Anglo has performed extremely well in the face of trying times, writes Simon Carswell, Finance Correspondent

ANGLO IRISH Bank's head of Irish operations said its "watchlist" of potentially bad loans was like a hospital AE department. Loans were unlikely to go directly to intensive care (the bad debt department) before a visit to AE.

Commercial property and housebuilding account for a large tranche of Anglo's €69 billion loans, so Pat Whelan's hospital analogy was apt given the poor health of the housebuilding sector.

The analogy was also useful to show that Anglo has seen no material deterioration in the quality of its loans or the value of the assets covering them.

Loans end up on the watchlist if, for example, two partners fall out in a company that has borrowed from the bank or if a rent review on a commercial property funded by Anglo doesn't come in time.

"Nothing goes to the impaired loan list without a journey to the watchlist," said Anglo chief executive David Drumm.

About 1.5 per cent of the bank's loan book is typically on watch at a time. The bank said yesterday its annualised bad debt charge was only 0.1 per cent of loans, slightly above the level on September 30th, 2007, and well below analysts' forecasts of 0.25 per cent.

The bank says it is not feeling any pain from the building sector.

"It was inevitable that housing would have to correct itself but it is not all bad," said Mr Drumm. He said the downturn gave young lenders in Anglo the opportunity to see "the other side of the show".

Falling property prices and assets values have pushed up Anglo's average loan-to-value ratio to 73 per cent in March from 65 per cent last September.

The biggest surprise in Anglo's half-year interim results yesterday was its ability to tighten its belt so quickly. The bank cut its cost/income ratio to 19 per cent from 22 per cent in a six-month period largely by reducing pay, while still managing to recruit.

"I have never seen a bank do such a turnaround on costs," said Scott Rankin, analyst with Davy Stockbrokers. "Rather than put the brakes on costs, they put it into reverse. That is phenomenal."

The bank has taken advantage of a strong first-half performance to take a €191 million hit on assets affected by the financial crisis and still managed to reach its 15 per cent earnings growth target.

It is sticking with its 15 per cent earnings growth target for the full-year to September 30th, 2008. While it has said there are "no emerging systemic trends causing material concern", the bank said it remained "highly vigilant". It will be hoping there won't be more frequent visits to intensive care - at least not before triage in AE.