Business

Sunday 18 November 2018

Duffy's return

Scourge of Irish banking is back with his new Nama-like asset management company

Just six months after he stepped down as Bank of Scotland (Ireland) (BoSI) boss, Mark Duffy is back. His new company, Asset Resolution Corporation, aims to do for the foreign-owned banks what NAMA is doing for the Irish-owned banks.

When he retired from BoSI last April, after 16 years in charge, it seemed as if Duffy's 28-year career in Irish banking was over.

And what a career it was. After joining the state-owned ICC Bank in 1981 as a graduate trainee, he moved to venture capital company 3i two years later, before joining Anglo Irish Bank in 1987.

He spent five years at Anglo before joining the then-Equity Bank as chief executive in 1992. At the age of just 32, he was by far the youngest chief executive of any Irish bank.

It sounds better than it was. Equity Bank was one of the last of the micro-banks which were a feature of the Irish financial landscape from the 1960s through to the early 1990s.

When joining Equity, Duffy and a number of his colleagues cut themselves a sweet deal, securing a significant stake in the bank.

When Equity Bank was bought by Bank of Scotland in 1999, this stake translated into a 5pc shareholding in Bank of Scotland (Ireland). When the shareholding was eventually bought out in 2002, Duffy shared in an estimated €33m payout.

The acquisition of Equity by Bank of Scotland suddenly transformed Duffy's outfit from an extra into a leading player.

Deal

The ink was barely dry on the deal when Duffy announced that BoSI was going to charge just 1pc over ECB rates for its mortgages, only half the margin the Irish banks had enjoyed on home loans up to then.

In the cosy world of Irish banking, this just wasn't done. Duffy's move caused consternation, with all of the other lenders queuing up to declare that they wouldn't be following BoSI's example, and that sure it wouldn't catch on anyway.

Indeed one bank chief executive famously declared that he wouldn't be losing any sleep as a result of Duffy's move to slash mortgage margins.

He may not have lost any sleep but the same gentleman lost his job shortly afterwards. As more and more of their customers threatened to walk, all of the other banks were eventually forced to follow BoSI's example.

His success in smashing the Irish mortgage cartel firmly established Duffy's position in the ranks of Irish banking's awkward squad.

Two years later, BoSI paid €275m for Duffy's former employer ICC. This transformed BoSI into one of the leading business banks. ICC was to be BoSI's last Irish acquisition.

As the booming Celtic Tiger pushed the price of Irish financial assets to ridiculous heights, Duffy wisely resisted the temptation to pay over the odds.

However, despite its success in the mortgage business, BoSI remained primarily a business bank. If it wanted to get big in retail it needed a branch network.

However, instead of buying someone else's branches for a huge premium, Duffy did something completely different. In 2005, he paid the ESB €120m for its chain of electrical goods shops in 2005 and turned them into BoSI retail branches.

Branches

It now has 41 branches, which were rebranded Halifax, Bank of Scotland's main UK retail brand, in 2006.

While Duffy may have resisted the temptation to splurge on a big trophy acquisition, he did grow BoSI's loan book from just €5.3bn at the end of 2001 to €32.1bn by the end of 2008, a more than six-fold increase in just seven years.

Although this expansion was initially profitable, BoSI, along with all of the other banks lending in Ireland, was badly hit when the bubble economy finally burst last year.

It recorded losses of €250m in 2008 after writing off more than €550m in bad debts.

Just to make matters worse, Bank of Scotland came unstuck in the UK.

It almost failed in September 2008 and was only rescued by a shotgun marriage to Lloyds. Even that wasn't enough as the British government had to pump over £17bn into the enlarged bank and take a 43pc stake.

Lloyds, in turn, has had to inject more than €1.4bn into its Irish subsidiary.

However, BoSI insists that Duffy's departure was unconnected with these developments. Duffy himself has said that he had wanted to leave the bank since the beginning of 2008 and was twice asked to stay on by his employers.

He was also the strongest external candidate to succeed Brian Goggin as Bank of Ireland chief executive, a job that eventually went to insider Richie Boucher.

And now, just six months after he stepped down from BoSI, Mark Duffy, the scourge of the Irish banks, is back. He has teamed up with tax adviser Kevin Warren to set up the Asset Resolution Corporation (ARC).

ARC claims to have up to €3bn available to buy the distressed Irish assets of the foreign-owned banks such as Ulster Bank, NIB, ACC and of course BoSI, which don't qualify for NAMA.

Between them, the foreign-owned banks have somewhere in the region of €61bn of Irish property-related loans.

With most of the foreign-owned banks planning to either dramatically shrink their Irish loan books or exit the Irish market altogether, there should be plenty of rich pickings for Messrs Duffy and Warren.

ARC could also have other major implications.

One of the main arguments used to justify the price being paid by NAMA for the bad loans of the Irish-owned banks is that there is now no market for Irish property and that any valuation mechanism will of necessity have to largely rely on educated guesswork.

The arrival of private buyers of distressed bank loans, such as ARC, helps to create that market.

Suddenly NAMA will no longer be able to hide behind the absence of a functioning market as a defence if it overpays for the banks' bad loans. If it does, its critics will be able to point to the price being paid by companies such as ARC for similar assets.

This has the potential to save the Irish taxpayer billions of euro.

The new company also calls into question NAMA's monopoly on the purchase of distressed assets from the Irish-owned banks.

Why should ARC, and the other companies which are likely to follow it into the Irish market if it is successful, be restricted to buying the distressed assets of the foreign-owned banks?

What's wrong with letting NAMA compete with these private-sector players to buy the bad loans of the Irish-owned banks?

How will the willingness of companies such as ARC to enter the market for the distressed assets of Irish-based banks play in Brussels?

Will the EU rubber-stamp NAMA's exclusive right to buy the bad loans of the Irish-owned banks or will it insist on allowing competitors enter the market?

That Duffy's venture has raised all of these awkward questions before ARC has spent a single red cent on a bad loan, fully restores him to his previous position of bete noire of the Irish banking system, something which he will relish.

All he has to do now is to deliver. Taxpayers everywhere should be hoping that he does.

Irish Independent

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