Policy of disposal just makes banks weaker
OPINION:Only in Ireland would banks seek to sell profitable foreign assets to shore up their continuing domestic losses, writes BRIAN LUCEY
THE LAST number of weeks has seen major change continue in the landscape of Irish banking. We have seen the continuation of the worrying trend towards lower competition, with Postbank following other non-Irish banks and winding up its retail banking operations. While it is a fundamental requirement that the banks rebuild their balance sheets, it is only now dawning on many that, in the absence of significant competition, this may well arise in large part from increased charges and profits from Irish operations.
This probability is increased by a Gadarene rush towards a policy whereby the main banks sell off profit-making, usually overseas, operations using the funds thereby generated to avoid State involvement in recapitalisation. In most rational business environments, organisations sell the unprofitable parts of the business and invest the funds in further expanding their profitable and growing areas – but Ireland, as we know, is different.
Selling the external, profitable parts of the banks may give a short-term boost to share values by reducing the dilution inherent in the State recapitalisation, but it is folly in the long term.
Apart from the consequent loss of value that ensues from the disposal of these assets, we will be left with banks that are weaker than now, being concentrated entirely in and on Ireland rather than being inherently multinational and thus possessed of inbuilt diversification. They will be less attractive to anyone – investor, customer or State. But at least the management and boards will remain entrenched . . .
That brave new Ireland for retail banking customers will see the banks take every opportunity to squeeze funds from transactions, and to push customers towards the highest margin product. That is as it should be, but with absent competition the customer faces higher charges, higher barriers and less choice in regard to switching, and a more dismissive attitude.
A recent experience of mine in the USA exemplifies this: since 2009, Bank of Ireland has had an apparent policy of limiting cash withdrawals on debit cards to what in practice amounts to an arbitrary sum. Needless to say they have not formally stated this policy exists.
While it is perhaps not problematic in the EU where one can use a debit card in most transactions, elsewhere one is forced to use either expensive credit cards or extremely expensive cash from credit cards.
That was my experience, but Bank of Ireland was singularly unable or unwilling to provide a coherent rationale as to why this limit existed, its duration, its scope or its action. It was hard not to conclude in my discussions that they were perfectly happy to allow people to use expensive credit cards, and why would they not be so?
The emergent vision of Irish banking, the fruit of banker delusion (the banks are fine, really . . . ) and Government disingenuity (Nama will work/is cheap/will get credit flowing . . .), is one where the retail landscape is dominated by a couple, or three, domestically focused banks; where these banks have sold off all non-Irish (ie all productive and profitable) assets; where this has been encouraged to allow State involvement from recapitalisation to be minimised; where, as a consequence, the banks are just about viable and just about above regulatory minimums in capital ratios; where they are forced to squeeze charges and margins in Ireland to satisfy even the most passive shareholders; where customer service and responsiveness is minimised; where zombie banks with zombie boards entrenched by a zombie State stalk the land preying on the remnants of commercial activity. And all unnecessary.
There is an alternative to the present emergent plan. A healthy, vibrant banking sector is crucial to the re-emergence of a healthy, vibrant economy. A healthy banking sector is one that embraces and engages in international competition, is one that values customers, that provides a decent return to shareholders, and is appropriately regulated to ensure that credit boom/bust cycles are minimised.
The first stage is that we need to move to a realistic recognition of losses. The recently revealed figures can only have been written by Pollyanna. Despite admitting that it expects a 30-per-cent-plus discount on assets to be transferred to Nama, AIB actual booked provisions less than half that. Expect much the same to come from the other banks.
Despite report after report emerging from liquidators, courts and other sources that losses on commercial property portfolios of 50 per cent are not unusual, the delusions persist that somehow banks can absorb the losses over time and remain as they are. This is folly. The losses are such that banks are bust when they reveal the total losses, and will need massive recapitalisation. But selling off profitable assets will hardly attract private capital to the remnants.
Of the €77 billion loans to be transferred to Nama, in exchange for €54 billion in State debt, it is doubtful in my long-held opinion if more than €30-€35 billion will ever be recovered. This means the banks will face a hole of more than €40 billion. That loss should be recognised, and soon. Subordinated debt in the banks amounts to some €10 billion plus, and should be the first to absorb these losses.
However, under the guarantee, the subordinated debt holders are immune from market reality and can reasonably refuse to either engage in debt-equity swaps initiated by the banks or to face fully the consequences of capitalism. The State must make it absolutely clear that the guarantee expiry in October 2010 will remove this comfort blanket. It is not unreasonable to expect €7 billion plus of the losses to be then absorbed by the banks’ subordinated debt holders.
The remainder will have to come from two sources – from the national pension reserve fund (which may necessitate legal changes), and from immediate trade sales of one-quarter to one-third of the banks to international purchasers. Cleaned, well-capitalised, diversified banks will be attractive to purchasers.
Reorganisation may well involve creation of a third force, but it must be recognised that neither Anglo nor Irish Nationwide Building Society have any future as banks – a wind-down schedule and costs must be published. The State also needs to put in place a resolution regime for failing banks. The lack of one resulted in the precipitate guarantee which has become an albatross for the State in terms of moving forward any coherent strategy on the banks.
Overall, this would leave the State with a new investment of some €25 billion or more, cheaper than Nama as planned. But that would result in healthy banks and a healthy banking system.
Brian Lucey is professor of banking at Trinity College Dublin