Tuesday 20 March 2018

Emmet Oliver: Foreign takeover of Ireland's banks is now a real solution

Unlike economists walking the corridors of Ireland's leading universities, the Government is in the unfortunate position of having to come up with actual policies to end the financial crisis.

With house prices still in retreat, consumer spending still sliding and unemployment highly elevated, there seems little point in trying to engage in new thinking, particularly in the banking area.

But there are solutions, none of them palatable, but solutions nevertheless. The Irish banks have myriad problems, but ultimately they are starved of funding and starved of capital. Their ability to generate a profit, even after everything that has happened, remains intact, albeit not at the levels of the bubble years.

While there are good national strategic reasons to oppose a foreign takeover of the Irish banking system, there are now compelling reasons to no longer fight this idea, particularly when solely domestic ownership of the system has produced such negative outcomes.

A takeover of Allied Irish Banks or Bank of Ireland by one of the so-called European 'super banks' (Santander remains the most obvious choice) must be considered a real option in the present depressed climate.

The governor of the Central Bank Patrick Honohan bravely acknowledged this recently and the Department of Finance must now be convinced of same.

A takeover by a large and well capitalised outside institution solves a lot of problems and solves them quickly.

One is liquididity; any of the large European banks from Barclays to BNP Paribas to Rabobank could provide their Irish satellite with access to cheap and plentiful inter-bank funding.

Once underwritten by a well resourced parent, even large-scale bond issues would be possible, while short-term liquidity via the repo and commercial paper markets would be easily obtainable.

ECB dependence would drop and the Irish financial system could, at least for a time, slip out of the international headlines.

Ratings upgrades are also possible, particularly if it's Santander, which has been on an acquisition spree under its chief executive Alfredo Saenz Abad.

The other benefit is capital. If acquired by a foreign institution, the Irish banks could be recapitalised with a reasonable additional buffer; that would be small beer for a giant international retail bank, but large beer for the already over-stretched Irish exchequer.

Yet no acquirer wants to put in regulatory capital that could be invested in more profitable ways elsewhere, but the Irish banks must be coming towards the peak of their loan losses and once the buffer goes in, you start to look forward to years of profits (albeit smaller than usual) coming in to offset the upfront investment.

The Irish banks are also massively overburdened with additional cost that an acquirer could gradually take out, restoring profit margins run down in the heat of the crash.

The acquirer would also be facing competition from other undercapitalised banks with legacy loans and high leverage; pinching market share even in the inert Irish banking market would surely be possible.

The final reason why a foreign bank might want to come in is that margins are going to be restored across all key product lines in Ireland. Only Portugal and Finland have lower average mortgage rates than Ireland. Yes, impairments are going to continue for some time, but any new entrant is arriving into a market of rising margins.

The Government may be hoping in private to give away AIB and/or Bank of Ireland for a song, but would anyone take either institution, when their loan books are still so toxic?

Who knows, but the problem is more a cultural one. Many of those running the large banks remain pathologically opposed to ceding control to an outside bank.

There is also a rather surreal view out there that foreign ownership of major Irish banks would result in limited credit flowing into the Irish economy or rationing by far away bank executives in London or Madrid.

But have these people looked at the existing credit flow in Ireland already, with Irish ownership? It is hardly an advertisement for domestic ownership of the banking system.

With foreign ownership ticking so many boxes at this crucial time, it is vitally important that such a solution is considered at the highest levels of government and even among banking executives themselves.

Irish Independent

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