Farm Ireland

Tuesday 20 March 2018

Bank exits won't lead to Credit Crunch but beware of rising costs of banking

Donal O'Donovan

Donal O'Donovan

A CREDIT crunch in the agriculture sector is unlikely despite the loss of two serious players in the farming scene. However, the flight of Danske Bank and ACC bank does point to higher costs for customers down the line.

The good news is that the shutting of the two banks won't create anything like the fall-out that hit hotels when Bank of Scotland (Ireland) (BoSI) pulled the plug in 2010 for example.

Hotels were badly hit by the loss of BoSI but there are big differences for agriculture this time around.

In 2010, many hoteliers were looking to roll over loans drawn down during the boom, and knocking on the doors of banks that had little or nothing to lend.

This time around the longer-term loans being sought by farmers, especially in the dairy sector, are targeted at expansion.

However, more importantly, the main banks have cash to lend at the moment.

The loss of ACC Bank and Danske Bank will undoubtedly cause disruption for thousands of their farm customers.

They could do without the hassle of switching accounts, arranging new overdraft facilities – always easier when they are not needed – and having to build new bank relationships.

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But there are banks open to them and quiet willing to lend to farmers.

The so-called pillar banks are under orders to lend €4bn each to small- and medium-sized enterprises (SMEs) this year, including to farmers.

There will be new targets in 2014.


Bank of Ireland reckons it is writing half of all new lending to farmers. AIB is not far behind. Both have marketing campaigns running, aimed at winning more farm customers.

Still, it is the concentration of business in fewer banks that will raise concerns.

Margins at the banks are ultra-tight. Compare the price banks pay for cash from depositors and what they get to lend and no mainstream bank is making even a 2pc margin.

Much historic lending cannot be re-priced.

Profitability will have to be squeezed out of new customers and new activities. With less competition, borrowing costs will continue creeping up, but watch out too as banks seek to shift more and more of their business model towards fees – upfront arranging fees for loans, and regular bank charges and penalties will all be part of that mix.

On that score its worth shopping around for individual services.

On the debt side, as always the question of whether you can borrow should always be secondary to whether you should.

Margins and prospects probably mean capital investment loans are most relevant for dairy farmers.

Irish grass is cheap to produce and the global market is about to open up.

Against that, Irish farmers already face high fixed overheads – in the form of meeting stringent environmental regulations, for example.

Borrowing costs are a fixed overhead too, interest rates and bank charges might vary over time but nothing compared to the volatility of commodities.

The bank will always want its money, no matter what happens to reduce or delay farmer payments.

Irish Independent