IIB gets ready to capitalise on Northern boom

Mortgage lender IIB made €88 million in profits last year and now it plans to expand its operations into the Northern market, its chief executive, Ted Marah, tells Barry O'Halloran

It's not exactly a fond reminiscence, but Mr Ted Marah, chief executive of IIB Bank, remembers that back in the dark days of the 1980s, anyone who wanted a mortgage had to jump through quite a few hoops.

"You had to know someone who knew someone with some influence with a building society manager, and they got you on a waiting list for an application form to get a mortgage in two years' time," he says.

It sounds pretty Victorian and, while there is still plenty of debate about the competitiveness or otherwise of today's mortgage market, it has to beat waiting meekly in line for a building society official - with sideburns and a stiff collar - to send you out a form.

Mr Marah says that IIB was the first bank to introduce "criteria-based" mortgage lending. That is, you got your home loan if you satisfied a set of criteria, much as you have to today. The bank was also the first in the Republic to finance the loans from the international money markets and to lend through brokers, who are also very much a part of today's market.

Now it's part of a general throng of mortgage lenders, who use similar models, but it is continuing to perform well. In 2004, its new mortgage lending came to €2.2 billion. It was a key driver of the bank's after-tax profits of €88 million for the year.

That was a 23 per cent increase on the €71.7 million it posted in 2003. A once-off gain from the sale of its interest in First Active helped, but Mr Marah points out that excluding this still leaves IIB with €83 million or so, which is a 14 per cent advance on 2003.

Broadly speaking, mortgages accounted for one third of that figure, Mr Marah says. "If you look at overall profitability, it's about a third from our home loans business, about a third from our corporate lending business, and about a third from our other activities, which include private banking and treasury," he says.

IIB is not in general retail banking and, while it loans to the small and medium-sized enterprise (SME) sector, Mr Marah stresses that it is more interested in the "medium" element. It's also interested in deals that are neither small nor medium, but quite big.

For example, it co-funded last year's €1.1 billion purchase of Savoy Hotels in London by the Derek Quinlan-led Quinlan Private consortium. IIB provided about half that figure to fund the deal. It does not have an ongoing relationship with the property group. "Derek (Quinlan) does what he does, and if it meshes with what we do, then we do get involved," Mr Marah says.

"In so far as Irish customers are involved overseas, be they companies or individuals, we will work with them.

"We have a representation in most of the countries in western Europe and most of the countries in central Europe," he says.

"We will finance people and companies who want to invest overseas and we will source transactions there too."

IIB was also involved in another of last year's high-profile deals, the Quinn Group's acquisition of radiator and plastics group Barlo plc, which was originally the target of a management buyout led by its chief executive, Dr Tony Mullins.

In fact, it had an involvement in most of the bigger corporate deals and fundraising exercises in the Republic last year.

It arranged the funding for two of the three motorway public-private partnerships (PPPs) that finally got off the ground, the Dundalk and Fermoy by-passes.

IIB had access to expertise in this area through its parent company, Belgian bank, KBC, which, coincidentally, and long before the National Development Plan (NDP), set up a division in Dublin's International Financial Services Centre (IFSC), that specialises in financing infrastructure projects around the world.

KBC has been a shareholder since the 1970s, and bought it out completely in 1999. IIB is KBC, Mr Marah points out. That is going to be emphasised later this year when its founder and current chairman, Mr Patrick McEvoy, steps down. KBC's managing director, Mr Jan Van Hevel, will step into his shoes.

Mr Hevel, who has led KBC since 1996, is already on IIB's board. But it is not an indication that the parent wants to put the subsidiary on a tighter rein. Instead, Mr Marah describes the move as an endorsement of what the Irish bank has been doing.

Last year, KBC agreed to forego a €38 million dividend due to it and re-invest it in IIB. It has also waived its dividend this year, meaning that over the two years, the bank has grown its capital base by close to €160 million.

In addition, it is going to raise €100 million in subordinated debt, giving it an extra €250 million in total. The bank currently has €654 million capital employed. It is going to expand its presence on this island by opening a regional headquarters in Belfast. IIB has already hired a senior figure from Northern Bank, and is moving ahead with getting the necessary licensing from the UK's Financial Services Authority.

The logic behind this move is that Northern Ireland is beginning to show signs of strong growth. Mr Marah says that it is partly the peace dividend, and partly the fact that economic expansion in the Republic is beginning to make an impact north of the Border.

"If you look at employment growth in the course of 2004, it was below the growth in the Republic, which was 2.3 per cent," he says.

"They had a 1.8 per cent growth in Northern Ireland, in comparison with a European average of 0.5 per cent and a British growth rate of 1 per cent.

"You're looking at a growth rate that's 80 per cent above that of the UK and almost four times the European average."

Along with that, he points out that there has been a shift in the nature of employment in the North, with job numbers in traditional industries falling by 6 per cent and those in services and construction increasing by 8 per cent.

"It's very similar to what happened here in the recent past," he says.

If the North catches up with the Republic, IIB's move could prove shrewd. The growth in the Republic over the last 10 years led to a fivefold increase in the bank's profits. If it approaches this level of expansion in Belfast, it's highly unlikely that Mr Marah and his colleagues will be looking for someone in a building society to do them any favours.