Full text of statement by Irish Nationwide chairman Danny Kitchen, May 12th, 2009.
It is a matter of regret to me that on the first occasion on which I address you as Chairman of the Society I must report that 2008 was a very difficult and, as you will see from the financial results a very disappointing one for the Society.
Both in Ireland and elsewhere the collapse of property values has severely impacted on banks and financial institutions. This collapse in the markets in which Society operates has resulted in substantial provisions having to be made against the loan book and consequently the Society incurring substantial losses for the year.
The nature of the Society's commercial loan book is that the largest 100 customers represent approximately 60% of the loans and because of this concentration, both the Society and its auditors have been able to go through the provisioning process in a much more specific way than perhaps would be possible in other organisations. Consequently the Board feel that the provisions made do reflect a conservative approach, albeit certain assumptions have to be made in arriving at these figures. I would stress that these provisions do not represent loan write-offs despite what you may read in the press. They are the Society's view of the likelihood of default and an estimate of any potential shortfall in getting our money back. The borrowers, however remain obligated to repay 100% of the loan.
The Society is pursing a strategy which began at the end of 2007, predating the market collapse, of reducing the proportion of its assets relating to the commercial property sector. Clearly this is something which cannot take place overnight without damaging the value of those assets and the plan is to reduce the proportion of the commercial property loans to around 50% of the book by 2013. At the same time the Society is seeking to prudently expand its home mortgage business and in this regard, we are very much open for business for home buyers.
As you may have seen in the press this morning, the Society has raised a further €750m by issuing medium term notes under the Government Guarantee and I am pleased to say that we had over 40 European Institutions subscribing for these notes. I think that this demonstrates the Society's ability to raise any necessary funds to refinance notes due for redemption this year.
As many, if not all of you are aware the Society benefits from a Government Guarantee of its deposits and other liabilities and on behalf of the Board, I would like to thank both the Taoiseach and the Minister for Finance for their public support of the Society in recent weeks.
I also want to extend the Board's thanks and appreciation to the management and staff of the Society who since September have laboured under much increased Regulatory information requirements. It is remarkable that they have performed so well given the confidence sapping reports in the media over that time.
All, and I would stress all of the Irish Institutions covered by the State Guarantee rely on the continuing support of the Government for their future funding. Quite why certain elements of the media chose to sensationalise the Board's comments in this regard remains unclear to me as they are a statement of the obvious. This kind of reporting and indeed comments from some politicians who one would think should know better, undermines public confidence in our financial institutions and is extremely unhelpful in an already difficult situation. Yes, undoubtedly mistakes were made but my own view is that we need to put this behind us and get down to sorting out the problems. Recrimination will solve nothing
The deterioration of property markets associated with serious dislocation of international financial markets has produced an extremely challenging environment. Frankly I do not see any likelihood of improvement in the markets in which we operate in 2009.
2009 will be a difficult year and whilst it is impossible to predict an outcome for the year given the uncertainty out there, I would hope that the Society will produce better results than in 2008. Both the Board, management and staff will all be working hard to achieve this.
It would be wrong for me not to mention Michael Fingleton. I know some of you may have mixed feelings towards him but what cannot be denied is that in his 37 years of service, he took the Society from a minnow to the substantial financial institution it is to-day. He was focussed on maximising benefits for members and brought a shrewd eye to many of the business decisions made by the Society. None of us has a monopoly of wisdom and it is unfortunate that his retirement should coincide with the market turmoil we have seen over the last 18 months or so. The Board would like to wish Michael and his wife a happy and enjoyable retirement.
I will now move on to the high profile issues I mentioned at the beginning of the Meeting. As I said I will deal with each matter in turn and will ask for questions thereafter.
I would ask you to limit your contribution to asking questions relevant to that particular topic and to avoid making speeches. I believe in this way we can deal with the issues involved in a productive and time efficient manner.
Michael Fingleton's Bonus
Much has been written about this bonus little of which has been accurate.
The situation arose in early 2008 when the Board asked Michael Fingleton to remain as Chief Executive for another year despite his eligibility to retire. An agreement was reached in April 2008 that he would indeed stay on the basis that his total remuneration would be no less than that in 2007. Part of this remuneration was to be a bonus payment of €1m but this was not linked in any way to the performance of the Society in 2008. Rather it was by way of a bonus for the retention of his services. You should be aware that this, when agreed, became a contractual commitment of the Society.
In September 2008 the Government introduced the Guarantee Scheme and again there have been suggestions that the Society breached the terms of this Scheme by paying the €1m bonus in November 2008. This is not the case as has been confirmed to the Society by the opinion of Senior Counsel.
To Recap:
· In April 2008 the Society entered into a contractual commitment with Michael Fingleton
· The introduction of the Guarantee Scheme did not affect this contractual commitment and
· There was no breach of the Guarantee Scheme as has been confirmed by senior counsel.
Michael Fingleton's Pension Arrangements
Let me first apologise to you for the error which occurred in the accounts for 2007 which has caused this issue to re-surface. In note 31 of those accounts the information on the pension transfer was set out but a typographical error referred to "members" when it should have been "member", Mr. Fingleton, being the only member of that particular scheme. Like most people I enter the world of pensions with some trepidation as it can be difficult to both explain and indeed understand. However, I'll do my best to set out the position in as simple a way as possible.
Firstly the background:
Michael Fingleton worked for the Society for over 37 years and as part of his terms of his employment he had the provision of a defined benefit pension scheme.
This scheme changed in character over the years with the last revision being in 2005. Under the scheme he was entitled to a pension of 2/3rds of his pensionable remuneration. In my experience this multiple would be standard in most defined benefit schemes.
The Society, therefore, had an obligation to fund this future pension provision and made payments over the years into the fund. The fund invested these monies to enable it to pay the pension obligations when Mr. Fingleton retired.
In January 2007, Mr. Fingleton indicated that rather than draw the pension to which he was entitled and for which the fund had built up the necessary resources, he would prefer to transfer these resources to a private pension fund. This was allowed under revenue rules and the Society employed an independent actuary to calculate the size of a fund necessary to provide Mr. Fingleton with his pension entitlement had he chosen to draw this pension. This figure was €27.6m. As this was a lesser figure than the resources accumulated in the fund the Society received a rebate of the balance of €1.7m.
I hope you are all still with me!
So what was the impact on the Society of this transfer?
1. The obligation to pay the pension was removed
2. The Society got a rebate of €1.7.m from the fund.
It is important to bear in mind that if the transfer had not taken place and assuming the pension liability today was of similar size then the Society would have to make up in cash any shortfall from this value. By way of illustration had the fund held the same investment mix as at the transfer date the value based on current valuations would be almost €4m. This would mean the Society would have a cash liability to the fund of nearly €24m.
Loans to Mr. Fitzpatrick
I am sure that you will appreciate we all need to be circumspect in any discussion on this matter given the enquiries currently going on at Anglo Irish Bank. However, I will set before you the involvement of the Society in this matter.
Mr. Fitzpatrick had been borrowing from the Society for many years on a short term basis but it was only in 2007 that these amounts escalated to the figures you will no doubt have read about.
From the Society's perspective these loans were profitable, well secured and, in some instances were supported by Anglo Irish. In addition, part of the rationale was that by facilitating Mr. Fitzpatrick the Society could benefit from any syndication by Anglo Irish by building a business relationship with its Chairman/Chief Executive. However, no such syndication took place.
The Society, in line with its normal reporting procedures, informed the Regulator of this loan amongst others and at no time was any adverse comment received.
In summary, therefore I would contend that it was quite proper for the Society to lend to Mr. Fitzpatrick as the loans represented good profitable business. There was no reason to believe any impropriety was involved as Anglo Irish was aware and in some cases, party to the loan. The use to which Mr. Fitzpatrick put these loans is a matter between him and Anglo Irish. The Society has not and nor does it want any role in the matter whatsoever.
In hindsight it would perhaps have been better not to lend to Mr. Fitzpatrick as the Society has been dragged into the controversy surrounding these loans and undoubtedly suffered reputational damage as a result.