Emmet Oliver: IL&P shows how long it will take to get back to 'normal' banking
Published 01/09/2011 | 05:00
While the economy is gradually adjusting to the cost of the bank rescues, the sheer length of time it is going to take to rehabilitate the banks is still not fully appreciated.
This is illustrated in one line in this week's financial statements, for the half-year, from Irish Life & Permanent (IL&P).
In those results the company reveals it has submitted a restructuring plan to the European Commission for Permanent TSB, in which it envisages returning to normal levels of leverage, but not until 2015.
Mercifully the bank says by then it will be able to manage a loan-to-deposit ratio (ie, loans divided by deposits) of 122pc -- essentially the kind of safe level adopted by most mainstream lenders.
It is, of course, sensible for the bank to move to this level gradually, but the fact that it needs a four-year time horizon to achieve this metric highlights the extraordinary damage done to this institution by the previous management team, headed up by Denis Casey as chief executive and chairwoman Gillian Bowler.
Over the four years the bank will have to sell assets, slow lending and grow deposits in a shrinking economy in order to fulfil these targets. The road will be painful, but also very long.
One must remember that Irish Life & Permanent began trying to deleverage (by reducing its ratio of loans to deposits) back in 2008, so based on its latest projections for returning to banking normality, this lender needs an extraordinary seven years to get back to what is regarded as a prudent relationship between deposits and loans.
The scale of this task, being taken on at present by IL&P chief executive Kevin Murphy, is enormous and even when the bank gets there it has very modest ambitions.
For example, it only expects an interest margin of 1pc when its fortunes are restored. This is well below what lenders in other markets are setting as long-term targets (Lloyds Banking Group recently set itself a target of 2.3pc)
While the company is slowly finding itself able to access non-deposit funding again, whoever owns IL&P (and more importantly its banking arm Permanent TSB) in future will surely never let the company find itself in a position where it is loaning out almost €3 to customers while only holding €1 on deposit (the position at the end of 2008).
Thankfully, IL&P is not the Irish banking system. The system itself is healing a little faster.
ECB data shows that Ireland's collective loan-to-deposit ratio (a proxy for reliance on wholesale funding) is about 150pc, with countries like Denmark and Sweden cranking up the leverage a lot more than us.
But what the latest figures from Permanent TSB remind us is that cleaning up the mess is expensive in euro terms, but also expensive in time terms.
Pension issue comes back to haunt Mueller
Those buying Aer Lingus tickets could be forgiven for being as nervous as those buying their stock these days if one looks at the scale of the airline's pension deficit.
At €400m, the hole in the Irish Airlines Superannuation Scheme is bigger than the entire market value of the carrier. It even dwarfs the airline's renowned net cash position of €358m. Christophe Mueller, appointed in July 2009, must be cursing the emergence of such a problem now.
Against a catastrophic economic downturn, he has managed to grow revenues at the airline by 6pc since his appointment.
While hardly runaway top-line growth, to keep the airline expanding passenger revenues at all has been an achievement, although shareholders, among them Ryanair, would prefer to see more cost reductions.
While Mr Mueller states that legally there is no obligation on him to increase the airline's contributions into the scheme, his employees are likely to see things differently.
Based on historical precedent, it is likely the pension deficit will be the next industrial relations battleground, and that could make shareholders and customers nervous -- a risk the airline itself refers to in its latest numbers.
The Aer Lingus pension issue has bedevilled many of Mr Mueller's predecessors and an astonishing €104m was ploughed into the scheme four year ago using proceeds of the airline's IPO -- ie, public money.
That action by then CEO Dermot Mannion was supposed to neutralise the issue, but didn't.
Now the deficit issue is back again and Mr Mueller will be expected to hold the line as the carrier is already making an €18m contribution to the scheme annually.
With confrontation in the air, the possibility of the Government exiting the carrier at any decent kind of valuation (a step recommended by economist Colm McCarthy) becomes ever more distant.
Mortgage debt - too important to be left just to banks
Would you trust the Irish banks with €24bn of capital to play with? After private shareholders foolishly trusted the banks during the later boom years, it appears that Minister for Finance, Michael Noonan, is now prepared to do the same over mortgage debt.
With losses on mortgages of €9.4bn already pencilled in over the next three years alone, Noonan appears to be simply saying to the banks, you are going to lose this money, so now go and lose it.
Mortgage losses is a nicer phrase than mortgage forgiveness. But having injected €24bn into the stricken financial system here (with a little help from burned bondholders) is it not appropriate to take a closer look at how the capital will be deployed?
If the banks are instructed to write down mortgages in a small number of cases, or to imaginatively find ways to slim down the negative equity portion of mortgage loans, it must be done in some kind of public way.
Shareholders must have a say in how their capital is to be used and for the Irish financial system this means the government in most cases.
As a result a residential mortgage board, where decisions good and bad are flushed out from behind closed doors, will be essential.
A huge chunk of the population is nauseated at the idea of anyone having their mortgage obligations reduced using public money, but if it is to be done, it must be done properly and in the open.