TOP 1000:Things looked decidedly safer a year ago; in 2009, the top five are far from comfortable

WHAT A difference a year can make. The last time this report was published, in June 2008, the top five financial firms in Ireland looked cosy at the top, despite the ongoing credit crunch. Since then, however, much has changed.

The collapse of Lehman Brothers last September led to chaos on the financial markets and turmoil among the top five. Depfa Bank (1), the largest financial institution in Ireland by asset size, and part of the German Hypo Real Estate Group (HREG), is on the verge of dissolution, while US investment bank Merrill Lynch (3) has had to be rescued by a merger with Bank of America.

Of the domestic banks, the once formidable Anglo Irish Bank (5) has since been nationalised, while both AIB (4) and Bank of Ireland (2) have been guaranteed and recapitalised by the Government – and the prospect of nationalisation remains a distinct possibility.

Depfa Bank, which lends to the public sector, ran into trouble when the short-term lending markets froze following Lehman Brothers’ demise, problems which led to its parent HREG being bailed out by the German government.

Whether the bank has a future remains to be seen.

Similarly, the prospects for Anglo Irish Bank, following its nationalisation, are uncertain. While the Government has committed to running the bank as a going concern, the coming year may see the bank start to be run down.

Both AIB and Bank of Ireland have yet to convince the market that they can survive independently, and with the Government’s stake in the banks rising with each recapitalisation, nationalisation may still be on the agenda.

In the meantime, share prices of both banks are a fraction of what they used to be, and over the past month Bank of Ireland has overtaken AIB in terms of the largest domestic bank by market capitalisation.

The banks also remain severely constricted in their lending ability, leading to severe cash-flow difficulties in the small- to medium-sized enterprise sector and reduced consumer lending.

In the short term, this situation is unlikely to ease until both banks’ bad assets are cleaned up, most likely by the National Asset Management Agency (Nama); required capital adequacy levels are restored; and investors’ confidence is returned. Whether this can be done without further Government intervention remains to be seen, but should be resolved over the coming year.

Among the other major domestic players, it is likely that we will see a “back to basics” approach as banks, which built up huge exposures to the property sector during the boom, return their focus to core areas.

Burnt from its foray into commercial property development, EBS (14) has already announced it will stick to its consumer driven business going forward, while Irish Life Permanent (7) is thought to be considering a restructuring of its business in order to maximise value in its life assurance operation.

ACC Bank (31), which is owned by Rabobank (17), is in the process of downsizing through the closure of 16 branches throughout the country.

The bank, which has a significant exposure to property, is set to focus on the agricultural and renewable energy sectors.

And while speculation has raged since September that consolidation is imminent in the Irish financial sector, with a host of possible mergers touted, it is likely that by this time next year the number of players in the Irish market will have declined.

One possible move might be the creation of a “super mutual”, through a merger of part of Irish Life Permanent with EBS and the beleaguered Irish Nationwide (23).

Another likely change on next year’s list is whether Nama, which is being set up to manage the impaired assets of the domestic banks, will be included. With an estimated €70 billion in bad debts to be transferred to the agency, it might make the top 10, but that will all depend on the value put on the loans.

Like the domestic sector, IFSC banks have also been rocked by the global credit crunch. In the year to March 2009, assets among international banks based in Ireland fell by more than a quarter, while the financial crisis has thrown the business models of many of the banks into turmoil.

Many Irish-based international banks have developed expertise in securitisation, either through structuring, administering or investing in asset-backed securities.

However, as this financial technique played a large part in the collapse of the US sub-prime market and the resulting global turmoil, its future looks uncertain. Already, institutions such as Structured Credit Company and Sachsen LB have collapsed.

But, despite the gloom, there may also be opportunities in the current crisis, with Dublin being mooted as a possible location for German “bad banks”, set up to help the country restore stability to its banking system.

Also, some banks have seen significant growth in their asset bases over the past year. Bucking the trend are Citibank (25), which almost doubled its assets during the year, Scotiabank (19), which grew its assets by 27 per cent in 2008, and Intesa Sanpaolo Bank Ireland (11), which expanded its asset base by 17 per cent.

Insurance firms have also suffered over the past year. As equities plunged around the world, life assurers were hit hard by declining values, as well as by the reputational damage caused by the financial crisis.

Hibernian Aviva (32) saw a 22 per cent drop in its assets as it slid down the rankings, while one of the world’s largest insurers, AIG (51), ran into difficulties and had to be bailed out by the US government.

Policy holders in Irish Life (10) were also affected by the global crisis when Lehman Brothers, which provided the capital guarantees on a number of the Irish company’s investment products, collapsed.

Companies operating in the cross-border market also suffered from the downturn. Italy is one of the largest markets for Irish-based companies such as Eurizon (22) and Mediolanum International Life (46) to sell into, but it is estimated that the volume of this business more than halved during 2008.

Companies targeting the UK market from Ireland also suffered. In 2005, The Hartford Life, one of the US’s largest life firms, set up its European headquarters in Swords, Co Dublin, to sell life products into the UK market.

It also had plans to roll out its products into Germany, but last month it was announced that it would suspend sales in the UK and “re-size” its Dublin operation, which employs over 180 people.

While the business environment should improve somewhat as equities stage some sort of rally, it will remain very challenging.

Life firms will most likely suffer as future sales of tracker bonds are hit as a result of the Lehman Brothers controversy, while many consumers are also running scared from general equity-based products due to the collapse in values they have experienced over the past year.