Bank throws in towel in Ireland after risky adventure that spanned two decades
ANALYSIS:UNLIKE ITS exit, Bank of Scotland (Ireland)’s entry to the Republic’s banking market was a quiet affair, coming through the £2.1 million acquisition of Equity Bank in the low-key days of 1989.
The new bank (BOSI) made its initial name as a small-business lender, without really trying to upset the long-established Irish banking status quo.
This changed, dramatically, about a decade later in 1999 when the bank’s bosses turned their attention to Irish mortgages. That summer, with the strength of its flush Scottish parent fully behind it, Bank of Scotland (Ireland) generated shockwaves by offering to sell the cheapest mortgages in the Irish market.
And they weren’t just a little bit cheaper: the bank’s interest rate was almost a full percentage point below the next best offer. The only glitch was that the mortgages were not available over the counter, with Bank of Scotland yet to establish a branch network.
By September of that year, the success of the Scottish bank’s move became clear when other lenders began to cut their mortgage rates, thus offering a fillip to a housing market that was already booming. When building society EBS came to take its turn to reduce rates, its then head of lending, Martin Walsh, was unknowingly prescient when he warned that ever-falling rates could lead to overlending and “subsequent economic problems”.
Such difficulties were still happily in the distance as the decade turned, however, and BOSI strengthened its Irish mortgage position.
The bank was responsible for a further, and arguably more fundamental, market shake-up in 2000 and 2001 when it introduced the concepts of tracker mortgages and interest-only loans to a very hungry band of Irish homebuyers and owners. Innovative in the extreme compared to the plain-vanilla fixed and variable offerings that dominated until then, trackers promised to stay within a fixed margin of the European Central Bank’s key interest rate for the life of the loan.
This meant consumers were for the first time protected against arbitrary rate changes by individual lenders, a shift that was widely welcomed.
Interest-only loans, already a standard in Britain, offered borrowers the benefit of paying back (at least for a time) only the interest on their loan, rather than the capital. Along with other institutions, the bank also started to offer loans of 100 per cent of a property’s value, thus dispensing with the need for buyers to save for a deposit.
When placed in the context of a housing market running away with itself amid a raft of property-related tax reliefs, the bank’s offerings (which were unashamedly copied by other lenders) probably had a greater impact than the bankers behind them ever anticipated.
By the end of that decade, almost all lenders in the Irish market were offering trackers and almost all were losing money on them. Interest-only loans, meanwhile, helped to fuel residential investment at levels that are now known to have been hazardous.
As recently as five years ago, though, the Irish economic picture was still rosy and Bank of Scotland (Ireland), having absorbed its acquisition of State-owned ICC in 2001, wanted to gobble up a greater slice of the banking pie.
Under chief executive Mark Duffy, the bank made its boldest move yet in 2005, with a €120 million deal to buy 52 ESB shops and the loan book from the electricity company’s white goods business. Hey presto, a branch network was in place and BOSI was promising even more market ripples, such as Saturday banking and an all-round cheaper service.
At the start of 2006, the first retail branch opened savings accounts, personal loans and credit cards. BOSI was rebranded as Halifax, reflecting its ownership by Halifax Bank of Scotland (HBOS).
Current accounts followed a year later, along with online banking.
Business banking, particularly to the hotel sector, was taking off, as the lender drew on its roots and took advantage of a seemingly insatiable demand for credit.
At that stage, Duffy reported a 14 per cent increase in first-half profits and said the bank was “well-positioned to benefit from the opportunities in the Irish market”.
Alas this happy state was not to last and, by the summer of 2007, the credit crunch was starting to form. HBOS, Bank of Scotland (Ireland)’s parent, was already heavily burdened by debt, and a shortage of credit was less than helpful to its position.
The following year, 2008, brought the financial world closer to the sorry state in which it exists today. For BOSI, this meant change, and lots of it. It tightened its mortgage offerings, scrapping 100 per cent loans, raising tracker rates and heralding a “review”. Business lending – the driver behind much of its growth – was turning increasingly sour.
A few months later, Irish conditions for the bank were superseded by the forced merger of its struggling parent with Lloyds, to form the Lloyds Banking Group. The “review” of BOSI that followed this deal would have serious ramifications, although a flirtation with the institution becoming involved in a so-called Irish banking “third force” late in 2009 delayed the inevitable for a time.
In February this year, the situation gained some clarity when Lloyds said it was closing its 44-branch Halifax network, which accounted for about €10 billion of BOSI’s €32 billion loan book. The remainder was heavily written down by Lloyds, which said at that stage that it had written off €4 billion in Irish exposure. A few weeks ago, it said 44 per cent of its Irish loans were impaired.
In recent months, most media references to BOSI have referred to judgments the bank has won against borrowers who have failed to repay, or to calling in receivers to businesses that can not survive.
Yesterday Lloyds itself threw in the Irish towel, admitting defeat after an adventure that spanned two decades but will undoubtedly have lingering consequences.
Will the departure of Bank of Scotland Ireland significantly impair competition in the domestic banking sector?