Progress and problems aplenty in tough year

Deleveraging balance sheets and cutting costs were key issues for the financial institutions but the mortgage arrears crisis is the big unknown

If last year was all about reducing the number of banks in the Irish financial sector, 2012 was about reducing and repairing the size of those that remained.

The progression from a bloated sector that had far outgrown the State – and indeed the Government’s ability to save it – to a slimmed-down industry continued over the past 12 months.

By the end of 2011, six banks had become four following the merger of the former Educational Building Society into AIB and the marriage of Ireland’s two worst banks, Anglo Irish Bank and Irish Nationwide Building Society, into Irish Bank Resolution Corporation.

The mergers were only the start of a long road back to self-sufficiency, sustainability and profitability.

If this were a marathon, the half-way point would still be some way off. The pace is painstakingly slow but at least they’re heading in the right direction.

By the start of this year, the bill to the Irish taxpayer for bailing out the banks had reached €64 billion, or about 40 per cent of the State’s GDP, making it the most expensive bank bailout for any country in modern times.

“The year was characterised as one of balance-sheet healing for the Irish banks as they scaled back operations and set about reducing their exceptional funding requirements,” said analyst Stephen Lyons at the stockbroking firm Davy.

“This was most evident through a consistent reduction in European Central Bank funding reliance, deposit stability and more lately a return to public debt issuance.

“In comparison, bank profitability has disappointed through continued declines in interest rates, with deposit repricing unable to keep pace.”

Restructuring

Another year of big banking news started with Ulster Bank’s announcement in January that it would shed a further 950 jobs on top of the 1,000 staff that the State’s third-largest bank laid off in 2009.

The plan was aimed at cutting €80 million from its costs as parent, Royal Bank of Scotland, looked to restructure what it regarded as a core part of its operation but one which had devoured £13 billion (€16 billion) of state aid, almost a third of the public money injected into the 82 per cent state-owned British bank.

Two months later, bailed-out AIB unveiled its long-awaited redundancy plan after a protracted negotiation between the 99.8 per cent State-owned bank and the Department of Finance over the level of pay-offs to staff.

The bank said it would lay off 2,500 workers, about one in six of its workforce. Staff were offered three weeks’ pay per year of service plus the usual two weeks’ statutory – well below what had been offered to bank staff who had left the other banks in 2010.

The lower pay-outs reflected the reality that the Irish institutions were almost in full State ownership and far from being in rude financial health.

Permanent TSB announced 250 redundancies in July after a viability plan was developed for the bank, which had been something of an after-thought during the three previous years of the financial crisis.

The State had taken control of the Permo, the biggest mortgage lender during the property bubble, in 2011 following a €2.7 billion capital injection. The Government took over its profitable life and pensions company Irish Life for €1.3 billion this year, thereby completing the €4 billion recapitalisation of Permanent TSB directed by the March 2011 stress tests which were carried out under the terms of the EU-IMF bailout.

In April, Minister for Finance Michael Noonan unveiled plans at the sixth quarterly review of the bailout programme to restructure Permanent TSB into what could become a “third national bank”. It seemed to indicate a shift in Government policy away from the two “pillar” bank restructuring of the sector around Bank of Ireland and AIB, and finally marked out a future for the loss-making bank.

For a bank with 225,000 mortgages and 644,000 current accounts, a wind-down of the lender following the route being taken with Anglo and Irish Nationwide was simply not an option for Permanent TSB.

Instead, the plan was to leave €14 billion of loans in a viable entity, move €12.5 billion into an asset management unit or internal bad bank to be run down and leave €7 billion of UK mortgages in the bank’s CHL business as a standalone unit to be sold when the time was right.

The Minister left the door open on the possibility of shifting Permanent TSB’s loss-making tracker mortgages or other loans to the run-down vehicle IBRC as it shuts down the Anglo and Irish Nationwide shops over time.

Moving trackers was considered as part of a wider restructuring of the viable banks, namely AIB and Permanent TSB, as they were almost fully State-owned. However, as year-end approaches, this idea appears to have found little traction with the troika.

Bank of Ireland indicated in August that up to 1,500 jobs would go at the State’s least-worst bank. This was on top of the 3,700 staff who had left the bank since 2009 when staff numbers peaked at close to 16,000.

Richie Boucher, chief executive of Bank of Ireland, the only Irish lender to avoid outright or effective nationalisation, said the plan was to cut costs by a third to €1.5 billion from a peak in 2009.

IBRC said in August that it had reduced staff numbers to about 1,000 from a peak level of more than 2,000 combined at Anglo and Irish Nationwide in 2008.

Further staff reductions have taken place since, as the bank has reduced its loans to €27 billion (before write-downs for bad debts) from €73 billion at Anglo and €12 billion at Irish Nationwide when those two failed lenders were at their biggest.

While the restructuring in the domestic banking sector was immense during 2012, the most radical change came at Danish-owned National Irish Bank.

Parent Danske in Copenhagen shut down the bank’s retail business, closing the loss-making lender’s remaining 27 branches and laying off a further 100 employees, almost one in four staff, and rebranding to Danske.

The bank decided to park almost €5 billion of mostly property loans within the overall €9 billion NIB loan book in an internal unit to be run down.

Terry Browne, Danske’s new country head for Ireland, replaced NIB chief Andrew Healy who left in May. The changes, he said, were part of a refocusing on big corporate, high net-worth and private clients. It was a sign of Danske’s long-term commitment to Ireland.

As one foreign bank was retrenching from high-street banking, another was expanding into it. Belgian-owned KBC Bank Ireland, which had avoided a high-cost nationwide branch network during the boom, opened a retail branch on Lower Baggot Street in Dublin city earlier this month, the first of a growing chain planned to take advantage of the other Irish lenders pulling back from this end of the market.

But expansion on the ground was the exception rather than the rule. AIB said in July it would close 67, or one in four, of its 267 branches as it sought to take out a fifth of its costs, roughly €350 million in savings, up to 2014 to try to return the bank to profitability.

Chief executive David Duffy, not yet a year in the job, said in July the targeted branches were carrying out far fewer transactions than other busier outlets and that the tie-up with An Post would fill the gap for customers affected by the closures.