Subscriber OnlyFinancial ServicesAnalysis

Bank of Ireland chief Francesca McDonagh leaves unfinished business for successor

British banker overhauled the culture of Ireland’s largest bank and leaves company on the cusp of a key profitability target

Shortly after taking over as chief executive of Bank of Ireland almost five years ago, Francesca McDonagh made a point of blocking off a few hours every month in her busy schedule for a particular kind of meeting.

“They were called open-door sessions, as they allowed any employee – particularly those who wouldn’t ordinarily come in contact with her – to sign up to go in and see her,” according to a colleague at the bank, who declined to be named. “It set an important tone.”

The British banker has spoken herself of how the exercise – which moved to Zoom during the pandemic – gave her huge insights into the business, including “really bad” and “inconvenient” feedback that informed what needed to be fixed or addressed.

There was always a view among bank insiders, however, that McDonagh was keeping a keen eye on what other doors might open as a result of holding the top job in Ireland’s biggest bank – before it emerged in April that she was leaving to take over as chief executive of embattled financial giant Credit Suisse’s Europe, Middle East and Africa operations.

“Was it the most unexpected departure announcement in Irish banking? No. There was always a feeling inside that she was only here for a period. She invested a lot in her own brand and was very well scripted every time she did anything publicly,” said a former executive at the bank, who asked not to be named. “The fact that she did five years was an achievement in itself. And she left her mark.”

In her five years at the helm, the former HSBC banker oversaw a 35 per cent reduction in Bank of Ireland’s non-performing loans and 13 per cent decline of running costs, driven by the culling of 1,300 jobs over the past 24 months.

She also pounced last year on opportunities for the bank to buy back Davy, when the stockbroking and wealth-management firm was forced to put itself on the block in the wake of a bond-trade scandal, as well as the entire €9 billion performing loan book of KBC Bank Ireland, as the Belgian-owned lender went about retreating from the Irish market.

Indeed, it seemed, before those deals were unveiled, that McDonagh was missing out on opportunities as Permanent TSB and AIB went about carving up Ulster Bank between themselves and AIB agreed to buy back its former Goodbody Stockbrokers unit.

And while her predecessor, Richie Boucher, ran Bank of Ireland following the crash with an obsession of repaying the bank’s €4.8 billion taxpayer bailout, McDonagh has seen off the State as a key shareholder.

Reduced stake

She told analysts on Wednesday, as the bank reported results, that with Minister for Finance Paschal Donohoe having reduced the Government’s stake in the past 13 months from 13.9 per cent to below 3 per cent – taking it from being the bank’s main shareholder to outside the top 10 – it is expected to “fall to zero” over the coming months. The bank has returned €6.5 billion to the State via various payments.

‘McDonagh has orchestrated a significant turnaround in Bank of Ireland’s profitability’

Meanwhile, the bank said on Wednesday as it reported interim results, that it is set “in the near term” to deliver on McDonagh’s overriding financial goal of having sustainable profits of in excess 10 per cent of shareholders’ equity – albeit with the help of rising official interest rates in the euro zone and the UK.

“McDonagh has orchestrated a significant turnaround in Bank of Ireland’s profitability. While she has overseen many important advancements during her stewardship, consistent delivery in the context of the strategic cost agenda has been instrumental in terms of returns enhancement,” says John Cronin, an analyst with Goodbody. “While rising rates are now playing a significant role in the improved outlook, her strategic decisions strongly underpin Bank of Ireland’s refreshed guidance.”

McDonagh took over the helm in October 2017 as public and political uproar over the industry-wide tracker mortgage scandal was screeching towards a crescendo. Within weeks of taking on the role, the then 42-year-old was hauled, along with the heads of the four other remaining retail banks, in before Paschal Donohoe for a dressing down.

After taking hands-on approach to the tracker controversy, receiving daily reports and personally reviewing some files, McDonagh presided over the announcement weeks later that the bank had identified 6,000 additional customers, mainly stemming from it relying on an overly legalistic interpretation of contracts, rather than doing the right thing. It brought the bank’s total to 14,500.

McDonagh quickly hired fellow HSBC alumnus, Irishman Oliver Wall, as her chief of staff as she put her own stamp on things, amid a flurry of senior exits, as is often the case – for various reasons – when a new boss is hired from outside an organisation. She took her time getting her feet under the table before unveiling her grand strategy in June 2018 before analysts and investors in London.

It included a plan to grow the bank’s net loans, which had contracted in the decade following the 2008 financial crash, by 20 per cent to €90 billion, cutting running costs by €200 million to €1.7 billion, doubling the profitability of its UK business and delivering a 10 per cent return of shareholders equity. All by the end of 2021.

However, a year after unveiling the objectives, McDonagh started to walk back on the €90 billion target, warning how the “external environment” had changed, with extended Brexit uncertainty hampering loan-book expansion in Ireland, while in the UK, competition in an already ruthless mortgage market had intensified. Meanwhile, lower-for-longer European Central Bank (ECB) rates were further depressing income growth.

Retrenching

During the course of McDonagh’s leadership, Bank of Ireland’s net loans actually contracted by almost 2 per cent to €74.6 billion. This was fuelled by a volte-face on the CEO’s original plan to grow the UK loan book aggressively, in favour of retrenching from mass-market mortgages and moving into more bespoke, but higher value, home loans to the likes of professionals seeking larger-than-average loans and people looking to take equity out of their homes.

“In retrospect, the original UK plan may have been overly optimistic and lacked credibility. But Francesca showed a willingness to acknowledge that it wasn’t working and decided to take a different route,” says a former colleague.

“Indeed, one of Francesca’s greatest attributes is her willingness to listen to an alternative view. That’s not something you get at the top of many big organisations.”

‘If she’s displeased with you, you’ll know from her body language. But I’ve never seen her raise her voice’

While a recently published profile of McDonagh cited a senior industry figure as saying she had a reputation as a “screamer and shouter”, this is at odds with the picture painted by a number of current and former colleagues who spoke to The Irish Times.

“I don’t recognise that portrayal. I’ve seen Francesca stare at people or raise an eyebrow when someone is waffling or obfuscating when she wants a direct answer on something,” according to one colleague. “If she’s displeased with you, you’ll know from her body language. But I’ve never seen her raise her voice.”

A former bank employee said: “She’s formidable – but in a good way. She comes in well prepared for meetings and expects others to have done their work, too. She’s deeply curious and soaks up data at volume.”

McDonagh, whose paternal grandparents hail from Galway and Laois and whose mother’s family fled Egypt during the Suez crisis in the 1950s, has spoken a number of times of how her relatively modest background – going to school at a Catholic state comprehensive in Croydon, south London, and having to use her powers of persuasion to secure a spot studying philosophy, politics and economics at Oxford University – has shaped her.

“People will talk about impostor complex; people often talk about diversity in terms of gender or ethnicity, but actually class diversity was probably a bigger factor for me personally: overcoming being from a different class, educational background than a lot of colleagues in an earlier stage of my career. It required a lot of confidence, determination and self-belief,” she said in conversation last year with Deloitte Ireland as part of a leadership series with the firm.

Transformed culture

Most insiders agree that she has transformed the culture of the organisation in her time at the helm – from holding open-door sessions to setting a policy where one staffer must channel the voice of customers at meetings when a decision is being taken. Employees joining her staff briefings, made all the easier in recent years by Zoom, have become used to McDonagh pressing home the bank’s “purpose”, as she put it, “to enable its customers, colleagues and communities to thrive”.

“That may sound trite, but she really believes it,” said a colleague, who joked that the frequent presence of McDonagh’s beloved dogs – Moses, a golden labrador, and Floyd, a retriever – in the background of virtual meetings should entitle them to a staff pension.

The turnaround is backed up by data. Bank of Ireland’s so-called culture index – measured by surveys carried out by employee engagement agency Karian and Box – has jumped from 54 per cent of staff scoring positively on number of questions testing the bank’s culture in 2018 to 75 per cent last year. The readings compare with a global benchmark for financial services firms, which has hovered around 72-73 per cent over the period.

Still, McDonagh’s successor will have their work cut out trying to generate such warm and fuzzy feelings beyond the bank’s workforce.

The banking sector here received a net trust score of minus 25 in a public survey carried out this year by consultancy firm Edelman on behalf of the Irish Banking Culture Board. A figure in negative territory means that more people say they have lower trust in banks than in high trust. A similar poll last year delivered a score of minus 28.

With McDonagh set to leave the bank early next month before relocating to Zurich, where she starts work in early October, Bank of Ireland will announce an interim CEO in the coming weeks. It is expected that Gavin Kelly, chief executive of its Irish retail banking unit, will take on the role ahead of a permanent CEO taking the helm.

Sources say that Bank of Ireland’s board, led by chairman Patrick Kennedy, has identified a permanent successor to McDonagh. The individual is said to be currently based overseas.

McDonagh is likely to have departed before the Central Bank concludes its enforcement investigation into the lender’s role in the industry-wide tracker mortgage scandal. A large portion of the €120 million that the bank has set aside on its balance sheet to deal with remaining tracker issues is made up of provisions for an expected fine.

Milestones

The task of bedding in Davy, acquired last month, and KBC loans will also fall on someone else – as will the job of growing Bank of Ireland’s loan book organically, following sustained contraction since the financial crisis.

While the IT overhaul programme McDonagh inherited had several milestone issues between its 2016 inception and the end of last year – including a delayed rollout of a new mobile banking app – the CEO kept her word on the €1.15 billion budget cap she set early on. But there’s more to be done here, too, as the technology is not leading edge.

Meanwhile, lobbying by McDonagh and her chairman for a relaxation of pay restrictions across bailed-out banks, arguing it is making it difficult for the bank to compete for talent, has fallen on deaf ears in Government for the entirety of her tenure. Will her successor have more luck?