Sunday 25 August 2019

Fingleton ‘disputed’ KPMG view of loan risk

By ‘06 many loans topped 100pc

Dispute: Former INBS managing director Michael Fingleton
Dispute: Former INBS managing director Michael Fingleton

Shawn Pogatchnik

Irish Nationwide’s then-managing director Michael Fingleton disputed a key finding by KPMG auditors in 2004 that the bank’s ‘profit-share’ loans increased the risk of losses, an external auditor told a Central Bank inquiry yesterday.

KPMG partner Vincent Reilly, who made his report to the INBS board in 2004, said he used his summary to highlight concerns over the bank’s profit-share model.

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After Mr Fingleton saw KPMG’s conclusion that profit-share loans bore elevated risks, Mr Reilly said the managing director insisted on adding a rebuttal to the end of the report before it was sent to the financial regulator.

The KPMG report described how typical profit-share loans covered 100pc of the purchase, with no repayments due until the asset’s sale, when INBS would take a cut of profits. Such loans usually were secured only by the asset itself.

“When we originally wrote that executive summary, Mr Fingleton wouldn’t have agreed there was additional risk,” Mr Reilly said.

“He was unhappy with these additional risk characteristics. He insisted on having his own sentence in there, which was: ‘Management are of the view ... that the situation as outlined above is highly unlikely’.”

Mr Reilly said his role as an external auditor precluded recommending policies on profit-share loans, merely to point out the risks involved.

And according to Alan Boyne, a KPMG accountant who produced a 2007 due diligence report for INBS, those risks quickly swelled in scale.

Mr Boyne told the inquiry his analysis of INBS’s €8.1bn commercial book found that 30pc – equivalent to €2.4bn – was committed by the end of 2006 to loans that exceeded 100pc of underlying asset value. “There’s certainly heightened risk when you have an LTV (loan-to-value) of that magnitude,” Mr Boyne said.

“As soon as you have a drop in property prices, you’re immediately exposed.”

Mr Reilly said he had advised the INBS board back in 2004: “Look, you know if there’s a deterioration in the commercial property market, the society may have to call on security on non-performing loans.”

He said Mr Fingleton insisted on inserting his own view into the summary, which was “effectively to say, ‘we don’t really agree with that because we’ll always be able to access liquidity’. He was very unhappy with that part of the executive summary”.

Mr Fingleton has been too ill to attend the current phase of the Central Bank examination of INBS’s 2011 collapse at an estimated cost to taxpayers of €5.4bn.

Lawyers for the inquiry are seeking to identify whether INBS ever drafted a specific policy on risk management of profit-share loans. Such loans ballooned from €1bn in 2003 to €4.8bn in 2006, with three quarters of that in UK property investments.

Mr Reilly said his 2004 report also called for staff roles in the bank’s UK operation to be segregated and rotated to guard against the risk of fraud, given its small staff size and huge loan book.

“At the Belfast branch, I could hang my hat on the potential for fraud”, he said, noting that the UK operation had “only five or six people operating up there, with about €2bn flowing through it”.

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