Thursday 20 July 2017

New BoI chief McDonagh faces real Brexit and branch challenges

New BoI chief Francesca McDonagh
New BoI chief Francesca McDonagh
Richard Curran

Richard Curran

Outgoing Bank of Ireland chief executive Richie Boucher hands over the reins to Francesca McDonagh in October, with the bank in a far better state than when he took over back in 2009.

With mortgage lending up 30pc in the first quarter, profits of over €1bn, a much healthier looking balance sheet with fewer non-performing loans and the economy growing at 3pc plus per year, it should be plain sailing for the new CEO. Right? Wrong.

Pre-tax profits last year were down 16pc, partially on the back of a weaker sterling. Around 40pc of the Bank of Ireland loan book is in the UK. The uncertainties that come with Brexit will pose a real challenge.

Equally, the bank is increasingly dependent on growth in the mortgage market at home to deliver higher profits. But that little apple cart could be upset by rising interest rates, which will come in time.

In fact, the person warning the most about the negative impact higher interest rates could have on Ireland's mortgage market is Boucher himself. He recently cautioned that the market was "highly vulnerable" to an increase in interest rates.

McDonagh seems eminently qualified for the task at hand. She is very familiar with the British mortgage market, which is important for Bank of Ireland. She also has strong experience in investing in digital platforms, something which Bank of Ireland is about to ramp up. However, at HSBC, where she runs the retail bank and wealth management operations for Europe, greater use of digital banking has prompted a fairly serious cull of bank branches.

The bank signalled the end of its branch closure programme in January, when it announced that a further 62 would go. This will bring to 340 the number of branches that have been shut since the start of 2016.

HSBC will be left with 625 branches by the end of this year, having more than halved its high street presence since 2011.

Digital success leads to branch closures. What might this mean for the Bank of Ireland branch network further down the road?

Competition in the banking sector in Ireland was decimated by the crash. But the one area where there remains some level of competitive pressure is in mortgage lending. Rating agency Fitch recently noted that the country's biggest banks will come under increased competition as the economy recovers.

They will all have to spend a lot of money on their transitions to digital banking.

And there is, of course, Brexit.

McDonagh is clearly used to operating in fast-changing competitive markets. Bank of Ireland has come a long way since the dark days of recession, but its momentum - and its share price - may be getting a little stuck.

O'Leary's latest connections will put the boot into Alitalia

Ryanair may have decided to get all "touchy feely" and nice a couple of years ago, but chief executive Michael O'Leary hasn't lost the ability to stick the boot in when he smells weakness in a competitor.

Investors find it an endearing quality.

O'Leary has talked about Ryanair making the move over to booking connecting flights on its platform for some time. During the week he announced that a trial of the process would begin in Italy, through Rome's Fiumicino Airport.

Passengers can book connecting flights through the Ryanair site to 10 other destinations instead of its traditional point-to-point approach.

Alitalia has been given a digout by the Italian state following bankruptcy, partially due to the rate at which Ryanair has been mopping up Italian business.

Ryanair will have 20pc of Italy's international market this summer, while Alitalia will have just 8.6pc. Alitalia remains king on domestic flights, however, by ensuring it has a monopoly on 10 of the 15 biggest domestic routes.

Ryanair has 'Fortress Germany' in its sights where Lufthansa still has 27pc international capacity from German airports but it may prove more difficult to crack than Italy was.

Ryanair said it plans to roll out the forward connections facility further across its network assuming it is successful in Rome. This might just be the beginning of a significant new sales vehicle as it remains in talks with Aer Lingus and Norwegian.

The initiative is another new departure for the airline which has been open to doing things differently in recent years - as long as they don't cost too much money.

Ryanair shares hit a fresh all-time high last Monday of €17.22. Some plane spotters have switched observing twin props, to spotting the rise in the value of Michael O'Leary's stake in the airline.

Last Monday it was worth €883m.

Statistically speaking, insurance customers paying too high a price

Fianna Fail finance spokesman Michael McGrath highlighted a lack of progress in resolving the issue of high motor insurance premiums during the week.

In discussions around a Dail private members' motion, McGrath said that too many insurance claims were being solved outside of court and in private.

These out-of-court settlements appear to be driving higher payouts. McGrath's logic here is that uncertainty around what sort of ruling courts will give, is driving insurance companies to reach deals early.

Greater certainty around awards would, according to McGrath, reduce overall payouts and therefore reduce premiums.

Not that long ago, it was widely believed that insurance companies were reluctant to disclose the value of out-of-court settlements in a single database because they didn't want anybody to know how low they were.

If true, it would have undermined the insurance industry arguments about the justification for higher premiums.

Now the assumption appears to be that these settlements are too high and legal uncertainties are contributing to higher premiums. Either way, the insurance industry is quite dysfunctional. Premiums have gone up by 60pc in recent years. Insurers are blaming the courts and scammers for large claims and therefore higher premiums. The legal profession is blaming the insurers.

The Government wants more information and transparency, a full 20 years after the Motor Injury Assessment Board first looked into it.

But could technology advances and new risk profiling have a part to play also?

Zurich Insurance chairman Tom de Swann told Reuters during the week that his firm was using artificial intelligence in deciding personal injury claims, with trials having cut the processing time to just seconds.

This kind of turbo automation is not to the benefit of many insurance customers. For example, if the statistics show that more accidents are happening with older cars, it doesn't follow that the age of the car is the cause of the accident.

Motor insurance fraudsters are more likely to use older cars because they are cheaper and the set-up costs of the "scam" are lower. Younger drivers, who cannot afford newer cars, partially because insurance costs are so high, tend to use older cars. They also tend to have more accidents.

A statistics only approach, would dictate that older cars are therefore higher risk. But that penalises older drivers of older cars, who pose a very low risk.

Zurich is even using machines to review paperwork, such as medical reports.

No wonder insurance pricing remains a complete mystery to many of us.

Artificial Intelligence may have its uses but statistics and data never give us the whole story.

Remember, if you are lying down with your head in a freezer and your feet in an oven - statistically speaking you are comfortable.

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