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Don't bank on an end to sector's many woes

IT'S not often you see bankers being thrown through windows. Yet about three years ago, Halifax television ads showed disgruntled rival bankers barging into one of its branches for a fight -- with one eventually being hurled through a window.

The bravado displayed by Halifax -- the retail arm of Bank of Scotland Ireland (BoSI) -- in the advert, where the bank was clearly saying it was here to take on the incumbents, is long gone. Last Tuesday's dramatic announcement that Halifax is pulling out of Ireland with the loss of 750 jobs shows it never really was up to the fight in the first place. And it looks like the Irish banking sector -- as well as our economy and consumers -- will be left to pick up the pieces.

"It's not good when a bank like that withdraws from Ireland," says Roel van Veggel, general manager of Rabodirect, which is part of the Dutch -based Rabobank group. "Eventually we could be stuck with two or three Irish-owned banks -- and foreign banks who are rethinking their position. Unless there are players in the market to challenge Irish banks, those banks might go back to their old behaviour of confusing their customers and not being very transparent."

BoSI is part of Britain's Lloyd's Banking Group. Its decision to pull Halifax from Ireland has sparked fears that other foreign banks could do the same -- particularly when they're already retrenching. Although the Danish-owned National Irish Bank (NIB), insists that it is "firmly committed" to the Irish market, it is still closing 25 of its 58 branches and laying off 150 staff. About a year ago, Ulster Bank, which is part of Britain's Royal Bank of Scotland, announced its plans to cut 750 jobs and shave off the First Active brand.

ACC Bank, which is owned by Rabobank, has been reviewing its operations here for some time. Like all banks operating here, ACC has been stung by the dramatic collapse of the Irish property market. "ACC is trying to address its property loan book," says van Veggel. "If that process gets done and dusted, it is the clear intention of ACC to build its business here -- but as a smaller bank."

Dan O'Brien, a senior editor at the Economist Intelligence Unit, believes the pullout of Halifax could encourage foreign banks to stay. "If anything, less competition will change the calculus for the remaining non-indigenous banks in favour of staying -- as there will eventually be richer pickings," says O'Brien.

Others are more dubious. "The departure of Halifax gives other foreign banks an opportunity to make the case that Ireland isn't a feasible or significantly profit-making operation anymore," says Dermott Jewell, chief executive of the consumer lobby group, the Consumers' Association of Ireland (CAI).

Former Irish Life & Permanent chief executive David Went says that he wasn't surprised to see Halifax pulling out of Ireland.

"Foreign banks come into Ireland trying to hoover up quick profits at the expense of domestic players -- and at the first sign of trouble, they put up the flag and go home," says Went. The move a few years ago by Halifax and other foreign banks to undercut the margins being charged by local banks on mortgages and loans "didn't do Halifax any good as it couldn't keep its business going", adds Went.

"It also damaged the domestic players who were forced to compete with similar discounts. You could argue that the incursion of some of the foreign banks contributed to the problems being experienced in Irish banking now."

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Joe Higgins, chief executive of BoSI, dismissed the suggestion that BoSI was fleeing Ireland at the first sign of trouble. "We have 850 staff in the business bank which we will continue to employ -- and 12,000 business customers," says Higgins. "That doesn't sound like 'fleeing' to me. We had to make a decision to close one part of our business.

"The change in the availability of funding worldwide and the change in the economic environment in Ireland undermined our position. We were at the stage where these developments were much more fatal to our business than they would have been to others."

There's a lot more than business at stake here, however. Halifax's withdrawal from Ireland could seriously damage our economy. Consumers and businesses are already struggling to borrow the money they need to buy homes or keep their businesses going.

"The pullout of Halifax will almost certainly add to the pace of credit contraction but given the relatively small size of the bank, the effect on the economy as a whole will be limited," says O'Brien.

Yet if more foreign lenders follow Halifax, our credit hole will deepen, more unemployed bankers will join the dole queue, more businesses will go under water -- and our recession will last for even longer than expected.

BoSI says it is committed to its corporate and commercial banking operations in Ireland. Although Higgins would not be drawn on the attempts made by BoSI to join the 'third force' in Irish banking, he admits it was one of the options that the bank explored. This third force, which is expected to be a merger of Irish Nationwide and EBS (and possibly Permanent TSB), seems to be the Government's answer to concerns about an upcoming oligopoly in Irish banking.

"None of the foreign banks have been lending for a while," says Ciaran Callaghan, a banking analyst with NCB. "In 2007, AIB and Bank of Ireland had about 35 per cent of the mortgage market between them. In the last six months, they have written about 80 per cent of new mortgage business. The foreign banks are all shells at the moment and we expect AIB and Bank of Ireland to be the dominant players going forward. That's why the Government is trying to create a third force."

However, many believe that the third force will never get off the ground. "In theory, it's a good idea to have another big bank out there as a competitor," says van Veggel. "But it's a bit like letting the lame help the blind. There needs to be a good business model behind the third force -- that is a bank with healthy profits. But if you put all of these three players together in their existing situation, it only increases the problem. And you would also have to have agreement on sizeable cost-cutting among the players -- which I can't see happening."

Went believes that a merger of EBS and Irish Nationwide would "amount to the square root of nothing"

"There will be a hell of a lot of overlap and job losses arising out of that," says Went, adding that a business lender would also need to be in the mix for the third force to succeed. "Putting two banks together is pretty difficult -- putting three together is pretty ambitious. Adding a business lender to that makes it more difficult again. We'll simply have to learn to love AIB and Bank of Ireland."

If Went is right, we might all have to brace ourselves for a particular type of love -- the unrequited kind.

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