Progress and problems aplenty in tough year

Also in July, Permanent TSB said it would close 16 of its 92 branches, again to reduce costs as part of a wider restructuring.

Swimming against the tide, Bank of Ireland said it had no plans for branch closures as this was how it sold products to customers.

The former Anglo Irish Bank, which never operated branches, announced plans to move staff out of offices on Baggot Street and relocate about 350 employees to the former Irish Nationwide head office at Grand Parade as part of a cost-cutting drive.

As cost came into focus, both within the banks and in relation to the financial pain they had caused to the State, bankers’ pay and pensions became a hot topic again late in the year. It emerged that six senior executives at State-owned IBRC were earning annual packages of more than €500,000. Just days after the story appeared, a seventh executive joined the bank on the same kind of package.

Two weeks later figures released by the Minister for Finance showed that almost 3,000 bankers at the four bailed-out lenders were each earning total pay of more than €100,000 a year, including 27 on more than €500,000 a year, among them 20 bankers at Bank of Ireland.

After AIB shifted €1.1 billion of loans earmarked for sale into the bank’s pension fund in July to cover redundancies and early retirements, political pressure grew over the pension pots of former senior executives. Eugene Sheehy, the bank’s former chief executive, bowed to pressure and agreed to reduce his annual pension by a fifth, from between €300,000 and €325,000 to €250,000.

Meanwhile, the erstwhile new headquarters of Anglo – that iconic eyesore and skeletal structure on the north quays in Dublin – was bought by the Central Bank from the State-owned National Asset Management Agency for €7 million.

Nama happened to own the building after taking over the debts of insolvent developer Liam Carroll.

In an ironic twist, the building once ear-marked for the bank that became the most expensive failure of Irish financial regulation (among other things) will become the future home of a more vigilant banking regulator.

Funding

The banks didn’t just cut back sharply on the operational side; they continued to shrink their balance sheets in their quest to return to life without Government guarantees, cheap funding from the European and Irish central banks and a bad-debt drag on profitability.

The so-called deleveraging of the banks continued into 2012 as the banks sought to hit the target of 122.5 per cent loans-to-deposits ratio (€122 on loan for every €100 on deposit), the level deemed self-sustaining when banks could stand on their own and fund themselves.

The troika of the EU Commission, the European Central Bank and the International Monetary Fund loosened the reins and allowed the banks to follow a more flexible formula of net stable funding which eased the battle for deposits raging at the start of the year.

This had been a damaging and unintended consequence of a troika-set target for the banks. Higher deposit pricing only served to further erode the banks’ net interest margins (the difference between the interest rate they pay for funding and what they charge for loans) and ultimately the capacity of the banks to get out from under the wing of the State.

In another positive sign for the banks, deposits stabilised further in 2012, reaching €155 billion in October, their highest level since January 2011, while borrowing from the European Central Bank fell to €57 billion by November 7th.

The former Anglo Irish Bank, now called Irish Bank Resolution Corporation, had €42 billion drawn from the Central Bank. All told, the amount of central bank drawings by the Irish banks had fallen from a peak of €153 billion in February 2011 to below €100 billion – still high but progress nonetheless.

Net interest margins at the banks remained below the 1 per cent mark on average in the first half of the year – well below the profitable level required to attract long-holding investors into the banks as buyers of part of the State’s 99.8 per cent interest in AIB, 99.5 per cent interest in Permanent TSB and 15 per cent in Bank of Ireland.

Besides dealing with a low interest rate environment, higher deposit rates and still elevated levels of bad loans, the fees for using the Eligible Liabilities Guarantee, the extended bank guarantee introduced in 2009, have been a heavy drag on profitability. Bank of Ireland, AIB and Permanent TSB recorded total income €1.8 billion between them in the first half of the year; the guarantee cost them almost a third of this sum in fees.

These high fees arose even though the amount of liabilities had fallen sharply – to about €70 billion from more than €350 billion (excluding State deposit guarantee for deposits of €100,000 and less) when the blanket guarantee was introduced in September 2008.

Despite Bank of Ireland and AIB raising public bonds without the guarantee for the first time since before the EU-IMF bailout programme (albeit using mortgages as collateral and not on an unsecured basis), the extension of the bank guarantee by yet another six months to the end of June 2013 was the source of irritation for some.

Bank of Ireland chief executive Richie Boucher said the bank was ready to come off the guarantee fully at the end of this month.

“The delay in timing is frustrating for the bank and is something we are keeping a very close eye on and we are having dialogue with the authorities on,” he told the Financial Times in mid-December.

Bank of Ireland had even managed to raise €250 million by issuing subordinated debt – quite an achievement given how it had burned some subordinated bondholders to raise capital to meet targets.

The raising of the first unguaranteed debt since 2010 was welcome. “This inching back into the markets suggests that Ireland’s banking bust may finally be coming to an end,” said Owen Callan, analyst at Danske (one of the primary dealers in Irish government debt).

The ending of extraordinary State guarantees for the banks, which have been around for the four years of the banking crisis, will be one of the first tangible signs that the Irish banks are no longer in crisis mode but this is still at least six months away.

Loans

Irish lenders managed to steal a march on many rival banks across Europe as they dumped excess loans and other assets to “right-size” themselves ahead of the offloading of trillions of euro of European bank assets as part of the euro zone wide drive to recapitalise financial institutions.

Bank of Ireland reached its €10 billion deleveraging target in the first half of the year at an average discount on the face value of the loans that was within the range expected in the March 2011 stress tests.

AIB’s performance wasn’t as good but it was still strong. By the end of October, the bank had shed €17 billion of assets and other loans – 83 per cent of the targeted €20.5 billion – but also within the expected stress-tested discount levels.

One sale of a distressed loan portfolio showed that banks can secure buyers for some loans only at fire sale prices. Lloyds sold a €2 billion book of mostly property loans advanced by the defunct Bank of Scotland (Ireland) for just 10 cent in the euro last month.