Saturday 22 September 2018

Francesca McDonagh’s honeymoon period at Bank of Ireland is cut short

Tracker scandal fallout and weak share price have piled pressure on the bank’s new chief, writes Dan White

Chief executive of Bank of Ireland Francesca McDonagh. Photo: Mark Condren
Chief executive of Bank of Ireland Francesca McDonagh. Photo: Mark Condren
Dan White

Dan White

New boss Francesca McDonagh’s inheritance at Bank of Ireland has turned out be a mixed one with several major problems including tracker mortgages, creaking IT systems and a large exposure to the collapsing second-hand car market piling up on her in tray.

The tracker mortgage scandal just keeps on growing. Bank of Ireland (BoI) is in the thick of it. When it issued its interim management statement on October 26 the bank told shareholders that it had identified 4,300 cases of customers who had been charged the wrong interest rate on their mortgages.

By the time it issued an update on November 9, just two weeks later, Bank of Ireland had identified a further 6,000 cases and revealed that it would be setting aside a further €150m-€175m in its 2017 results to cover the cost of fixing the tracker mess. If the number of cases more than doubles in the space of a fortnight what will the final total and cost be?

Bank of Ireland is confident that the latest provision against trackers, which comes on top of a previous €25m provision, will be sufficient to meet all eventualities. “We also stated [in the November 9 announcement] that this [the €150m-€175m provision] now gives us a clear picture of the number of impacted customers”, according to a BOI spokesperson.

In fairness to Bank of Ireland, the tracker mortgage scandal is an industry-wide one with all of its main competitors also found to have overcharged thousands of their tracker mortgage customers. Unfortunately, in addition to tracker mortgages, Bank of Ireland also has a number of unique problems of its own.

Traditional branch banking is an extremely expensive way of doing business. All of the banks have been trying to cut their costs by “persuading” their customers to do most of their routine banking electronically or online.

The key to getting customers out of bank branches is having the information technology systems that allow them to do their banking remotely. In October 2016, Bank of Ireland signed a €500m deal with Swiss banking-software company Temenos to purchase its UniversalSuite product. This is the centrepiece of BoI’s Project Omega, a €900m upgrade of its IT systems that will see it replace its core banking platform.

If all goes according to plan Project Omega will help Bank of Ireland achieve its target of reducing its cost/income ratio to less than 50pc. But is it? McDonagh was hardly in the door before reports began to appear that BOI was “reviewing” Project Omega.

So how is Project Omega progressing? “Important milestones have been met in 2017 relating to product builds and data consolidation,” said a Bank of Ireland spokesman. “Our investment programme continues to make progress and will, when completed, deliver a step change in building a truly customer-centric and efficient organisation.”

Others are withholding judgement for the time being.

“One of the single most important issues facing bank ceos is managing technological change. This is not just an IT project. It will involve organisational culture, potential new business models, big data usage, dealing with systems, and remuneration, etc”, says Goodbody Stockbrokers banking analyst Eamonn Hughes. He estimates that Project Omega could generate annual cost savings of up to €240m, but that the full benefits won’t be felt until the second half of 2021.

The need to get Project Omega right was almost certainly one of the main reasons McDonagh was hired to replace Richie Boucher. In her previous job as head of UK retail banking at HSBC she presided over a 40pc reduction in the number of branches between 2012 and 2017.

Bank of Ireland has 250 branches in the Republic, way more than the 200 of its biggest rival AIB. “The incoming CEO has form on branch optimisation,” says Hughes.

Project Omega isn’t the only item demanding McDonagh’s immediate attention. One of the few forms of lending to have grown in recent years has been car finance on the back of rapidly-rising new car sales.

Brexit has put the kibosh on that, with new car sales down 10pc so far this year. The post-referendum collapse in sterling against the euro has resulted in a huge upsurge in second-hand imports from the UK, up 38pc so far this year. Second-hand imports accounted for 38pc of all cars registered for the first time in the first 10 months of 2017, up from 28pc for the same period of last year.

And what has this got to do with Bank of Ireland? With the exception of VW and Renault, which have their own finance arms, Bank of Ireland has been the main provider of finance to new car buyers with Hyundai, Ford, Toyota, Opel and Kia all using BOI.

By far the most important type of loan has been the personal contract plan (PCP), where the lender guarantees the residual value of the car at the end of loan period. With second-hand cars now flooding in from the UK, almost 78,000 in the first 10 months of 2017, how realistic are these guaranteed values?

“Bank of Ireland is the market leader in car finance and offers a range of car finance options,” says a spokesman. “We have long-standing relationships with manufacturers and distributors who account for over 50pc of the new car market. Our PCP book is performing extremely well, is prudently managed, and has continuously extremely low arrears.”

Car finance is very much the exception to the rule. The interim management statement revealed that Bank of Ireland’s customer loan book totalled €77bn at the end of September, unchanged from mid-year. While BoI’s loan book has finally stopped shrinking almost a decade on from the crash, the fact that it has so far been unable to benefit from 5pc annual Irish economic growth tells its own story.

Continuing high levels of problem loans are almost certainly the main reason for this. Although non-performing loans fell by a further €400m to €7.7bn in the third quarter, this marked a sharp deceleration from the €1.3bn reduction recorded in the first half of 2017. What this seems to indicate is the existence of a hard core of non-performing loans, about 10pc of the total loan book, that is proving extremely difficult to clear.

“Bank of Ireland continues to be the largest lender to the Irish economy, with growing market shares in business banking and residential mortgages. This reflects the strength of our franchises and customer propositions as we continue to benefit from ongoing economic growth”, said a spokesperson who points out that BOI’s residential mortgage lending grew by 30pc in the first half and impaired loans levels are now at one-third of their peak levels.

This may well be so, but investors aren’t impressed with the share price down by 13pc to €6.29 over the past 12 months. If she is to rectify this situation McDonagh will have to lay out her vision of Bank of Ireland to investors.

Sunday Indo Business

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