Tuesday 27 September 2016

BoI's own board knows our banks are in trouble

Shane Ross

Published 30/03/2014 | 02:30

Mario Draghi, President of the European Central Bank,
Mario Draghi, President of the European Central Bank,
UCD economist Morgan Kelly

BULLY for the bogeymen. Bogeyman One, Mario Draghi, has dropped a bombshell into Enda Kenny's lap. Last week the boss of the European Central Bank (ECB) chose an unusual vehicle for his warning.

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He wrote a letter to Ireland's opposition spokesman on Finance, Michael McGrath, suggesting that all was not well with the banks here. Music to Michael's ears maybe, but toxic to the Taoiseach.

Not surprisingly, McGrath took advantage of the letter he received from Draghi to rattle his sabre at the Government. His response fell on deaf ears. Nobody wants to hear the words of warning. Draghi is shaping up to spoil our premature recovery celebrations.

Perhaps Mario Draghi is a party pooper? But if the Delphic words of the Central Banker are decoded they are chilling. He wrote of "issues" (Central Bank-speak for big problems). He subtly rubbished our Central Bank's recent balance sheet assessments because they were "not forward-looking and did not include a stringent stress test". That little treat is on the way later this year. Is Ireland prepared? Mario does not believe so.

Bogeyman Mario even made a veiled threat Central Bank-style, emphasising that Ireland had received "a quite extraordinary" level of support from the Eurosystem and that we still "continue to benefit" from this lifeline. His dark message was a country mile away from the regular plaudits about the Irish economic renaissance pouring in from other overseas bigwigs.

Mario's letter to Michael followed hot on the heels of a similar assessment from ratings agency Moodys. The agency did not mince its words. It insisted that the outlook for Irish banks remained "negative" as bad debts account for 30 per cent of banks' loan books. It warned of losses to creditors as a result of the looming stress tests. It forecast that there may be shortfalls in banks' capital and that the taxpayer could be clobbered again. Moodys declared: "Ireland has among the worst loan metrics in Western Europe."

The "Western European" reference was ominous – because the stress tests will be pan-European. If we are among the worst in the targeted group, we are heading for a fall at the autumn hurdle.

Unlike last time, these stress tests will be strict. They are a prerequisite to the arrival of the new Single Supervisory Mechanism (SSM). If Europe's new regulator is to be taken seriously, the stress tests must reassure external investors that Europe's banks have been restored to good health. It is essential that a significant number of European banks fail the tests if the creditworthiness of others is to be recognised.

AIB, Bank of Ireland and Permanent TSB are in the danger zone. So are a few German landesbanks.

What would be more politically convenient for a new European regulator if Ireland was the worst performer in the stress tests? A small country on the periphery would be judged a leading laggard. The embarrassment of rumbling a big German or French bank would be avoided. Ireland would be forced to recapitalise again.

Suddenly, the gloomy banking thesis put forward barely three weeks ago by Bogeyman Two, UCD economics professor Morgan Kelly, is looking plausible. It was ignored in Leinster House and silently ridiculed in the corridors of Merrion Street and Dame Street. But is Europe, as bogeyman Morgan maintained, preparing to make an example of our errant banks?

Not so, says Michael Noonan, Minister for Finance. Not so, says Enda Kenny. Not so, says Central Bank governor Patrick Honohan. All in unison.

Bold defenders, especially as none of the trio yet has a clue what criteria will be set by the tests. The only man with an inkling is the increasingly awkward Mario.

Surprisingly, Mario's message to Michael did not receive saturation column inches in Ireland. The consensus here remains: those suggesting that, come November, the banks will need more funds are unpatriotic Jonahs. They should stay silent.

The non-believers are refusing to bow to the national imperative of publishing "positive" news. The mainstream media, even most politicians, are timid on the topic, sensitive to the accusation of wishing disaster on the fortunes of the State so that they can personally benefit from the consequent political disaster.

Yet the message of caution is beginning to spread abroad. On Monday the Wall Street Journal carried Draghi's warnings. The recapitalisation bogey is reaching other influential readers overseas, even if it is not being given enough oxygen at home.

Elsewhere, scepticism about the true health of the banks is silently surfacing on the stock markets. In recent weeks, AIB shares have dropped from 17c to below 14c (-18 per cent) while Bank of Ireland stock has suffered an even steeper fall. On Friday, Bank of Ireland was down at 29c, having dropped 26 per cent from its level just three weeks ago.

Some canny investors, most notably speculator and BoI director Wilbur Ross, had spotted the rot and taken nearly a third of his own chips off the table.

The annual report of Bank of Ireland released last week let the cat out of the bag. Indeed, buried deep in the 436-page volume was one highly significant item. Listed on page 163 were Wilbur's fellow directors' shareholdings. He is not the only director shunning the shares. It is a board stuffed with non-believers.

Never before in the history of Irish banking have such shrewd board members so blatantly refused to back the optimistic words in their own report with their personal riches.

The board of the Bank of Ireland does not believe the bull that they peddle to shareholders, the blurb in the annual report aimed at encouraging less prescient investors to pour more cash into the shares.

Listen to the bull. Chief executive Richie Boucher is brazen: "We are confident in the group's prospects and in our ability to deliver sustainable returns for our shareholders."

So how many shares did Richie buy out of his €843,000 annual package in 2013?

Not a sausage.

Shrewd guy, Richie. His salary goes elsewhere.

The hapless BoI governor Alfie Kane – whose appointment to the job still stuns analysts – is almost euphoric. His claim in the report that "our progress has been endorsed by the international markets which have demonstrated a significant appetite for our equity and debt issuance" was a trifle untimely after last week's share price tumble.

Despite his brave words that "we are well positioned to support our customers and to deliver sustainable returns for our shareholders", Alfie failed to buy a single BoI share in 2013.

He is happy not to risk a red cent above his current pitiful holding – worth €3,211 at Friday's levels!

Alfie is filthy rich. He earns €394,000 a year as governor. He has a consultancy deal with BoI for an extra €59,000 and an accommodation, utilities and car allowance of €37,000.

But there are no flies on Alfie: €3,211 is sufficient to spend on BoI shares. Hardly in keeping with his concluding paragraph headed "confidence in the future".

The other directors follow the same pattern. With one exception – new director Brad Martin – they all squatted on their mostly paltry holdings in 2013. None of them swallowed the apple pie being served up by Boucher and Kane. They know that the stress tests are on the way. They know that fellow director Wilbur Ross dumped a third of his shares on the market at 32c and that he still has a huge bundle to unload. They know too that Michael Noonan, Enda Kenny, Alfie Kane and Richie Boucher are mouthing inanities about the coming stress test hurdle.

Instead, they are voting with their pockets. They are silent disciples of the Mario, Moodys and Morgan camps.

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