Thursday 23 November 2017

Banks now a feast for the world's vultures

Foreign megabanks might be shopping around our crippled banks next year, writes Roisin Burke

NO Irish-owned banks by 2014? Like prisoners on parole, they are forced to report regularly to the authorities, in the form of the ECB, IMF and EU. They have to shrink down, shape up, meet targets and give a good account for their plans of action by February next.

Some, like Anglo, almost certainly won't survive. Others will dramatically change in scale and function.

Already in the vice-grip of the EU/IMF thanks to the bailout, the future of Irish banking may land in international hands, according to some observers.

"Foreign megabanks could own Irish banking" -- John Reynolds, CEO, KBC

"The future banks in Ireland may be foreign owned," Reynolds speculates.

"My hunch is that after a period of settling down and achieving a better profile, an outside bank that sees the virtue of being part of the recovery story could come on the scene.

"Once things settle, by 2013/14, value in our banks will emerge and attract buyers. Maybe the megabanks like Santander or HSBC, or maybe a medium-sized player.

"After the shake-down, Bank of Ireland and AIB will still exist in some form and will have a lot going for them," Reynolds contends. "There's a market of 4.5 million people and a good living to be made here. They have good customers, a very valuable infrastructure -- these facts are being lost in the current climate of negativity.

"Bank of Ireland and AIB have something very valuable. Their customers are both highly loyal, and highly stuck, in this climate. To say there's nothing interesting there (for a buyer) is to miss elements.

"At the moment, you have the two big Irish monoliths, Bank of Ireland and AIB. Like Everest, they're there, and both will be present and active in a future market. Then you have KBC, NIB and Ulster. Each of us is a substantial bank with medium prospects in Ireland.

"There won't be acquisition just at this point. Most foreign entities are public companies and they won't be wading into Ireland straight away post IMF. It's not perfect timing yet, you need time for terra firma. But after the blame and indignation, maybe in a year's time, it will be time for an enlightened investor.

"It's most unusual for me to talk up Bank of Ireland and AIB, and there are a lot of issues, but while Anglo is a disgrace and should be shut down, Bank of Ireland is doing a decent job and intervention at AIB will improve things. We own them, we've got to make them work, not do them down, to enable them to develop a reputation."

What lies beneath? Ciaran Callaghan, banking analyst, NCB stockbrokers

Others, like Callaghan, think more bodies buried in the banking sector cellar in the form of massive mortgage or SME loan impairments is an issue.

"The market is afraid of what risks and loan losses might remain," he says. "It has always turned out to be worse than presented. Nama has taken care of the riskiest loans, and what's left definitely won't be as bad, but even so, no one knows how bad it is -- that's the concern."

He too sees a foreign-owned future as a possibility.

"If a big international bank took over a big share of Irish banking it might not be rewarded by its shareholders, but there is profitable revenue stream there, further down the track."

Another possibility that Callaghan sees is a significant outside competitor.

"A competitor would not be beholden to the expensive government guarantee and would be able to fund a more profitable loan book -- and would have a higher credit rating than Irish banks.

"One of the strong international banks with fewer worries about their capital position might be able to lend into the economy.

"The plans the Government submits next year (to the ECB/IMF/EU on the future of banking) will be key to defining the future landscape.

"Disposal of foreign business will have to happen to reduce wholesale funding exposure. It will be back to the early days, the Irish banking system will be a much smaller pie with a much smaller pool of revenue. Banking here is still going to need two or three main retail players, however," he concludes.

"Banking still in self-destruct mode" -- Mike Soden, banking Consultant

"Have you got a red pen?" asks the former Bank of Ireland boss. "Corrections are usually written with a red pen, and it's also the colour of blood, and the colour of overdraft -- being in the red.

"If you're writing about the future of the Irish banking system, it should be written in red," he says grimly.

Now a Central Bank commission appointee, he's reluctant to give too much away about where things are heading.

"What is aimed at is to slowly but surely create two banks," he says. "The others will be relieved of active service."

He says that the problems he outlined in his recent book, Open Dissent, still exist, with denial and lack of dissent at top level in Irish banking forming part of its continuing difficulty.

"We have this problem with pushing the self-destruct button," he says. "However, very talented people have decided our direction. Let's hope it works."

"We're the new Sweden" -- Simon Maughan, MF Global

"The model for the future of the Irish banking system to a degree is Sweden," Maughan says, referring to Sweden's Nineties' banking crash aftermath, rather than our recent snowy climate.

"You're likely to see a fully controlled market for at least the next two years. The nationalisation of pretty much the whole banking system, completely gone, with nothing to be rescued. Anglo disappears, it's performing loans go into another institution.

"Then gradually, over the next decade, you can list banks onto the market.

"There is a great danger in this of entrenching a monopoly forever," he warns. "While capitalism must prevail, to fix this you want the Government to do what it did in Sweden, to come in and seize complete control so the banks can earn a reasonable spread, but you want proper competition further down the line.

"The necessity here is disposals. Concentrate on banking in Ireland and don't worry about international business for now. This will have the likes of Bank of Ireland tearing its hair out and gnashing its teeth, saying 'where's our growth?' but it should just forget about UK and other foreign business for the next five years."

"One would think Bank of Ireland would continue to be a market leader and return to a freeflow, with around 25 to 30 per cent market share. AIB would still be number two, with about 10 to 15 per cent market share. As AIB's existing management are resisting selling and reducing, the Government will have to intervene."

"You need probably three smaller players in the long run. A significant one, such as Permanent TSB or a building society style entity, and then the other smaller players.

"But it's important to stress Ireland doesn't need flat out competitiveness right now. We're talking three or four years down the line. Banking will have to trust the Government for two or three years first. Having said that, 17 years later, the Swedish government still has a stake in the banking system there!

"Anything outside of Ireland should be sold. The question with asset sell-offs is, can the banks get a price that augments capital position? But even a before book value sale would be useful. The RBS did this in Britain, it managed to sell assets at, say 95 per cent below book value. It lost some money but it was effective in downsizing. Then it's a wash."

"Colossal job losses in banking sector" -- Larry Broderick, IBOA

"The new capital ratio requirements means 70-80 per cent of Bank of Ireland will likely end up owned by the State, and AIB will automatically have to be nationalised," says Broderick. "Anglo and Nationwide will go.

"Meanwhile there are rumours that AIB will be sold," he says. "The capital ratio requirement means Irish Life & Permanent won't be in a position to acquire EBS, so the State will have to have some equity in it.

"Cardinal (the firm backed by Wilbur Ross that is bidding for EBS against IL&P) will have a clear run to buy EBS, but will they want it if they have to put money into it?" he asks.

"Irish Nationwide, IL&P's banking business and EBS will likely merge. The expectation is that colossal job losses will follow," he says of the banking shrink-down.

"There have been 6,000 in the last 12 months and there will be more as foreign assets and non-core businesses are sold off. A domestic mortgage Nama could follow, with mortgage arrears being parked in one big separate banking entity."

"After the recent statement from Nama we would expect more managerial changes. There haven't been enough sweeping changes in compliance and culture.

"Banking board slimdowns are likely," he says. "If there are going to be mergers, then board member numbers will be reduced and people will be forced to resign."

Sunday Independent

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