Taking a global view of Irish business

ALAN DUFFY became head of corporate banking for UK-based banking giant HSBC during a golden period in banking in Ireland. The economy was roaring, the property market was booming and bankers were rolling in big profits, pay and bonuses.

Duffy took over the job in September 2006, but he couldn’t partake in the credit boom enjoyed by his domestic rivals for one simple reason – based on HSBC’s measures of what constituted good banking, he wasn’t permitted.

HSBC has traditionally been conservative about property lending; it only lends on property where the loan-to-value ratios do not exceed 65 per cent.

This meant Duffy’s team could not compete with the 85 per cent loan ratios being offered by the Irish banks.

“It was always a temptation but, frankly speaking, what was being done on the ground here in terms of loan-to-value, pricing, concentration risk, was so far outside of the group parameters that you would just be going out on a limb,” says Duffy, sitting in HSBC’s Irish offices overlooking Grand Canal Square in Dublin’s Docklands.

“We were unable to get into a lot of transactions being done between the existing banks on the ground at the time so we decided that internationally active Irish corporates ... we decided there was a very active sector in that.”

The decision was more about identifying a niche than being told to avoid a particular sector.

“I was not warned against getting into the real estate side. I was told to stick to the knitting and the knitting for HSBC is international banking and cashflow businesses,” says Duffy.

“It [property lending during the Irish boom years] made no economic sense at all and we were interested in hiring, or attracting to the group, relationship managers with broad experience, not a mono-product focus on real estate, so as to understand the trading fundamentals of Irish companies.”

Duffy’s experience in banking was never in property. He had even seen how the Scandinavian countries recovered from their property crash of the early 1990s when he worked for Canadian lender Scotiabank out of Dublin financing businesses in Norway, Finland and Sweden.

His work brought him in contact with shipping companies in Norway and Denmark, pulp and paper businesses in Finland and oil and gas exploration companies in Norway.

“The banking sector in Scandinavia was in a tough place at the time, but it came through very solidly, certainly in Finland and Sweden,” says Duffy.

“Norway was always relatively insulated from things because of the oil revenues and the fact that they were parking a lot of the oil revenues in their sovereign wealth fund, which is huge today.

“I worked in cyclical industries, which was a great learning curve that gave me exposure to a hugely diverse range of industries.”

Although it is Europe’s biggest bank, and one that survived the global banking crisis better than most international banks, HSBC is not very visible in Ireland, certainly not compared with elsewhere.

Duffy speaks with some delight about the bank’s sponsorship of the 2009 British and Irish Lions rugby tour to South Africa. Irish fans wore the distinctive red jersey carrying the bank’s name.

The captaincy by Munster and Irish international Paul O’Connell also raised the brand’s profile here.

HSBC employs 420 people in Ireland, most of whom work in funds management through the bank’s global banking and markets or “HSS” division. This part of the operation has recently attracted business from HSBC in New York.

The Irish business is moving out of insurance and private banking, a division HSBC’s then group chief executive, Mike Geoghegan, opened in Dublin in April 2008. The move now is towards fund management and HSBC’s corporate banking business, where Duffy manages 35 staff in Dublin.

There was no reason specific to Ireland why the private banking unit in Dublin closed. Duffy says that HSBC withdrew from retail banking in about 20 countries and the Irish private bank was “caught up” in the contraction of the private banking division in Canada.

Duffy says that HSBC measures the performance of single businesses across the group globally on a “five filter” basis – the ratio of assets to deposits; the return on equity; how cost efficient the business is; “how connected you are to the rest of the group”; and materiality as measured by profit before tax.

HSBC chose to open a corporate banking division in Ireland because many of the large Irish companies with a global reach had “touch-points” with the bank across the globe, he says.

“It was investing in a banking business in Ireland to serve those companies ... here but also to make sure that there was a relationship manager sitting in Dublin that could look after the global needs of these corporates,” says Duffy.

“We are the most international bank in Irish banking. That footprint is a compelling, competitive advantage.”

As a branch, and not a subsidiary of HSBC reporting into London, Duffy’s unit doesn’t disclose how much business it writes out of Dublin or how much it makes in profits, although he does say that its Irish corporate banking unit is very profitable.

Loans provided by the Irish business start at about €10 million, while the typical debt financing is about €25 million. HSBC also gets involved in syndicated or club loan deals with other institutions.

The bank also operates a treasury desk and a trade finance business from Dublin, and offers a cash management product through electronic banking that a lot of Irish multinationals use to pool their cash reserves.

Duffy is hoping to hire more staff in these areas in the first quarter of next year as well as an additional relationship manager to work with customers, he says.

One of the bank’s typical Irish clients is Cavan-based building materials company Kingspan. HSBC is part of a banking syndicate that has funded the company and the bank recently helped open doors for the group as it considers expansion opportunities in the Far East, a market that the Hongkong and Shanghai Banking Corporation (HSBC) obviously knows well.

The bank is also a big lender, cash manager and treasury provider to Grafton Group, while food company Kerry Group is a key client in Ireland and Latin America that receives similar banking services.

There is nothing easy or quick about growing into the Far East, says Duffy. His team in Dublin has to offer various products, be aware of the cultural differences of operating across continents and be “very determined and prepared to work very long hours”, he adds.

“It doesn’t happen overnight. When it does happen, it is a very sweet proposition to bring to a large Irish company but it is a lot of hard yards,” he says.

Duffy sees opportunities for Ireland’s food and agri businesses and medical devices companies in China, but also in Vietnam and Indonesia, which Irish firms are only beginning to explore. Irish businesses “travel well”, he says.

Because of the London-based bank’s global reach, Duffy’s main competitors are not other international banks in Ireland but HSBC’s businesses in the 19 countries in its European operations seeking capital from the parent to lend out.

Excluding the big four of Britain, Germany, France and Turkey, Ireland ranks “very well” among this group, says Duffy.

“It makes you very disciplined working for an international bank in a small market,” says Duffy. “You are competing for capital against 15 other countries in Europe, excluding the top four, ranging from Kazakhstan in the east to Ireland in the west.”

Despite having the “bailout country” tag, Ireland still continues to attract plenty of HSBC capital to clients, says Duffy, and is not classed in the same category as either Greece or Spain. This is down to the “very difficult decisions around budgetary measures” made by the Government, he says.

Throughout the Irish banking crisis, particularly during the darkest periods, HSBC continued to lend to the Irish banks, primarily Bank of Ireland and AIB, in the inter-bank market, where its surplus of deposits over loans made it a net lender in that market when cash was tight for many big banks.

Duffy says the HSBC “house view”, which he obviously shares, is that the euroz one will “remain intact” but with “further bumps along the road”.

Contagion from further economic difficulties in Britain and the US will also have big consequences for a small open economy like Ireland’s, he says.

Addressing the ongoing demand for fresh credit among small and medium-sized enterprises (SMEs), Duffy says the amount of business is not enough to draw HSBC into that end of the market in Ireland, as the bank isn’t equipped for it.

“Without a branch network, it is impossible to serve the SME market. We are not competing with the incumbent banks which have market intelligence; a retail banking presence. That is just not the space we are in,” he says.

HSBC will help small Irish companies set small overdrafts or credit card facilities in China through its network, but Duffy says lending to Irish SMEs at home would not work for HSBC.

Despite being one of the big-name survivors of the global financial crisis, HSBC’s reputation has been tarnished by a withering recent US Senate report detailing how its failure to enforce anti-money-laundering laws helped Mexican drug gangs, a Saudi bank with ties to al-Qaeda and nations such as Iran and Sudan, deemed rogue by the US.

“It happened as a result of issues 10 years ago and we are moving to address them. Where clients specifically raise it in meetings, we deal with it,” says Duffy. “It is a dent in our reputation, but we are firmly determined to fix it and move on.”

HSBC has also been drawn into the latest banking scandal, relating to interest-rate rigging, for which it is facing heavy penalties.

“These are legacy issues that are now more in the public domain and are being addressed,” he says. “There is a huge proactive will in the group being driven by our chief executive, Stuart Gulliver, to address these issues and move to focus on what is a fundamentally very solid banking platform.”

The latest controversies aside, HSBC’s status as a “safe haven” bank has continued to bring it deposits and other liquidity to its Dublin operations from multinationals, even though it doesn’t compete on interest rates.

“If you are a group treasurer sitting in New York and you have got a billion in cash and a portion of that is going to be with your business in Ireland, you will diversify it – you take a safe haven and you may play yield with some other institutions around town,” he says.

On the lending side, Duffy warns that the cost of the many layers of regulation being applied in international banking, particularly under the new

Basel III rules setting aside higher capital requirements in the years to 2019, will increase the cost of borrowing.

HSBC and other major international institutions deemed systemically important or “too big to fail” will be forced to set aside additional buffers of capital to protect against global economic shocks.

The higher cost of borrowing will be offset by having a stronger system of banking with internationally focused banks that have the capacity to finance internationally focused growing companies.

“What you will have is a more robust financial system that is less exposed to systemic shocks or better able to withstand shocks so that is hugely beneficial for the larger banks classified as systemically important,” he says.

Duffy believes the larger banks will be best-placed to support “extremely prudent” Irish companies which are operating in a large number of countries.

These companies want to know that a bank in a syndicated loan in year one will still be there in year five, he says. This is particularly relevant at the start of what is going to be a busy period for large international Irish-based companies, says Duffy.

“If you look at the balance sheets of most of the large corporates here in Ireland – debt levels are low, cash levels are high – what you are seeing is the start of acquisitions,” he says.

“United Drug, Kingspan, CRH and Kerry Group have announced acquisitions and they are all buying companies in markets generally outside Ireland.”

For Duffy’s outward-looking unit, this also means the start of a busier period for HSBC in Ireland supporting Irish companies.

Friday interview

Name: Alan Duffy

Job: Managing director of HSBC Corporate Banking in Ireland

Age: 47

Home: Rathgar, Dublin

Family: Married with two sons

Hobbies: Skiing, sailing and fly-fishing

Education: He has a business studies degree from Trinity College Dublin and an MBA from the Smurfit Business School at UCD

Career: He began his career in banking after leaving Trinity in 1985, starting at First Southern Bank, which was later acquired by Canada's Scotiabank.

He joined Dutch bank ING in 1998 and later worked at Banque Bruxelles Lambert before becoming head of corporate banking for HSBC in Ireland in September 2006.

Something you might expect:His job involves almost daily interaction with companies and HSBC bankers in the Far East, particularly Hong Kong.

Something that might surprise:He has an interest in military history as a result of his great grand-uncle James Duffy, who was from Donegal, winning a Victoria Cross fighting with the 6th Royal Inniskilling Fusiliers in the final year of the first World War.