer. IBRC will continue to operate as a regulated entity,bound by the Capital Requirements Directive and thereforesubject to an 8% minimum capital requirement.

Financial performance

The results for the year ended 31 December 2011 includeamounts relating to INBS from 1 July 2011. Further informationrelating to the INBS integration is contained in notes 1 and 2.

The Bank reports a loss before taxation for the year of 873m. This loss arises primarily due to net impairment charges of1,644m, a loss of 214m on the transfer of the majority of

the Banks Irish and UK deposit books, certain NAMA bondsand the Banks shares in its deposit-taking Isle of Mansubsidiary to AIB and AIB UK, and a loss of 426m on otherdisposals. These losses were offset to an extent by anoperating profit of 620m and a favourable adjustment of776m to the cumulative loss on transfer to NAMA. Interest

income on the promissory notes of 1,447m is a keycontributor to operating profit in the year.

The transfer of the majority of the Banks customer depositspursuant to the AIB Transfer Order increased the Banksreliance on central bank and monetary authority supportmechanisms for funding. This represented 87% of totalfunding (42.2bn) at 31 December 2011 (2010: 70%,45.0bn), with 40.1bn borrowed under special fundingfacilities (2010: 28.1bn).

Total assets at 31 December 2011 amounted to 55.5bn, adecrease of 17.4bn or 24% on a constant currency basis.These reductions demonstrate the Banks commitment todeleverage the balance sheet in line with the objective ofminimising losses for the taxpayer. The principal drivers of thisreduction were the transfer of NAMA senior bonds to AIBpursuant to the AIB Transfer Order, the sale of the majority ofthe US loan book, the ongoing deleveraging of the loanportfolio and receipt from the Minister for Finance, the Bankssole shareholder, of the first scheduled annual payment on thepromissory note. The Government promissory notes represent54% of the Banks total assets as at 31 December 2011.

Gross customer lending at 31 December 2011 totals 29.1bn 1.Impaired loans amount to 17.8bn, with cumulativeimpairment provisions of 10.4bn. During the year, the Bankrecognised a specific lending impairment charge of 2.1bn,driven primarily by the continued significant decline in prices inboth residential and commercial markets in Ireland and the UK,offset by a release of 0.6bn of the collective impairment

provision.

Total capital support provided by the Minister for Financeremains at 29.3bn. The Total capital ratio at31 December 2011 is 16.3% with a Core Tier 1 ratio of 15.1%.

Customer lending and asset quality

The Banks primary focus remains the orderly work-out of theloan book and the achievement of maximum recovery in theinterest of the Bank, the Shareholder and the Irish taxpayer.The Bank is required to report to the Department of Finance ona monthly basis on the progress in respect of these objectives.

Total lending

Analysis of customer lending 1 Loans and advancesHeld for sale to customers

2011 2010 2011 2010m m m m

Ireland 102 862 19,157 16,198

UK - 618 8,977 10,849

US 277 723 618 7,643

Total 379 2,203 28,752 34,690

Provisions for impairment (103) (565) (10,339) (9,577)

Customer lending net of impairment 276 1,638 18,413 25,113

Provisions as a % of loan balances 27% 26% 36% 28%

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Business review continued

Gross loan balances of 2.9bn along with cumulativeprovisions of 1.0bn transferred to the Bank on 1 July 2011under the INBS Transfer Order. These balances includedresidential mortgages of 1.9bn with cumulative provisions of0.4bn.

Gross customer lending balances, which declined during theyear by 10.8bn or 29% (excluding INBS additions), total29.1bn 1 at 31 December 2011, of which 28.8bn or 99%relate to loans and advances to customers while the remaining1% are classified as held for sale. Held for sale loan balancescomprise those remaining US loans of 0.3bn for which a salesprocess is being actively pursued and 0.1bn of gross loanswhich at 31 December 2011 were expected to transfer toNAMA. There remains 0.6bn of US loans classified as loansand advances to customers which could not be sold due totransfer restrictions and which are likely to be held untilrepayment, refinancing or an unrestricted ability to sell isachieved. At 31 December 2011 the Banks Ireland divisionaccounts for 66% of total lending with the UK and US divisionsaccounting for 31% and 3% respectively.

The reduction in the loan book has been primarily driven bydisposals and repayments in the US (7.0bn) and the UK(1.9bn) as the Bank continues to focus on deleveraging itslending portfolio. The UK and Irish markets remain stressedand deleveraging of the portfolio at acceptable prices remainschallenging.

During 2011 the Bank successfully completed the deleveragingof the majority of its US loan book. This process involvedindividual loan sales earlier in the year combined with the bulksale of US loans which was completed in a number of tranchesduring the final quarter of the year. The bulk loan sale was thelargest transaction in the US commercial real estate market in2011, with the three counterparties purchasing 5.8bn ofgross assets following a competitive bidding process.

The gross assets, for which the Bank received 4.4bn ofproceeds, had a carrying value of 4.8bn and included loansand swaps together with a number of foreclosed real estateassets. The overall loss on disposal totalled 406m. Thedisposal resulted in a significant reduction in the Groups riskweighted assets and was broadly neutral from a regulatorycapital perspective.

Lending asset quality

Grading analysis 1 2011 2010

Loans and Heldadvances to for

customers sale Total Totalm m m % m %

Good quality 4,397 7 4,404 15% 7,627 20%

Satisfactory quality 240 65 305 1% 1,035 3%

Lower quality but not past due or impaired 3,610 - 3,610 12% 4,778 13%

Total neither past due or impaired 8,247 72 8,319 28% 13,440 36%

Past due but not impaired 3,023 31 3,054 11% 5,910 16%

Impaired loans 17,482 276 17,758 61% 17,543 48%

28,752 379 29,131 100% 36,893 100%

Provisions for impairment (10,339) (103) (10,442) (10,142)

Total 18,413 276 18,689 26,751

Uncertainty within the markets continues to adversely affectthe Banks loan book across all sectors and locations. Whilstthere had been some improvement in the UK and US, the

continuing weakness of the Irish economy and weaker trendsin some parts of the UK in the second half of 2011 has seen anincrease in the proportion of the overall loan book that isdeemed at risk by management. This includes those loansthat are considered to be impaired, past due but not impairedand lower quality. At 31 December 2011, 84% of loans areclassified as at risk (2010: 77%).

Impaired loans at 31 December 2011 total 17.8bn(2010: 17.5bn), and represent 61% of the total loan bookversus 48% at 31 December 2010. Ireland continues to be theworst performing region with 65% of the portfolio impairedand specific provisions totalling 41% of gross loans. In the UKand US 55% and 25% respectively of the portfolios areimpaired.

The amount of loans classified as past due but not impaireddeclined to 3.1bn at 31 December 2011 from 5.9bn at31 December 2010. The decrease primarily reflects thedownward migration of loan balances to impaired status.

Ireland accounts for 2.2bn (71%) of the total past due butnot impaired amount, the UK 0.9bn (28%) and the US 24m(1%).

The level of loans past due and outstanding for more than 90days, which represents the highest risk element of past due,has decreased from 3.2bn at 31 December 2010 to 2.2bn,but as a proportion of the overall past due figure has increasedto 71% at 31 December 2011 (2010: 55%). A full agedanalysis is included within note 50 to the financial statements.

Lower quality but not past due or impaired loans at31 December 2011 totalled 3.6bn or 12% of gross lendingassets. Although currently not past due or impaired, theserepresent loans which management deem to have a higher riskof deterioration.

Lending assets deemed to be good quality by managementtotal 4.4bn at 31 December 2011, representing 15% of totalgross lending assets.


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Asset quality across the portfolio continues to be adverselyimpacted by the continued deterioration in economic andmarket conditions. The Banks Recovery Management Ireland(RMI) team proactively works with distressed customers andcontinues to manage the loan book with the aim of minimisinglosses to the taxpayer. Negative events, including deteriorating

trading performance, likely breach of covenant, challengingmacroeconomic conditions or missed payments, will alert RMIthat the customer may not have the ability to service its debt.In order to improve the customers overall financial positionforbearance approaches such as covenant reliefs oramendments thereof, variations in margin rates or loanrescheduling may be used. In some cases, where deemedappropriate, the Bank restructures distressed loans so as tostrengthen and improve asset quality. Restructures, which mayinclude an exchange of debt for equity or equity-like benefits,are only considered where the business model is deemedviable. In some cases the Bank will enforce its rights on its

security interest or will consider insolvency of the borrower inorder to ensure that the assets of the business areappropriately distributed. At all times, the Bank will considerthe net present value of alternative recovery strategies in orderto maximise the amount recoverable on a particular loan.

Forbearance on the residential mortgage portfolio is grantedby the Bank in order to temporarily alleviate the financialdifficulties of the borrower. This involves granting variouscontract revisions not normally available such as reducedrepayments, payment moratoriums and the roll up of arrears.Loans are identified for forbearance primarily as a result ofcontact from the customer or payment arrears and it is onlygranted following an assessment of the customers sustainableability to pay. Further details in relation to forbearance onresidential mortgages are included in the supplementaryinformation on pages 169 to 173.

Divisional lending balances by sector 1

2011

Business Residential

Commercial Residential Banking Mortgages Other Total

m m m m m m

Ireland 10,725 884 3,105 1,873 2,672 19,259

UK 8,378 537 35 - 27 8,977

US 594 297 - - 4 895

Total 19,697 1,718 3,140 1,873 2,703 29,131

Commercial lending represents 68% of the Banks total loanportfolio and consists of investment and development propertylending across all sectors. 15.9bn (81%) of commerciallending relates to the retail, office and leisure sectors. Thebusiness banking sector accounts for 3.1bn, or 11%, of theloan portfolio. The Bank is looking primarily to businessearnings to service these debt obligations. Residential lendingof 1.7bn comprises residential development lending of0.5bn and residential investment lending of 1.2bn andincorporates large value development and investmenttransactions. The residential mortgage portfolio, which wasacquired under the INBS Transfer Order, represents 6% of thegross loan book and incorporates owner occupier mortgagesof 1.5bn and buy to let mortgages of 0.4bn.

Other loans acquired from INBS are apportioned as follows at31 December 2011: Commercial 397m, Residential 120mand Other 81m.

Loans and advances to customers by regulatory groupsize 1

The top 20 customer groups, excluding loans classified as heldfor sale as at 31 December 2011, represent 9.6bn or 33%(2010: 9.1bn or 26%) of the Group's total loans andadvances to customers before provisions for impairment. Totalspecific impairment provisions on these customer groupsamount to 3.2bn. A regulatory customer group typicallyconsists of a number of connected entities and the balancesrepresent multiple individual loans secured by diverse portfoliosof assets and multiple contracted cash flows.

At 31 December 2011 undrawn committed facilities totalled0.2bn (2010: 0.6bn). The significant reduction in 2011 isdue to the expiration of facilities and the deleveraging of theloan book. Advances during the year were restricted topreviously committed facilities or were approved to protectasset quality and aimed at reducing the overall risk to, ormaximising recovery for, the Bank. In line with commitmentsgiven by the Bank in connection with the approvedRestructuring Plan, the Bank is restricted in any new lending tonew customers.

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Lending impairment charge for the year

Income statement - lending impairment

2011 2010

m m

Specific charge - loansand advances to customers 2,107 4,956

Specific charge - held for sale 34 2,683

Total specific lendingimpairment 2,141 7,639

Collective (release)/charge (597) 21

Total lending impairment 1,544 7,660

The specific lending impairment charge of 2.1bn for the yearto 31 December 2011 represents 6% of average loan balances.Of the total specific charge 2,107m relates to loans andadvances to customers with 34m relating to loans classifiedas held for sale. The loans and advances charge includesimpairment related to US loans prior to their designation asheld for sale at 30 June 2011.

Impairment is calculated in accordance with IFRS and reflectslosses incurred in the period based on conditions existing at31 December 2011. Losses expected as a result of futureevents, no matter how likely, are not recognised under IFRS. Inline with the Banks credit risk management process, thespecific charge was determined following a detailedassessment by Group Risk. This process also includedconsideration of the new impairment provisioning guidelinesissued by the Central Bank of Ireland in December 2011.

The collective impairment provision reflects an allowance forloan losses existing in the performing loan book where there iscurrently no specific evidence of impairment on individualloans. The provision has been calculated based on historicalloss experience supplemented by observable market evidenceand managements judgement relating to market conditions at31 December 2011. In 2011 there has been a release of597m in the collective impairment provision resulting in aremaining balance sheet provision of 773m, or 7% of thetotal performing loan book, at 31 December 2011. This releaseis principally attributable to the significant decrease in theperforming loan book, on which the Incurred But NotReported provision is assessed. At 31 December 2011 theperforming portfolio totalled 11.4bn compared to 19.4bn at31 December 2010.

Income statement - specific lending impairment

2011 2010m m

Ireland 1,557 5,813

UK 574 737

US 10 1,089

Total 2,141 7,639

On a sector basis, 1.4bn (66%) of the specific charge of2.1bn relates to investment property assets. The remaining

charge is attributable to business banking (0.2bn), personallending (0.2bn), development loan assets (0.2bn) andresidential mortgages (0.1bn).

Of the residential mortgage charge 46m is attributable to theowner occupier portfolio with the balance of 16m relating tothe buy to let portfolio. At 31 December 2011 balance sheetspecific and collective provisions in respect of the owneroccupier portfolio totalled 326m (23% on 1.4bn of grossloan balances) and on the buy to let portfolio totalled 170m

(39% on 0.4bn of gross loan balances).

Ireland continues to be the worst affected market, accountingfor 73% of the overall specific impairment charge. Consumerand business sentiment along with spending have beennegatively impacted by the weak global backdrop, eurozoneconcerns and the ongoing fiscal austerity measures. Conditionswithin both the commercial and residential property marketsremain very difficult. High unemployment and a continueddecline in disposable income have impacted credit quality,particularly across the residential mortgage portfolio. Propertyprices have continued to decline during 2011 and transactionalvolumes remain low. The stressed economic conditions and thecontinued decline in values have been the primary drivers ofthe increase in specific provisions across all sectors of the loanbook.

In the UK the overall macro environment remains weak andgovernment spending cuts are starting to have an impactacross most sectors of the economy. Within the commercialreal estate market prices and yields for prime properties inexcellent locations have stabilised and in a small number ofareas have increased. However for secondary and tertiaryproperties market conditions have weakened significantly,particularly over the second half of 2011, with decreasing rentsand an increase in vacancy rates resulting in a fall in assetvalues. In addition, deleveraging by UK and European bankshas meant that there has been a material decrease in fundingavailability for real estate transactions, which has had a knockon impact on liquidity and prices. These items have been thesignificant contributing factors to the specific impairment

charge of 574m in the period. Due to the reduction in the total loan book in 2010 and 2011through loan sales and considerable NAMA transfers, alongwith decreases in interest rates, customer interest income forthe year ended 31 December 2011 has reduced to 0.9bn, adecline of 45% compared to the year ended31 December 2010 (1.6bn).

As advised in the 2010 Annual Report and Accounts, the Bankis undertaking an internal review of historical interest ratesettings as applied to certain customer loan accounts for theperiod prior to January 2005, to determine whether interestrates applied were consistent with the terms of the associatedcustomer loan documentation. An additional provision of12m was charged in the year to cover the amount of anyliability to customers who may have been adversely affected,taking the total provision to 54m at 31 December 2011.

NAMA

The overall reduction in the cumulative loss on disposal ofassets to NAMA for the year ended 31 December 2011 totalled0.8bn. This primarily results from settled valuationadjustments relating to the completion of full due diligence byNAMA on assets previously transferred.

In the current year, NAMA has completed full due diligence on14.8bn of previously transferred IBRC assets. At31 December 2011, work was ongoing by NAMA to completefull due diligence on the remaining 7.8bn of loans, 7.5bn ofwhich transferred to NAMA in 2010 and 0.3bn whichtransferred in October 2011. This due diligence work wassubstantially completed in March 2012 and resulted in the


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Bank owing NAMA approximately 24m in respect of valuationadjustments. This amount was accrued in full during the yearended 31 December 2011. The final overall loss on disposalwill only be determined when full due diligence and finalsettlement has been completed by NAMA on all the assetstransferred.

During the year the Bank transferred 0.6bn of loans to NAMAat an average discount of 68%. As at 31 December 2011, theremaining eligible loans expected to transfer to NAMA amountto 0.1bn. NAMA has complete discretion as to which assetswill be acquired.

NAMA bonds

As part of the AIB Transfer Order, on 24 February 2011, theBanks entire NAMA senior bond holding of 12.2bn nominaltransferred to AIB at a price of 98.5%.

Subsequently, following completion of due diligence by NAMAon certain loans which transferred in bulk during Novemberand December 2010 the Bank received new senior andsubordinated bonds which increase the original considerationpaid by NAMA for these assets. As a result, at31 December 2011 the Banks nominal holding of NAMAsenior bonds, which accounted for 95% of the improvedconsideration, totalled 950m. This figure includes 33mnominal of senior bonds received by the Bank under the INBSTransfer Order on 1 July 2011. The NAMA senior bonds had amaturity date of 1 March 2012.

In February 2012, NAMA informed the Bank of its intention tophysically settle the senior bonds held on 1 March 2012 byissuing new senior bonds with a maturity of 1 March 2013.The Banks commercial preference was to receive cash inexchange for its holdings of senior bonds on 1 March 2012.However, bearing in mind the preferences expressed by both

NAMA and the Department of Finance and overall publicinterest considerations, the Bank agreed to accept physicalsettlement.

In October 2011 the Central Bank of Ireland advised the Banknot to increase its usage of sale and repurchase facilitiesprovided under open market operations with the ECB. As aresult, at 31 December 2011 there were no senior bonds usedin sale and repurchase agreements under open marketoperations with central banks (2010: 12.3bn). At31 December 2011 senior bonds with a nominal value of750m had been pledged under a Special Master RepurchaseAgreement with the Central Bank of Ireland.

NAMA subordinated bonds of 49m nominal were receivedduring 2011, representing 5% of the improved considerationreceived for assets transferred to NAMA. On acquisition, thesebonds were recognised within available-for-sale assets at aninitial fair value of 10m, representing an average valuation of21%. The difference of 39m is included in the gain/(loss) ondisposal of assets to NAMA.

Under the INBS Transfer Order, NAMA subordinated bondswith a nominal value of 154m and a carrying value of 47mtransferred to the Bank. The Banks nominal holding of NAMAsubordinated bonds at 31 December 2011 totals 843m, witha carrying value of 124m.

Financial markets

Funding overview

The Banks funding profile is primarily reliant on deposits fromcentral banks and monetary authorities, which at

31 December 2011 totalled 42.2bn, representing 87% oftotal funding (2010: 45.0bn, 70% respectively). The Bankexpects its funding requirements to decrease as the overalldeleveraging process continues in accordance with the termsof the approved Restructuring Plan.

In accordance with the INBS Transfer Order, borrowings fromthe Central Bank of Ireland under special funding facilitiestotalling 6.0bn and debt securities with a nominal value of0.6bn transferred to the Bank on 1 July 2011.

Due to the short term and concentrated nature of its fundingbase the Bank is not in full compliance with most of itsregulatory requirements.

The Banks credit ratings were downgraded to sub-investmentgrade in late 2010 by Standard & Poors and Moodys, and byFitch in February 2011.

The Group became a participant institution in the CreditInstitutions (Eligible Liabilities Guarantee) Scheme 2009 (theELG Scheme) on 28 January 2010 and certain qualifyingdeposits and securities issued by the Group from this dateonwards are covered by the ELG Scheme. A cost of 77m(2010: 128m) is included within interest expense for the yearrelating to the Banks participation. The EC has approved theextension of the ELG Scheme for certain eligible liabilities to30 June 2012.

Customer funding

Customer funding decreased by 10.5bn to 0.6bn in theperiod, primarily as a result of the transfer of 8.3bn ofcustomer deposits to AIB and AIB UK under the AIB TransferOrder. Remaining deposits are primarily related to lending orNAMA facilities.

Central bank funding

Borrowings from the Central Bank of Ireland under specialfunding facilities increased to 40.1bn (2010: 28.1bn). Thefacilities utilised were a Special Master Repurchase Agreement(SMRA), a Master Loan Repurchase Agreement (MLRA) anda Facility Deed from the Central Bank of Ireland. The majorityof the funds were advanced under the SMRA, involving thesale and repurchase of the promissory notes and the NAMAsenior bonds. Collateral assigned under the MLRA is derivedfrom the Bank's customer lending assets. The interest rate onthese facilities is set by the Central Bank of Ireland and advisedat each rollover and is currently linked to the ECB marginallending facility rate.

Borrowings under open market operations decreased to2.1bn (2010: 16.9bn). This decline is mainly due to thetransfer of 12.2bn of NAMA senior bonds to AIB pursuant tothe AIB Transfer Order.

The total amount of loan assets assigned as collateral underrated securitisation programmes and secured central bankborrowings at 31 December 2011 was 8.7bn (2010:13.5bn). This fall is mainly due to certain programmes nolonger qualifying as eligible collateral under open marketoperations.

Debt securities in issue

Debt securities in issue decreased by 1.5bn to 5.4bn largelydue to the maturity of 2.2bn of medium term notes, of which

1.9bn were unguaranteed but represented contractualcommitments for the Bank. The decrease is partially offset by0.6bn of medium term notes issued by INBS whichtransferred to the Bank on 1 July 2011 under the INBS Transfer

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Order. 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 banks

Placements with banks decreased by 1.2bn during the year.The total balance of 2.3bn at 31 December 2011 includes2.0bn 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 assets

The 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 of0.9bn from 31 December 2010. During the year 0.5bn ofAFS securities matured and the Bank disposed of a further0.6bn with a loss on disposal of 2m reported in otheroperating income/(expense). In addition the Bank acquired0.2bn 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 bonds

with 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 notes

The Minister for Finance, as the Banks sole shareholder, hasprovided the Bank with a promissory note to the value of25.3bn 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 of2.53bn 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 Groups capital and

fixed 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.

Capital

The 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 Groups 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 Groups 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.

Restructuring

Pursuant 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 Banks 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 Banks WealthManagement business and submit it to the NTMA by31 March 2011, (d) formulate in conjunction with INBS adetailed steps plan for the Banks 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 on-going litigation 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 to

which 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 Banks UK offices andits branches in Dusseldorf, Vienna and Jersey, (ii) the disposal


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of the Banks Wealth Management business and (iii) the Banksacquisition of/merger with INBS. The Bank was also required toprepare, in conjunction with INBS and the NTMA, a high levelrestructuring and work-out steps plan, based on theRestructuring Plan (the High Level Steps Plan) and, subject tothe approval of the NTMA, implement that High Level Steps

Plan, subject to any variations directed by the EC. The Bank isproceeding with the implementation of the High Level StepsPlan, following its approval by the NTMA on 20 June 2011,and is required to report to the Department of Finance on amonthly basis on the progress against the forecasts agreed inthe High Level Steps Plan. A number of commitments werealso made to the EC as part of the Restructuring Plan inrelation to the State aid provided to the Bank. A MonitoringTrustee was approved by the EC on 8 December 2011 toreport on a quarterly basis for a period of three years on theGroup's adherence to these Restructuring Plan commitments.

The Banks branches in Vienna and Jersey closed in June 2011and the Dusseldorf branch closed in August 2011. The assetsand liabilities of INBS (subject to certain limited excludedliabilities) transferred to the Bank under the INBS TransferOrder on 1 July 2011.

As a result of the disposal of the majority of the US loan book,the Banks representative office in New York closed in January2012 and the Bank now retains a small team in Boston to workthrough the residual asset cases and operational wind-down ofthe US office.

On 30 January 2012, following a comprehensive process toevaluate all of the available alternatives for the future directionof its Wealth Management business, the Bank announced itsdecision to commence an orderly wind-down of the business.This process is currently underway and may include a co-sourcing arrangement.

Costs

Operating expenses

2011 2010m m

Staff costs 107 130

Other administrative expenses 108 108

Depreciation and amortisation 23 26

Recurring operating expenses 238 264

Exceptional costs 82 89Total operating expenses 320 353

Total recurring operating expenses for the year to31 December 2011 are 238m and exceptional costs are82m.

Staff costs have fallen by 18% compared with the prior year.This includes the impact of a 13m credit representing a onceoff past service gain arising from approved amendments to theBanks two defined benefit pension schemes. Adjusting forthis, staff costs fell by 8%, driven by an 11% decrease inaverage staff numbers from 1,332 during 2010 to 1,186during the current year. This is primarily due to the transfer outof the Bank of 210 staff under the AIB Transfer Order andreduced US staffing following the loan book sales, partially

offset by the acquisition of 212 additional staff under the INBSTransfer Order. The Group headcount at 31 December 2011 is1,219 which includes 183 people working directly in theBank's NAMA unit. In late 2011 the Bank launched a voluntaryredundancy programme with a target reduction of 130 roles.This process will be implemented during 2012.

Other administrative costs of 108m are in line with theprevious year as significant professional fees continue to beincurred, principally in relation to ongoing asset recoverymatters.

Exceptional costs of 82m incurred during the year primarilyrelate to professional fees associated with Bank restructuringwork, significant non-recurring transactions and costs relatedto certain legacy matters. The principal non-recurringtransactions include NAMA and a significant debt recoverycase.

Taxation

No Irish tax will be payable on the Groups Irish businessactivities due to the availability of losses in the Bank which areoffset against taxable profits within the Group. However acurrent period foreign tax charge of 6m arises. A deferred taxcharge of 6m has been recognised in respect of the release ofdeferred tax assets.

The Groups current tax liability at 31 December 2011 includesa payable of 23m acquired under the INBS Transfer Order on1 July 2011.

The Group is currently in discussions with the US InternalRevenue Service with respect to potential US tax exposuresrelating to the Groups US filing obligations.

Risks and uncertainties

The Group is subject to a variety of risks and uncertainties inthe course of its business activities. The principal risks anduncertainties facing the Bank at present are those related togeneral economic conditions, Government policy andrestructuring risk, ratings downgrades, eurozone risk, liquidityand funding risk, NAMA participation, credit risk, operationalrisk, events of default risk, regulatory compliance risk, marketrisk, valuation risk, the Fitness and Probity regime, andlitigation and legal compliance risk. In addition continuedconcerns within the banking industry regarding counterpartyand country risk could adversely impact on the Bank. Moredetail is contained in the Principal risks and uncertaintiesstatement on pages 18 to 22.

Subsequent events and futuredevelopments

The key events that have occurred since the end of the yearare reviewed in note 57 to the financial statements. The GroupChief Executives review and the Chairmans statement reviewthe outlook and future of the Group.

1 Gross of impairment provisions and including lendingassociated with the Groups assurance company

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Board of Directors

Alan Dukes (66), was appointed as Non-executive Chairmanon 14 June 2010 having initially joined the Board in December2008. He is a Director and Public Affairs Consultant of WilsonHartnell Public Relations Limited. He has served at varioustimes as Minister for Agriculture, Finance, Justice, andTransport, Energy and Communications. He is a former Leader

of Fine Gael. He was Director General of the Institute ofEuropean Affairs from 2003 to 2007.

Chairman of the Board of DirectorsMember of the Nomination and Governance CommitteeMember of the Remuneration Committee

Dr. Noel Cawley (67), was appointed to the Board on24 May 2010. He is Chairman of Teagasc (the Agricultural andFood Development Authority). He is a Director of An Bord Biaand One51 plc. He was previously Chief Executive of the IrishDairy Board and Chairman of the Irish Horse Board. Independent Non-executive DirectorChairman of the Remuneration CommitteeMember of the Audit CommitteeMember of the Nomination and Governance CommitteeMember of the Risk and Compliance Committee

Oliver Ellingham (55), was appointed to the Board on14 October 2011. He is a chartered accountant and a formerHead of Corporate Finance (Europe) at BNP Paribas and asenior executive within BNP Paribas UK. He currently holdsNon-executive Directorships in a number of companiesincluding Vislink plc and the Naafi Pension Fund and he isChairman and owner of Woking Storage Solutions. Hepreviously also held senior management roles withinCharterhouse Bank (now part of the HSBC Group) and RobertFleming (now part of the J P Morgan Group).

Independent Non-executive DirectorMember of the Audit Committee

Maurice Keane (70), who joined the Board on21 January 2009, is a former Group Chief Executive andmember of the Court of Directors of Bank of Ireland. He is aDirector of Axis Capital Holdings Limited. He was alsopreviously Chairman of BUPA Ireland Limited and Bristol &West plc.

Independent Non-executive DirectorChairman of the Risk and Compliance CommitteeMember of the Audit Committee

Member of the Nomination and Governance CommitteeMember of the Remuneration Committee

A.M.R. (Mike) Aynsley (54), was appointed Chief ExecutiveOfficer and joined the Board in September 2009. He has held anumber of senior executive positions over a career spanningmore than 30 years including that of Chief Risk Officer NewZealand for ANZ Bank and its subsidiary, the National Bank ofNew Zealand. Prior to that he was a Global Partner, Banking

and Financial Services with Deloitte Consulting and GeneralManager Global Markets, Global Wholesale Financial Servicesfor National Australia Bank. He holds a Master of BusinessAdministration degree from Macquarie University.

Group Chief ExecutiveMember of the Nomination and Governance CommitteeMember of the Risk and Compliance Committee

Aidan Eames (53), was appointed to the Board on24 May 2010. He is a commercial lawyer and ManagingPartner of Eames Solicitors, Dublin. He is a Director of BordGis ireann and is Chairman of their Risk Committee. He isalso a member of the Department of Foreign AffairsIndependent Audit Committee. He has served as Chairman andBoard Member of a number of private and state enterprisesand acts as advisor to leading commercial and technologycompanies.

Independent Non-executive DirectorChairman of the Nomination and Governance CommitteeMember of the Audit CommitteeMember of the Remuneration CommitteeMember of the Risk and Compliance Committee

Gary Kennedy (54), was appointed to the Board on24 May 2010. He is a Director of Elan Corporation plc,Greencore Group plc and Friends First General InsuranceCompany Limited. He is also a Director of a number of privatecompanies. Previously, he was Group Director, Finance andEnterprise Technology at Allied Irish Banks, p.l.c. and was amember of its main Board. Prior to that he was group vice-president at Nortel Networks Europe after starting hismanagement career at Deloitte & Touche. He served on theBoard of the Industrial Development Authority of Ireland forten years and also on the board of Calyx Group plc.

Independent Non-executive DirectorChairman of the Audit CommitteeMember of the Nomination and Governance CommitteeMember of the Remuneration CommitteeMember of the Risk and Compliance Committee

Roger McGreal (59), joined the Board on 15 November 2011.He is a former Executive Director of Woodchester Investmentsplc where his responsibilities included banking, credit and risk.Previously, he held senior management roles in the CorporateBanking division of Bank of Ireland and the Investment Bank ofIreland where he was Associate Director of Corporate Lending.He was appointed as a Non-executive Director of IrishNationwide Building Society in September 2009. He holdsNon-executive Directorships in various private companies andhe is also on the Board of a number of companies establishedin the International Financial Services Centre in Dublin.

Independent Non-executive DirectorMember of the Risk and Compliance Committee


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Corporate Responsibility

Introduction

At IBRC we recognise our corporate obligations andresponsibilities and are committed to fulfilling them.

The management and staff of the Bank believe that acommitment to supporting the development of the widercommunity is an important part of our corporate responsibility.The Bank continually invests in the development and trainingof our staff, as well as maintaining quality relationships withour stakeholders. We also take a responsible approach toenvironmental issues and are proactive in seeking innovativeways in which to become more efficient.

Environment

As a corporate citizen, IBRC recognises its responsibility to theenvironment and aims to operate in a way which minimises itscarbon footprint. We take a responsible approach toenvironmental issues and are proactive in seeking innovative

ways in which to become more efficient. The Bank has anEnergy Statement which recognises the importance ofpractising energy efficiency to minimise costs and impact onthe environment.

Carbon footprint

We monitor our carbon footprint as an organisation and haveinitiated measurement of the Banks impact on theenvironment. We obtain carbon tracking reports from anumber of our suppliers. It is our preference to source and dealwith environmentally focused and aware suppliers and wehave incorporated this preference into our tenderingprocesses.

We continue to track three elements of the Banks impact onthe environment, measuring electrical, gas and waterconsumption in the majority of our offices .

Energy consumption

The Banks main energy supplier is a company which iscommitted to sourcing most of its energy supplies fromrenewable sources. In Ireland, the Bank participated in theElectricity Winter Demand Reduction Scheme from December2011 to March 2012. Available information to date confirmsthat we achieved our committed reduction in electricalconsumption.

It is Bank policy to recycle paper, cardboard, glass andcomputer consumables where possible. All electronic andelectrical equipment is disposed of in a safe andenvironmentally responsible way as stipulated in the EU WasteElectrical and Electronic Equipment Directive. In addition, theuse of video, web meetings and teleconferencing facilitiesacross all offices is reducing our business travel and thereforeminimising our carbon footprint.

It is important to the Bank to continue to increase theenvironmental awareness of the Groups staff. In 2011, wecontinued to increase our waste recycling rates throughimproved waste segregation methods and awareness amongststaff in our Dublin offices. These are now being formallymeasured and reported on by our service providers on amonthly basis. We will continue to focus our attention in 2012on further reducing resource consumption and maintaining

responsible methods of waste disposal.

Community

We believe that a commitment to supporting the developmentof the wider community is an important part of ourresponsibility as a corporate citizen.

The Banks Corporate Social Responsibility agenda hashowever significantly reduced since nationalisation. We haveretained a limited number of community based pillar activitiesto ensure that the Bank does its part in encouraging socialinclusiveness and supporting the young and disadvantaged.Much of the work done in this context is rooted in thegenerosity and commitment of our staff who give their timeand effort to support a wide range of worthwhile causes.

Warrenmount School, Dublin

In Ireland, IBRC is committed to supporting our mentoringprogramme for secondary level students of WarrenmountSchool, located in the Liberties district of Dublin, during theacademic year 2011/2012. We started this programme in 2000

and since then it has received widespread commitment fromstaff who, with the Banks support, offer their time to helpstudents realise their full potential. To date, over 130 membersof staff have been involved with the Warrenmount initiative.The mentoring scheme enables pupils to develop importantpersonal and professional skills which will benefit their futurelives and careers.

Dublin City University & University of Limerick

The Bank comprises a well-educated staff, many of whom havebeen fortunate enough to avail of a third level education.Supporting those less fortunate to attain a third level educationis the rationale behind our Access Scholarship Programmes fordisadvantaged students in Dublin City University and Universityof Limerick. In close co-operation with the universities, theseprogrammes are structured to ensure the participatingstudents are supported throughout the duration of theirchosen degree course.

Giving programmes

The Bank has a history of supporting a number of charities. Anumber of Irish based employees participate in a Give As YouEarn scheme in support of Children Direct, a partnership offive Irish childrens charities: Temple Street Childrens Hospital,the ISPCC, Enable Ireland, Focus Ireland and ActionAid Ireland.Under this initiative, which has been in place since 2004,monthly donations made by staff are matched by the Bank.

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Corporate Responsibility continued

Workplace

We are a business in wind-down with a highly important job todo before full resolution of the Bank in 2020. Between nowand then, our collective objective is to achieve the very bestreturn for the Irish taxpayer. To do this, we need a high calibre,specialist and focused workforce with the necessary expertiseand experience capable of achieving the best result possible.

The Bank therefore continues to invest in the training,development and well-being of our staff. We aim to developour staff by furthering their technical and specialistcompetencies. This ensures that our employees receive theappropriate training to help them undertake their roles. Weassist employees in furthering their education. This includesfunding to cover approved course fees and study leave inadvance of exams.

Employee well-being is of continual importance to us. We runan Employee Well-Being scheme, which is available to staff inIreland and is operated in conjunction with an independent

consultancy firm. This service offers confidential support tostaff. Similar programmes exist for UK staff (EmployeeAssistance Programme) and US staff (Ability Assist).

The staff, management team and Board aspire to uphold a setof core values and principles by which to operate in the bestinterests of all our stakeholders - the Minister for Finance,customers, suppliers, regulatory bodies and the community.

Health and safety

In line with health and safety legislation, the Bank is committedto achieving the highest standards of safety, health andwelfare for its employees, contractors and visitors in theworkplace.

As required by Section 20 of the Safety, Health and Welfare atWork Act 2005, the Bank has prepared a written SafetyStatement outlining our policies on occupational health andsafety matters and defining the necessary managementstructure for the implementation of these policies. This SafetyStatement is reviewed annually, or as required by changes inlegislation and/or work practices in the Bank.


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Principal risks and uncertainties

The Group is subject to a variety of risks and uncertainties inthe normal course of i ts business activities. The Transparency(Directive 2004/109/EC) Regulations 2007 require a descriptionof the principal risks and uncertainties facing the Group.

The Board of Directors and senior management have ultimate

responsibility for the governance of all risk taking activity andhave established a framework to manage risk throughout theGroup. Details of the risk management policies and processesthat the Group adopts are contained in note 50 to the financialstatements.

The business risks and uncertainties below are those riskswhich the Directors currently believe to be the material andprincipal risks to the Group. The precise nature of all the risksand uncertainties that the Group faces cannot be predictedand many of these risks are outside of the Groups control. Theprincipal risks and uncertainties outlined below should be readin conjunction with the Chairmans statement and the GroupChief Executives review.

General economic conditions

The Groups results are influenced by macroeconomic andother business conditions in the Groups three historicalmarkets: Ireland, the UK and, to a lesser extent, the US.

Some sectors in Ireland have sustained their contribution toexport-led growth but, overall, economic conditions in Irelandremain challenging and consequently the results of the Grouphave been adversely affected. Ireland continues to experiencesubdued consumer confidence, high unemployment, andweaker domestic commercial activity. In the short term,austerity measures introduced in consecutive budgets continueto define domestic business sentiment and inhibit personaldisposable income and spending. Such measures, which formpart of the overall adjustment programme for Ireland, haveimproved the countrys competitiveness.

Further deterioration in property prices could further adverselyaffect the Groups financial condition and results of itsoperations. The Groups financial performance may also beaffected by future recovery rates on assets and the historicalassumptions underlying asset recovery may no longer beaccurate given the general economic situation.

While there has been some improvement in the UK and US,conditions remain uncertain surrounding the sustainability ofboth the global and relevant regional economic recoveries,particularly if fiscal and monetary supports are withdrawn. Inthe UK, the modest economic recovery is still exposed to

changes in UK Government policy initiatives designed to fostergrowth, which in turn could impact negatively on the broaderdemand for goods and services. As a result, unemploymentcould increase and residential and commercial property wouldagain suffer decreases in value.

Government policy and restructuring risk

As the Banks only shareholder, and under legislative powersrelevant to the Bank, the Minister for Finance is in a position toexert significant influence over the Group. The Bank is alsowholly reliant on the support of the Irish Government.Government policy in respect of both the Bank and the widerfinancial services sector has a major impact on the Group.Changes to government policies or the amendment of existingpolicies could adversely impact the financial condition andprospects of the Group.

For instance, if new governmental policies were to require theBank to resolve its position over a shorter than expected timeframe, projected asset recovery values could be negativelyimpacted.

Also, due to the substantial package of assistance for Irelandagreed between the Government, International Monetary Fund(IMF) and the European Union (EU) in November 2010,which included agreements to reorganise and restructure the

Irish banking sector, the IMF and the EU retain significantinfluence on the future of the Bank. The Bank also remainssubject to risks which could result from any further measuresagreed between the Government, the IMF and the EU.

The Credit Institutions (Stabilisation) Act 2010 (CISA), enactedon 21 December 2010 following agreement of the assistancepackage, gives broad powers to the Minister for Finance tofacilitate the reorganisation and restructuring of the bankingsystem in Ireland. In this context, the Irish Governmentsubmitted a joint restructuring plan and work-out plan inrespect of the Bank and Irish Nationwide Building Society(INBS) to the European Commission (EC) on 31 January 2011(Restructuring Plan). The Restructuring Plan had beenprepared in conjunction with the Department of Finance andthe National Treasury Management Agency (NTMA).

A direction order (the Direction Order) was made by the IrishHigh Court under Section 9 of CISA on 8 February 2011 underwhich the Bank was directed to (a) reduce its net lending inline with forecasts derived from the Restructuring Plan, (b)formulate a detailed steps plan for the rationalisation and,where appropriate, closure of the Banks UK offices and itsbranches in Dusseldorf, Vienna and Jersey and submit it to theNTMA by 31 March 2011, (c) formulate a detailed steps planfor the disposal of the Banks Wealth Management businessand submit it to the NTMA by 31 March 2011, (d) formulate inconjunction with INBS a detailed steps plan for the Banksacquisition of/merger with INBS and submit it to the NTMA by31 March 2011, (e) transfer the remaining eligible loan assets(as defined in the National Asset Management Agency Act

2009 (the NAMA Act)) to the National Asset ManagementAgency (NAMA) by the later of 31 December 2011 or thecompletion of any ongoing litigation delaying transfer of thoseloans and (f) take certain steps in connection with an auctionprocess to be operated by the NTMA in connection with thetransfer of certain of the Banks deposits and assets.

On 24 February 2011, the Irish High Court made a transferorder under Section 34 of CISA pursuant to which the majorityof the Banks Irish and UK deposit books, certain NAMA bondsand the Banks shares in its whol ly-owned deposit-taking Isleof Man subsidiary were transferred to Allied Irish Banks, p.l.c.(AIB) and AIB Group (UK) p.l.c. (AIB UK) (the AIB TransferOrder). On 31 March 2011, the Bank submitted the threesteps plans referred to at (b), (c) and (d) above to the NTMA.On 7 April 2011 the Minister for Finance issued certainrequirements (Ministerial Requirements) to the Bank underSection 50 of CISA pursuant to which the Bank was obliged toimplement in all material respects, with the approval of theNTMA, the high level steps plans appended thereto in relation

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Principal risks and uncertainties continued

to (i) the rationalisation and, where appropriate, closure of theBanks UK offices and its branches in Dusseldorf, Vienna andJersey, (ii) the disposal of the Banks Wealth Managementbusiness and (iii) the Banks acquisition of/merger with INBS.The Bank was also required to prepare, in conjunction withINBS and the NTMA, a high level restructuring and work-out

steps plan, based on the Restructuring Plan (the High LevelSteps Plan) and, subject to the approval of the NTMA,implement that High Level Steps Plan, subject to any variationsdirected by the EC. The Bank is proceeding to implement theHigh Level Steps Plan, following approval by the NTMA on20 June 2011.

The Restructuring Plan, which was approved by the EC on29 June 2011, provides for the amalgamation of the Bank withINBS and sets out in detail how the loan books of thecombined entity will be resolved over a period of up to tenyears. To ensure that the assets are managed in a wayconsistent with the resolution of the combined entity, certaincommitments are now binding upon the Bank, including acommitment that it cannot enter into new activities. AMonitoring Trustee was approved by the EC on 8 December2011 to report on a quarterly basis for a period of three yearson the Groups adherence to these Restructuring Plancommitments.

The Bank has prepared an operating plan which is intended toform the basis for the implementation of the RestructuringPlan and the High Level Steps Plan. The operating plan focuseson accelerated deleveraging of the Bank, and includes theaccelerated disposal of its US loan portfolio and the disposal orwind-down of its Wealth Management division in accordancewith the Restructuring Plan, the Direction Order, the MinisterialRequirements and the High Level Steps Plan. The initiatives aresubject to operational challenges and market dependencies inrespect of timing and optimal pricing, which will increase theexecution risk of the operating plan.

Note 57, Events after the reporting period, confirms that on30 January 2012 the Bank announced that the Board hadapproved a strategy and direction put forward by managementto wind down its We

Documents

Anglo Annual Report 2011