2019 sees Brexit deliver new banking giant as domestic lenders quiver

Tracker scandal rumbles on as domestic banks move to sell off problem mortgage portfolios

The dreaded B-word hovered malevolently over the banking sector, like most areas of Irish economic and political life, in 2019.

Fears over the impact of a chaotic Brexit left banks in a bind as many small businesses held off on borrowing to invest and nervous households squirrelled away more money – at a time when the European Central Bank (ECB) is charging banks a negative rate of 0.5 per cent to leave excess funds with it. The three bailed-out banks' combined deposits were €12 billion higher than their loan books in June.

If the Iseq has become the most Brexit-sensitive national stock index in Europe since UK voters decided to quit the European Union in 2016, the Iseq financials gauge has been at the coalface: slumping as much as 40 per cent between April and September before recovering almost half those losses towards the end of the year on mounting hopes that prime minister Boris Johnson’s withdrawal deal would pass through parliament.

Brexit also saw Bank of Ireland, which is lead by Francesca McDonagh, being usurped as the largest bank in the State as UK giant Barclays transferred tens of billions of assets to its new EU hub in Dublin – which will leave it with a €190 billion balance sheet – to ensure continued access to the single market. It is among more than 100 financial firms that have applied to set up or extend operations in Ireland as a result of Brexit.



The tracker mortgage scandal remained firmly in the headlines during 2019. The Central Bank’s final report on its examination on bank practices in the area, published in July,

3½ years after it first ordered lenders to comb through their portfolios, found that 40,100 borrowers had either been wrongly refused their right to a cheap loan linked to the European Central Bank’s (ECB) main rate or put on the wrong rate entirely.

The Central Bank claimed that almost half the cases emerged from its challenging of lenders to do the right thing by customers and include them in their compensation programmes, even when the banks felt they had a legal defence not to do so that would have stood up in court.

In May, Permanent TSB became the first lender to be fined for its involvement in the industry wide scandal – receiving a €21 million penalty for causing "unacceptable harm" in its treatment of more than 2,000 impacted customers.

The other five lenders subject to enforcement investigations – AIB and its EBS unit, Bank of Ireland, Ulster Bank and KBC Bank Ireland – have set aside tens of millions of euro between them in 2019 in anticipation of fines.

Banking culture

The 14-member Irish Banking Culture Board, established by the banks in April in the wake of the tracker debacle to help rebuild trust in the sector, knew from the outset that it faced an uphill struggle.

The board, chaired by former Court of Appeals judge, Mr Justice John Hedigan, published the results of an industry-wide survey on the day of its launch. It found that over a third of staff in the sector wanted to a raise a concern over the previous 12 months, mainly relating to their company not acting in the best interest of customers.

However, more than 40 per cent of these individuals failed to speak up, fearing that it would be held against them or that nothing would come of it.

While deputy Central Bank governor Ed Sibley prompted some head-scratching across the industry when he told a Banking & Payments Federation Ireland conference in November that echoes of pre-crisis hubris were creeping back into the sector, it didn't take long for his point to be proven.

Within days, the chief executive of Belgian banking giant KBC Group, Johan Thijs, cropped up on a call with financial analysts to complain about the regulator's continued focus on the tracker mortgage issue and lenders' other previous sins.

“What is still an annoying thing is all the tracker mortgage stuff and, honestly, we would recommend to Central Bank of Ireland: come on, guys, turn the page,” said Mr Thijs, whose group owns KBC Bank Ireland. “We’re focused on doing business, we’ve learned our lessons, we know what to do.”

He added: “Let’s now stop doing all the nitty-gritty stuff, which is an administrative hampering of the development of the financial institution – and the financial market as a whole in Ireland.”

Thijs apologised the following day for what he described as his “insensitive” comments.

Domestic banks moved increasingly to sell off problem mortgage portfolios over the course of 2019, amid pressure from regulators to lower their non-performing loans (NPL) ratios to the EU average, which currently stands at about 3.5 per cent.

Surviving domestic banks have cut their average NPLs ratio from a peak of 30 per cent in 2013 to 7 per cent at the end of June, according to Central Bank data. Most of the early focus had been on restructuring distressed debt, with the terms of 110,000 mortgages eased over the period.

But with banks now down to their trickiest cases, Permanent TSB and Ulster Bank sold portfolios of owner-occupier loans in the second half of the year. Elsewhere, AIB, which has offloaded billions of euro of commercial loans in recent years, has begun to line up a portfolio of soured home loans, called Project Birch, with a view to launching a sale in early 2020.

Lower for longer

The prospect of lower-for-longer ECB rates weighed heavily on the wider European banking sector during the year, as policymakers struggled to reboot inflation in a weakening economy. Irish banks are particularly exposed, given their high levels of low-profit ECB-tracker loans. Moody’s, the ratings agency, estimates this accounts for between 15 and 55 per cent of individual banks’ gross loans.

This, along with the pressure on incomes as a result of Brexit uncertainty, has caused banks to look again at their costs. Four of the State’s five surviving banks are working on plans to cut jobs in the near term under what is likely to be the biggest cost-cutting drive by the industry since the bailout years.

Ulster Bank, which is lead by Jane Howard, took an initial step earlier this month as it moved to cull 175 roles across its manager grades, while AIB in October looked for 200 people to put their names forward for voluntary redundancies across its problem loans division as well as its mortgages and consumer credit brands. The trend is set to continue in 2020.

Changes at the top

This year also saw a number of top executives quit bailed-out banks against a background of discontent.

over the impact of the Government’s decade-long €500,000 pay cap and effective ban on bonuses, which face an 89 per cent tax.

Minister for Finance Paschal Donohoe has been sitting since June on a report he commissioned in 2018 from recruitment consultants Korn Ferry into bankers' pay.

It is said to call for an easing of the restrictions. But he knows that acceding to these recommendations amounts to political suicide as the country faces into a general election next year.

Bernard Byrne stepped down as chief executive of AIB in March to join Davy as head of the stockbroker's capital markets division, while his chief financial officer (CFO), Mark Bourke, left the same month to take over as finance head of Portuguese lender Novo Banco.

They were replaced by internal figures, Colin Hunt and Donal Galvin, respectively.

Bank of Ireland's CFO of seven years, Andrew Keating, announced in June that he was quitting to become director of group finance at CRH. Having a few friendly faces at CRH helped when he joined the company in November. CRH's new chairman is none other than his old boss, Richie Boucher, while CRH's CFO, Senan Murphy, was previously the bank's chief operating officer. All three are also alumni of Ulster Bank.

A former top finance executive at AIB, Myles O’Grady, was selected in October to replace Keating at Bank of Ireland, having been hired in June as the company’s director of commercial partnering in the Republic.

Meanwhile, the longest-surviving CEO across the domestic banks, Permanent TSB's Jeremy Masding announced in October that he will step down in 2020, eight years after the Welsh banker took charge of the lender.

New sheriff

The banks also saw a new sheriff arrive into town as Egyptian-born Gabriel Makhlouf, a former top official in the UK and New Zealand, became the governor of the Central Bank in September, a few months after Philip Lane departed for Frankfurt to become the ECB's chief economist.

Makhlouf was caught up in a controversy during the summer over his handling of a budget leaks scandal in New Zealand, where he had been head of the country’s treasury department.

The new governor asserted his independence in early December, refusing to bow to pressure from some in political circles to ease mortgage-lending restrictions that were introduced in 2015 by Lane's predecessor, Patrick Honohan.

Makhlouf told the Oireachtas finance committee the following day that he plans to be a thorn in the side of the banks.

“Under my leadership, I am absolutely determined to make sure that the practices and culture and behaviours of the past are not repeated,” he said. “We’re going to make sure the banks are held to account for their actions.”

Fighting talk.