Sunday 21 April 2019

Casting a calm eye over our financial woes as mob bays for blood

AIB boss Eugene Sheehy tells Aengus Fanning that he and his colleagues were 'totally shocked' by recent banking revealations

The mob is out there somewhere baying for bankers' blood. But Eugene Sheehy, at the head of the country's biggest bank AIB, is calm, composed, even clinical as he looks over the Dublin skyline from his top-floor office in the Ballsbridge bankcentre.

He is no greedy fat cat, of that I am sure. He has been with AIB for 38 years, since he was 16. He is very well paid but, at 54, he has taken a salary cut and foregone bonuses for the rest of his banking career.

I knew his father, Maurice Sheehy, when he was boss of the Irish Sugar Company. Maurice was diffident, steely and, well, clinical. But he had the kind of integrity that we now call old-fashioned. He was one of the Irish corporate warriors who forged the success of companies like Irish Sugar when times were at lot tougher than they are now.

Maurice had to maintain an air of confidence and serenity even when the arcane politics of the Sugar Company were at their most turbulent. I can readily see that Eugene has inherited many of his father's qualities, including that iron determination.

No one expects AIB to become a philantrophic institution and there is no doubting that when Sheehy wants to play his part in getting the economy moving, his motives are pragmatic rather than altruistic.

AIB has eliminated the 30-day credit they used to take from customers and they pay as soon as they get the invoices. Sheehy wants this effort to get money moving and wants state agencies, local authorities and businesses who can afford it to do the same.

This, he believes would have a dramatic impact on small and medium-sized businesses across the country, would sustain them through crisis, and help to build confidence again.

AENGUS FANNING: I'd like to begin with the broad economy itself. In my opinion it's catastrophic. Would you agree?

EUGENE SHEEHY: Clearly I believe that we're facing into a scenario that we've never encountered before and certainly isn't in the text books.

We don't have any collective memory to draw upon for what we're facing into, that's certain.

I think it's the pace of the decline, and the strains that are apparent in the way that we collect tax. You know, for the last number of years the economy was very active, very buoyant. We had a very strong tax base coming off activity rather than the base of tax so we'd a lot of activity, a lot of spending taxes, a lot of stamp duty, a lot of transaction type VAT taxes.

So the economy and the Exchequer was very sensitive to activity and once activity tapered off -- which happened before employment began to taper off, we felt it up front.

That's something new that we haven't experienced before.

It means that we're going to have to find ways to get through this period while we re-adjust. The Taoiseach said it already in his recent speech -- that there is an inevitability across the board around a decline in living standards.

How can we do that in a socially cohesive way that's fair and keeps the country united and maximises whatever assets and energy that we might have? I think that's the challenge for business,

AF: In the popular perception there's little sign of unity or patriotism about. Most people would see banks as looking after themselves, and that politicians and the trade unions still seem to be playing to their own vested interests rather than this idea that we're all in this together, and that it is a very, very serious crisis that requires unity and patriotism. We don't believe that it is happening in practice.

ES: Well certainly I think the voices that call for division are louder than those that call for unity. While we work through the current peak of the change, which happened so quickly, I think opinions will moderate and the benefits of collaboration will become apparent. Now I know that sounds like motherhood but I could give you some examples of what people can do in business and what different interest groups can do to make a difference because if we don't collaborate to make a difference our fate is surely written and we won't be able to maintain anything like the standard of living we've become accustomed to.

AF: A lot of blame for the economic situation is apportioned to the banks who, as far as people are concerned, aren't lending money to businesses.

ES: I understand why people would do that. Banks are large, they're profitable, they're the people that represent the establishment. When there are stresses and people worry about their future, the bank comes into focus.

How the banks behave and how they're perceived are often two different things. I believe that generally they behaved pretty well. But they are now required to change their behaviour again because we're facing a different set of problems and the banks are going to have to respond to that and

actually move from being a reactive, stabilising force in society to being a positive change agent along with government in terms of policy and how we react to the crisis. I don't think there's any possibility of the banks avoiding criticism. Clearly this country ran into a very high level of activity in property and construction.

We sustained more than twice the OECD average level of construction for probably eight or nine years. We convinced ourselves with data saying "well this is actually a function of the demographic, we need all of this and we need all of that" and at some stage in the future that maths may be correct, but in the face of a global shock it doesn't stand up because confidence is gone and people won't consume at that level.

AF: Well personally, Eugene, I would blame central banks for some of this in the sense that when oil prices started to go up, central banks followed the monetarist idea of inflation as the great evil. All they seemed to be able to do is put up interest rates and loans that seemed to be okay became toxic. I'm being simplistic now and I'll admit that, as far as I'm concerned, if interest rates in August '07 were where they are today there might have been no toxic catastrophe

ES: The history books will actually be easily written because the cause and effects are not too difficult to establish. But the solution is going to be much more difficult as all countries are in this at the same time. The question is: How can Ireland become one of the winning countries on the way out?

AF: Even yesterday I was talking to a fairly young Fine Gael politician. He said people are petrified. Fear is a natural human emotion, but I don't like us being characterised as being petrified, as if we're frozen into fear because of our jobs and our future and our families -- very understandable things admittedly.

ES: I think people are very fearful of the future but I'd say petrified is an overstatement. I think over the next couple of months leadership will be very important because we will get a much clearer picture of how global the nature of the problem is, and then Ireland has to define itself in terms of "if this is the global game, how do we get a better result than the average?"

AF: When one remarks to people that we seem to be fearful and disunited, their answer often is: "Well, we've a vacuum of leadership, which means that this is likely to happen."

ES: I don't think any leader can change that at the moment, change is happening too fast and it is unpredictable. That isn't sustainable, even in banking internationally. Really for us, for me personally, this particular phase started in August 2007 when Northern Rock went bust and we had people queuing around the corner in Harcourt Street looking for their money back. That was a long time ago, and since then every week, every second day, there has been another event that has pulled a piece of the confidence out of the jigsaw puzzle. That will stop at some stage because the amount of disclosure that is coming out eventually completes itself and, hopefully, we are close to the end of that.

AF: Can you make any guess as to what the next year holds, or the next two years, or the foreseeable future?

ES: I think we still have probably another few months of bad news to come because a lot of businesses are hanging on at the moment and they need a reason to hang on longer. That is why I think the recapitalisation of the banks is an important thing, because things will gradually pick up.

There has been a lot of deferral of order, there has been a lot of deferral of capital expenditure, so there is probably some pent up demand in the economy to get some work done. Now we need to find ways to do that and there are practical ways to do that. We have done a few things ourselves on that, but on a wider scale a lot of businesses could actually help the economy at the moment.

AF: People talk about leadership, but to me it sometimes means doing the obvious thing rather than anything wonderful. I must say this to you quite sincerely, Eugene, one of the reasons I wrote to you a couple of weeks ago was your letter to the staff. I thought, while it was stating the obvious, it was a very good letter telling them not to be distracted by the big drama going on out there, stick to your jobs. It had the hallmark of leadership, but at the same time it was a fairly obvious thing to do.

ES: I think there are lots of books about leadership. My own point of view is that leadership should try to absorb the uncertainty that is out there and let the rest of the team get on with the job.

Whether it is a bank or a business, there are customers that require service. Not all demand has gone away, so rather than having people panicking at what is going to happen next month, free them of that.

Don't mislead them about the future, you have to tell people that things are challenging, but everybody doesn't have to be burdened with these problems at the same time. I think calm is important, certainly in our business it is very important.

I have always found the staff in AIB to be reasonably confident, that in the long run things work out, but you have to take care of the short-term problems in a certain style that (shows) we will get through this issue.

Banks have always been the catalyst for economic cycles, which always manifest themselves in a worse way in a bank than they do generally, because money is the denominator for economic activity. If the economy has a problem it becomes apparent in a bank much quicker. It is more apparent

in our business. We also see the turnaround before anybody else because when confidence returns it first returns in our business. . .

AF: Jesus, let us know when you notice it, give us a call.

ES: You will hear me shouting it.

AF: Here we are on Day One, post capitalisation, and bank shares have gone down again. There is a general scepticism about big institutions and small investors alike investing in banks at the moment.

ES: The international view is what matters in terms of bank stock because our investors are basically international.

We have a lot of domestic shareholders but most of our stock is held internationally.

They look at Ireland, they look at the banks in Ireland and form a view about whether this is a good long-term investment.

AF: And what about the opinion commonly expressed over the past 24 hours since the Anglo Irish and Irish Life & Permanent debacle where people are saying this is the last straw, the international investment community will have lost all confidence in Irish banking and by extension in 'Ireland Inc'.

ES: Certainly it has been very damaging. We are very disappointed that this has happened. Obviously we don't know the details of it, but it has been damaging. The job of international investors is to discriminate. They don't buy every food company or every bank, they look at the pack and decide to back what they think are the winners.

Our job is to make sure that we are on the winners' list and that is the way we represent ourselves.

It is very important for banks that the level of governance and credibility is high. We have an international board and I think we in AIB have a very good reputation in terms of governance and compliance.

AF: And can you say any more about this particular debacle -- was Anglo Irish, or is it, a very badly managed bank?

ES: We were as surprised as most observers when some of the revelations came out. Certainly, my colleagues and I were totally shocked about some of the things that came out and they reflect very poorly on the way the bank was run. Our job and (that of) colleagues in Bank of Ireland and other institutions here is to convince international investors that we are run differently.

AF: But on the one hand you say that international investors are able to make critical distinctions between different banks, and yet you are also saying that, up to not so long ago, we probably thought Anglo Irish was a well-managed bank, or a reasonably well-managed bank. How do we not know? You tell me that AIB operates on the soundest principles of good governance. I don't doubt you Eugene, but how is anyone to know for sure?

ES: You can only know when you look at the accounts, but that is the financial measurement of good governance. On the behavioural side you have to look to the board. The Government has completed an in-depth study of the bank, its governance and directors' loans and those kinds of issues over the last couple of months. As the minister said in the Dail yesterday, the two main banks came out spotless and that is the Government's third-party view.

But because half of our business is international we have a lot of scrutiny from other regulators, so while we are regulated in Dublin, we have also quite a lot of regulation across many different countries and we have a very clean record with them all.

AF: The Master of the High Court acknowledged that there is no house trade at the moment. What is the point in repossessing a property that you can't sell? What he said, as far as I can interpret it, is that there should be no repossession pro tem.

ES: We won't be troubling the Master of the High Court with repossessions. Last year AIB didn't repossess any family home. We have 161,000 mortgages and this year we won't be doing it either. We are in process with 15 or 16 people but we expect to resolve the issues with them, as we do historically.

We don't go that far because we don't have to go that far. The most important question about any mortgage is: What was the decision on day one, was it a well-structured mortgage? Could the customers afford it?

Now people run into problems, they lose their jobs, they get sick, they run into all sorts of problems which nobody can foretell. When that happens customers engage with us, we deal with it in a way that we have done for the last 20 years and that is why we keep out of the repossession game.

That is our view and that is the way we do it. There will be reports of repossessions in the courts but the facts are that AIB didn't repossess one family home in 2008. But people don't believe that because they are afraid.

They take a read from the US or the UK and they translate it to Ireland. It is not a good comparison, it is a totally different structure. I don't think you will see any kind of mass repossession in Ireland, certainly you won't see any from AIB and I don't believe the other banks are going to do it either. It is a much more empathetic model here. That is not to say there won't be problems because it is highly correlated to unemployment.

But the deal with the Government is to reassure people that there won't be the type of things they read about in the US and the UK.

AF: That is an encouraging message for the ordinary householder and people who are worried about their future and their jobs. On the other side of things, as you know the town abounds with rumours, about big property developers X being in for billions and that one man lost a fortune in Lehman Brothers and another lost a fortune in Anglo Irish. You know, Eugene, I sometimes hear these rumours from people who should be well-qualified to judge and I still don't know whether to believe them or not. Is the rumour factory gone into overdrive or is there a basis for what is being said?

ES: There is no doubt there has been a significant destruction of wealth -- let us call it wealth -- over the last two or three years and a lot of the wealth that was there was the notional value of assets, so as the assets are worth less the notional wealth is less. And then we have lots of other examples of things that people lost money on, not just in Ireland but everywhere in the world, so that people who were investing in equities generally lost money, people who were investing in property generally lost money, but while you hear rumours of people who have lost money, there are people who were prudent who weren't that exposed and who are still wealthy and it is important, because these people are the ones who are going to help us out because they are going to re-invest.

AF: If you had a quarter of a million in cash Eugene, where would you invest?

ES: I would put it on deposit in AIB where I would get a very good rate. (Laughs).

AF: Surprise.

ES: I would probably be inclined to put it into equities because I strongly believe in the equities market.

AF: Long-term you believe in it?

ES: Yes, long-term I believe in it.

AF: And suppose you had €5m in cash?

ES: I would spread it a bit more. I will give you the classic banking answer -- you distribute your assets. In the long-term you can never avoid every pitfall, but if you spread your bets . . .

AF: And if you had €5m, would you put any of it into property?

ES: At the moment, if I could get a good commercial tenant who was yielding well I would consider it, but historically I have never invested in property.

AF: What would you consider, if you were putting some of your €5m into property?

ES: If you had a good location with a good tenant and you were getting a yield of 5 per cent or 6 per cent , but I have never done it.

AF: Would you put 20 per cent of it into that, of your €5m?

ES: The asset allocation model is going to depend on your age, there isn't an easy answer to that -- your age, your income, your future obligations, what you are worried about, what your lifestyle is. And it is going to be different for everybody.

AF: People are saying, you know, 'I don't even know whether I should keep my money in cash, there might be hyper-inflation down the road, they might start to print money and my money will be worthless'. And others will say that equities are just a disaster, and then others will say property mightn't be such a bad thing. All these opinions float around every day, you hear them, I hear them. Is there any sense to be made of them?

ES: The classic answer now has always been the same. You diversify. You have a bit of everything. You keep some cash, some bonds, some equities, property if you want to. You diversity, but it has to be related to the individual needs.

You don't want to put a 90-year-old into equities. But you don't want to put a 20 year-old into bonds. It really comes down, as we call it, to the "fact find" on the individual and you model it (on that). A lot of people criticise that approach, but I haven't come across any of the text books that say there is another way to do it.

You don't want to say to somebody "put it all into gold" or something like that, that's gambling.

AF: It is not as exciting, is it?

ES: Banking, it is not as exciting as journalism.

AF: You must be joking.

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