Are we there yet? Well, no but we are moving on

The main banks are moving closer to profitability, but that does not mean our financial woes are over


Another year, another step closer to normalised lending. Or so we hope. The past year has reminded us we cannot take anything for granted in the financial sector.

Most of the main banks moved closer to profitability and made strides towards achieving the goal of the cherished 2 per cent-plus net interest margin. However, others continued to exit this market, IBRC, ACC and Danske; redundancies remain a feature of the sector; and questions persist as to whether Allied Irish Banks, Bank of Ireland and Permanent TSB will require additional capital when the euro zone stress tests are completed next year.

And there is still no sign of an external solution from Europe to help the three banks to deal with their loss-making tracker mortgages at a time when interest rates in the euro zone are at a record low of 0.25 per cent.

On December 16th, while speaking to a committee of the European parliament, European Central Bank president Mario Draghi warned that the Irish banking sector remains a source of “some concern”.

He said “outstanding issues” required swift and decisive action and the recent balance sheet assessments carried out by the Central Bank here “falls short” of the more stringent test that would be carried out in 2014 ahead of the ECB assuming the role of banking supervisor for the euro zone.

The balance sheet assessments by the Central Bank, which was a condition of our bailout exit, showed that AIB, Bank of Ireland and Permanent TSB did not need additional capital. But the regulator found that they should all take extra provisions against bad loans, a finding with which Bank of Ireland has taken issue.

AIB and Permanent TSB, both more than 99 per cent owned by the State, are yet to receive approval for their restructuring plans from the European Commission.

Work in progress
The year began with a bang with the Government’s decision on February 7th to liquidate Irish Bank Resolution Corporation with immediate effect. Special liquidators were appointed to manage the sale of nearly €22 billion worth of loans, with anything not sold to be transferred to the National Asset Management Agency. It remains a work in progress.

The first half of the year also saw the Government end the eligible liabilities guarantee, a successor to the hated bank guarantee of September 2008, and issuing directions to AIB, Bank of Ireland and Permanent TSB to reduce their payroll costs by 6-10 per cent.

In March, the Central Bank set targets for AIB, ACC, Bank of Ireland, Permanent TSB, Ulster Bank and KBC to offer mortgage solutions to customers in arrears of 90 days or more with their home loans.

These loans stirred up a hornet’s nest in September when the heads of each bank went before an Oireachtas committee to outline their compliance with the targets. Bank of Ireland chief executive Richie Boucher was resolute about the bank’s decision to charge interest on split-interest mortgages though the bank later agreed to reduce the rate following a request from the committee. Somebody has to pay for and this and Boucher doesn’t want it to be his shareholders.

Strategic default
AIB chief executive David Duffy repeated his assertion that there is a high level of strategic default in the system. He insisted that letters threatening to take possession of homes, which were sent to customers in arrears who had refused to interact with the bank over the past couple of years, represented a “sustainable solution”. Up to September, AIB had warned close to 6,000 mortgage customers that it would take legal action if they continued to refuse to engage with the bank on their arrears.

Ulster Bank told the committee that about 1,000 of its mortgage arrears customers have had the interest rate on their home loans reduced to as low as 0.5 per cent in an attempt to help them pay the money back.

This so-called “economic concession” treatment is being offered for periods of five to seven years or “could even be for the lifetime of the loan depending on a customer’s circumstances”, chief executive Jim Brown said. He said 35 per cent of its 18,025 mortgage accounts in arrears of 90 days or more were “not engaging with the bank and are not paying anything” on their loans.

In the second half of the year, ACC Bank, owned by Dutch financial group Rabobank, and Danske Bank both decided to quit the retail market here. Rabo will continue to offer some products to Irish customers through its own brand while Danske will offer services to the corporate and institutional markets but current account and mortgage customers will have to find new homes.

On a positive note, KBC and Permanent TSB both launched campaigns to win current account and personal loan customers. Both are small players in the sector here but at least add a competitive edge.

Vying with IBRC’s liquidation for the biggest banking story of the year was Bank of Ireland’s €1.88 billion capital package in December. This allowed the bank to buy out the Government’s interest in its 1.8 billion preference shares dating from 2009. It also allowed the bank to avoid a punitive €460 million step-up in the cost of the shares if they were not redeemed by next March.

It’s another important step along the road for the bank in freeing itself from the influence of the State and demonstrated a strong appetite among new and existing investors for Bank of Ireland paper.

Not to be left behind, AIB’s Duffy said in November that the bank would return to profitability at some point next year and he hopes to bring external investors into the bank in the next few years.

Musical chairs
Matthew Elderfield stepped down as deputy governor and head of financial regulation at the Central Bank to return to the UK, where he has taken a senior position with Lloyds banking group.

Elderfield will probably be best remembered for placing Quinn Insurance into administration in 2010, an action that precipitated the fall of businessman Seán Quinn.

Frenchman Cyril Roux won the race to succeed Elderfield after which Fiona Muldoon, director of credit institutions and insurance supervision, also announced her intention to leave the regulator.

Muldoon, who lost out to Roux for Elderfield’s former post, oversaw the establishment during the summer of a pilot scheme by secured and unsecured lenders to provide treatments for borrowers in financial distress who have loans with multiple financial institutions.

This scheme is designed to help borrowers and lenders to avoid the cost and distress of the new personal insolvency or bankruptcy regimes. The pilot is set to be extended by the Central Bank.

Others involved in the financial services sector’s game of musical chairs included Pat Farrell, who stepped down as chief executive of the Irish Banking Federation, the sector’s main representative body, to become the communications chief at Bank of Ireland.

Noel Brett, the head of the Road Safety Authority, has taken up the wheel at the IBF and is overseeing the merger with the Irish Payment Services Organisation.

KBC Bank Ireland chief executive John Reynolds stepped down in November after 29 years with the bank to be replaced by chief financial officer Wim Verbraeken.

Reynolds is also handing over the baton as IBF chairman to AIB’s Duffy.

The year closed with ratings agency Fitch giving its assessment of the outlook for Irish banks.

It noted that AIB and Bank of Ireland are likely to turn profitable next year for the first time in five years but said there will “still be challenges for asset quality”.

Fitch expects Irish banks to become long-term property managers for many of their problems loans and will keep properties on their balance sheets for “some time” to come.


A good year as institution completes buy-back of State’s preference shares and performs well on Irish stock market

The Richie Boucher-led institution closed the year in positive fashion by completing a €1.88 billion capital package to buy back the State’s preference shares dating from 2009.

This involved an equity placing of €580 million and the placement of €1.3 billion of notes, secured on the preference shares, with new and existing investors.

It removed a potential step-up in cost of €460 million next March and removed a restriction on the bank being able to pay a dividend on ordinary stock.

It also reduced the dividend paid on the preference shares by €55 million a year while the bank can continue to count the €1.3 billion in remaining preference shares as capital for regulatory purposes, which is important in advance of the euro zone stress tests next year.

The package also has the effect of diluting the Government’s shareholding from 15 per cent to 14 per cent.

Bank of Ireland’s shares have also been among the best performing on the Irish stock market this year, more than doubling in value to a current trading level of about 26 cent each.

There was mixed news in the October budget, with the Government imposing a three-year bank levy that will cost Bank of Ireland about €40 million annually, while abolishing the restriction on the use of Irish tax losses, of which Bank of Ireland has about €1.1 billion to utilise.

The balance sheet assessments carried out by the Central Bank were a mixed bag for Bank of Ireland. While it was found to require no additional capital, the regulator found that the bank should take additional provisioning of €1.3 billion against its Irish mortgage book and commercial loans.

In a statement issued on December 2nd, Bank of Ireland indicated that it disagreed with the regulator’s assessment and that it was in “ongoing” dialogue on the matter. Perhaps more significantly, Bank of Ireland was freed this year by the European Commission from a 2011 commitment to sell its New Ireland Assurance subsidiary, which was something Boucher never wanted.

This sale has been replaced by other measures, including the closure of the ICS Building Society platform.

To round off the year, Bank of Ireland has even managed to retain its defined benefit pension scheme, following a recent deal with staff.


Wind-down gathers pace as liquidators announce details of loan sales but threat of litigation hangs over zombie bank

Formed through the merger of parts of Anglo Irish Bank and Irish Nationwide, IBRC was effectively laid to rest on February 7th when the Government liquidated the bank in dramatic fashion.

It happened overnight as the Government fretted that its secret plan for the institution, hatched over many months, was about to leak out.

Kieran Wallace and Eamonn Richardson of KPMG were appointed as special liquidators and charged with selling its €21.7 billion portfolio of loans by the year end at market value. Residual loans are to be transferred to the National Asset Management Agency.

IBRC’s board and senior management were relieved of their duties immediately and all of the bank’s staff were put on notice that they would be made redundant with only statutory entitlements.

The wind-down has gathered pace as the year has progressed with the liquidators announcing some details of the loan sales on December 12th.

Project Evergreen comprised Irish corporate loans with a par value of about €2.5 billion and 50 borrower connections. This was divided into 13 borrower connections and one remaining portfolio of loans. It is expected that 84 per cent of the portfolio, by par value, will trade to buyers with just three borrower connections being handed to Nama.

Project Sand, comprising mortgage loans with a par value of around €1.8 billion and 13,250 borrowers, will close for binding bids on January 27th.

Projects Rock and Salt comprised mostly commercial real estate loans written through the UK branch and British UK subsidiaries of IBRC with a combined par value of about €7.3 billion. This process is expected to conclude on February 14th.

Project Stone comprised commercial real estate loans originated through the Irish offices of IBRC with a par value of around €9.3 billion. First phase indicative offers were due on December 12th.

Project Pebble comprised commercial real estate loans originated through IBRC’s Irish offices with a face value of about €800 million. Phase one offers were due on December 19th.

IBRC could continue to cast a long shadow for some time to come with former executives and some parties involved in the loan sales threatening litigation.


Reliance on funding from monetary authorities falls as share price registers gains on junior ESM market

It was a busy year for AIB chief executive David Duffy as he seeks to return the bank to profitability and repair its balance sheet.

Overall levels of wholesale funding continued to reduce. AIB’s reliance on funding from monetary authorities fell to about about €16 billion at the end of September 2013 compared with €18 billion at the end of June.

In addition, it completed issuances in the year, including a €500 million, five-year, asset-covered security in September and a two-year credit card securitisation in October for the same amount.

In November, the bank completed the issue of a €500 million fixed-rate senior unsecured debt issue, with a maturity of three years and a coupon of 2.875 per cent – the first fully unsecured, unguaranteed debt transaction by the bank since 2009.

As with Bank of Ireland, the budget brought mixed news.

On the one hand, the three-year bank levy will cost it €60 million a year but on the other hand, the Government has lifted the restriction on the use of deferred tax assets.

On December 2nd, AIB said the Central Bank’s balance sheet assessments showed that it does not require any additional capital. However, it is understood that the regulator found that AIB should take extra provisions for bad loans.

The bank had refused to comment on this by the time of going to print.

Perhaps the most bizarre development in relation to AIB this year was the appreciation of its share price on foot of buying by retail investors sucked in by Bank of Ireland’s share price rise and the seeming turn in the Irish economy.

It has more than doubled in value to trade above 11 cent on the junior ESM market in Dublin.

This gives it a market capitalisation of about €60 billion, which makes no sense given that it is 99.8 per cent owned by the State and there is no institutional interest in the stock, is loss-making and has not yet had its restructuring plan agreed by the European Commission.


Good bank/bad bank review sparks rumours about future of bank’s operations in Republic

This year saw persistent speculation about the future of Ulster Bank in the Republic. This related largely to a good bank/bad bank review of its parent group Royal Bank of Scotland undertaken by the British government.

Subject to regulatory approval, a number of Ulster Bank assets – about £9 billion worth – will be managed by the “bad bank” and run down.

“But we also need to have full confidence that the rest of the Ulster Bank business is doing all it can for its customers and is playing its part within the wider company,” RBS chief executive Ross McEwan told staff on November 1st.

“We need to ensure that we have a viable and sustainable business model for Ulster Bank as part of this review. It’s an important business for the whole island of Ireland and we understand the need to get this right.” McEwan said he would announce a plan for the way the bank serves its customers around the time of its full year results in February. Ulster Bank will form part of this review.

In August, Ulster Bank announced an operating loss of €387 million for the first half of the year, down from €675 million in the same period of 2012. The bank said this was due to a 30 per cent reduction in impairment losses to €591 million.

The year was also marked by the sale by Ulster Bank of a number of high-profile Celtic Tiger-era loan assets, including department store Arnotts and the Morans hotel chain.

The bank encountered sporadic disruptions to its technology platform, which shut customers out of their accounts online and created difficulties around ATM withdrawals. While not on the scale of its system-wide IT difficulties in 2012, these episodes prompted the bank to apologise to customers .


Launch of new products sees Belgian bank increase customer numbers as return to profit expected in 2016

It was a mixed year for the Belgian bank. While ACC and Danske announced their exits from the Irish retail banking market, KBC launched a number of new products, including current accounts.

Then on November 14th, KBC surprised analysts by announcing additional provisions of €671 million for the Irish business to be taken in the fourth quarter of the year.

This included €510 million due to the reclassification of €2 billion worth of restructured mortgage loans from non-impaired to impaired, and provisions of €161 million for corporate loans due to a “more conservative outlook on future cashflows and collateral values given the slower-than-expected recovery in Ireland”.

When added to the previously guided €104 million, this will give the bank total provisions of €775 million for the fourth quarter.

KBC said it expects to return to profitability in 2016. On the same day as the provisions were revealed, KBC said its chief executive John Reynolds was stepping down after 29 years with the bank to pursue other opportunities and would be replaced by chief financial officer Wim Verbraeken.

On the ground, KBC increased its customer base here by 25 per cent during the year following the launch of current account and other services.

Speaking at the Irish Bank Federation’s annual conference, Dara Deering, head of retail banking at KBC Bank Ireland, said its customer numbers had risen to just over 160,000.

She said credit card and personal loan products would be launched “very soon”, while its deposit base had grown by 50 per cent to about €3 billion.

It is now offering a white label home insurance product through Zurich Insurance, and life assurance through Irish Life.


New lending and play for current account customers mark an eventful year for Permo

This was the first full year of Permanent TSB’s “Bank Plus 2” strategy as devised by chief executive Jeremy Masding.

It is now managed on the basis of three distinct business units, each with a separate management team, a “discrete strategy, clear objectives and line of sight to performance”.

It effectively involves the core bank, which is back in the market lending; an asset management arm, dealing with loan arrears; and its non-core UK business, which is closed to new business.

All the while, the bank awaits final approval from the European Commission for its restructuring plan. This is expected in the coming months.

The year began with PTSB announcing plans to do about €450 million in new lending, roughly five times the level of 2012. It also made a play for current account customers by offering free banking if customers mandated at least €1,500 a month to their account and
signed up for online banking.

PTSB had a busy close to the year. In November, it took over the troubled Newbridge Credit Union following a request from the Central Bank of Ireland. Later that month, the bank raised €500 million through a sale of residential mortgage backed securities.

This was the first publicly placed new issue of residential mortgage backed securities by an Irish bank since 2007, and the first by PTSB since 2006.

In December, details of the balance sheet assessments by the Central Bank began to emerge. As with Bank of Ireland and AIB, PTSB has been required to take extra provisions although it does not require additional capital at this time.

As with AIB and Bank of Ireland, PTSB’s shares have more than doubled in value this year and trade at under five cent. This gives the bank, which is 99.2 per cent owned by the State, a market value of €1.6 billion.