Are we there yet? Well, no but we are moving on
The main banks are moving closer to profitability, but that does not mean our financial woes are over
Richie Boucher, Chief Executive Bank of Ireland, arriving at Leinster House, for a meeting with the Oireachtas finance committee. Photographer: Dara Mac Dónaill / The Irish Times
David Duffy , CEO, at the AIB Annual Results Press conference, at Ballsbridge, . Photograph: Eric Luke / The Irish Times
Another year, another step closer to normalised lending. Or so we hope. The past year has reminded us we cannot take anything for granted in the financial sector.
Most of the main banks moved closer to profitability and made strides towards achieving the goal of the cherished 2 per cent-plus net interest margin. However, others continued to exit this market, IBRC, ACC and Danske; redundancies remain a feature of the sector; and questions persist as to whether Allied Irish Banks, Bank of Ireland and Permanent TSB will require additional capital when the euro zone stress tests are completed next year.
And there is still no sign of an external solution from Europe to help the three banks to deal with their loss-making tracker mortgages at a time when interest rates in the euro zone are at a record low of 0.25 per cent.
He said “outstanding issues” required swift and decisive action and the recent balance sheet assessments carried out by the Central Bank here “falls short” of the more stringent test that would be carried out in 2014 ahead of the ECB assuming the role of banking supervisor for the euro zone.
The balance sheet assessments by the Central Bank, which was a condition of our bailout exit, showed that AIB, Bank of Ireland and Permanent TSB did not need additional capital. But the regulator found that they should all take extra provisions against bad loans, a finding with which Bank of Ireland has taken issue.
AIB and Permanent TSB, both more than 99 per cent owned by the State, are yet to receive approval for their restructuring plans from the European Commission.
Work in progress
The year began with a bang with the Government’s decision on February 7th to liquidate Irish Bank Resolution Corporation with immediate effect. Special liquidators were appointed to manage the sale of nearly €22 billion worth of loans, with anything not sold to be transferred to the National Asset Management Agency. It remains a work in progress.
The first half of the year also saw the Government end the eligible liabilities guarantee, a successor to the hated bank guarantee of September 2008, and issuing directions to AIB, Bank of Ireland and Permanent TSB to reduce their payroll costs by 6-10 per cent.
In March, the Central Bank set targets for AIB, ACC, Bank of Ireland, Permanent TSB, Ulster Bank and KBC to offer mortgage solutions to customers in arrears of 90 days or more with their home loans.
These loans stirred up a hornet’s nest in September when the heads of each bank went before an Oireachtas committee to outline their compliance with the targets. Bank of Ireland chief executive Richie Boucher was resolute about the bank’s decision to charge interest on split-interest mortgages though the bank later agreed to reduce the rate following a request from the committee. Somebody has to pay for and this and Boucher doesn’t want it to be his shareholders.
AIB chief executive David Duffy repeated his assertion that there is a high level of strategic default in the system. He insisted that letters threatening to take possession of homes, which were sent to customers in arrears who had refused to interact with the bank over the past couple of years, represented a “sustainable solution”. Up to September, AIB had warned close to 6,000 mortgage customers that it would take legal action if they continued to refuse to engage with the bank on their arrears.
Ulster Bank told the committee that about 1,000 of its mortgage arrears customers have had the interest rate on their home loans reduced to as low as 0.5 per cent in an attempt to help them pay the money back.
This so-called “economic concession” treatment is being offered for periods of five to seven years or “could even be for the lifetime of the loan depending on a customer’s circumstances”, chief executive Jim Brown said. He said 35 per cent of its 18,025 mortgage accounts in arrears of 90 days or more were “not engaging with the bank and are not paying anything” on their loans.
In the second half of the year, ACC Bank, owned by Dutch financial group Rabobank, and Danske Bank both decided to quit the retail market here. Rabo will continue to offer some products to Irish customers through its own brand while Danske will offer services to the corporate and institutional markets but current account and mortgage customers will have to find new homes.
On a positive note, KBC and Permanent TSB both launched campaigns to win current account and personal loan customers. Both are small players in the sector here but at least add a competitive edge.
Vying with IBRC’s liquidation for the biggest banking story of the year was Bank of Ireland’s €1.88 billion capital package in December. This allowed the bank to buy out the Government’s interest in its 1.8 billion preference shares dating from 2009. It also allowed the bank to avoid a punitive €460 million step-up in the cost of the shares if they were not redeemed by next March.
It’s another important step along the road for the bank in freeing itself from the influence of the State and demonstrated a strong appetite among new and existing investors for Bank of Ireland paper.
Not to be left behind, AIB’s Duffy said in November that the bank would return to profitability at some point next year and he hopes to bring external investors into the bank in the next few years.
Matthew Elderfield stepped down as deputy governor and head of financial regulation at the Central Bank to return to the UK, where he has taken a senior position with Lloyds banking group.
Elderfield will probably be best remembered for placing Quinn Insurance into administration in 2010, an action that precipitated the fall of businessman Seán Quinn.
Muldoon, who lost out to Roux for Elderfield’s former post, oversaw the establishment during the summer of a pilot scheme by secured and unsecured lenders to provide treatments for borrowers in financial distress who have loans with multiple financial institutions.
This scheme is designed to help borrowers and lenders to avoid the cost and distress of the new personal insolvency or bankruptcy regimes. The pilot is set to be extended by the Central Bank.
Others involved in the financial services sector’s game of musical chairs included Pat Farrell, who stepped down as chief executive of the Irish Banking Federation, the sector’s main representative body, to become the communications chief at Bank of Ireland.