Friday 19 January 2018

Lloyds' exit good for the shareholders

UK banking giant Lloyds' decision to pull the plug on the rest of its Irish operation leaves a gaping hole in the banking market.

With a peak loan book of €32bn, Bank of Scotland (Ireland) and its Halifax stablemate had an 8 per cent share of total Irish lending. The disappearance of this lending capacity is bad news for borrowers but potentially good news for the shareholders of the Irish-owned banks.

Every decade seems to produce a banking disaster where many, if not most, of the world's major banks lose their shirts. In the Eighties, it was lending to Latin America; in the Nineties, lending to Eastern Europe and the Far Eastern "Tiger" economies; while in the Noughties, it was US sub-prime lending.

So what will be the banking disaster of the current decade? Although the decade is still less than eight months old, Ireland is already making a strong claim for the title. Not alone have the domestic players lost an absolute fortune, with the likely cost of recapitalising the banks now set to top €40bn and Nama set to pay a similar amount to purchase their bad loans, virtually all of the foreign-owned banks operating in Ireland have also dropped a packet.

Ulster Bank, the Irish subsidiary of RBS, which is in turn 84 per cent-owned by the UK government, has shunted almost £15.7bn (€19bn) of toxic loans into the RBS in-house "bad bank" and written off more than £4bn (€4.85bn) of bad loans since mid-2008.

NIB, which is owned by the Danish Danske bank, has written off more than €1.4bn, almost a seventh of its total loan book, since mid-2008 while Dutch bank Rabobank has been by far the most aggressive lender pursuing builders and property developers for the repayment of unpaid loans.

Between them the foreign-owned banks had a combined loan book of about €120bn at the top of the market in late 2007. That was about 30 per cent of all Irish bank lending. If these loans were put up for sale today the foreign-owned banks would be lucky to recover 50c in the euro.

This means that even when, like Lloyds, the foreign-owned banks haven't formally exited the Irish market, they aren't lending. Instead they are concentrating on trying to get back as much of the money they have already lent. This means that the lending capacity of the Irish banking system has shrunk by at least a third. Throw in such domestic basket cases as Anglo and Irish Nationwide and the real reduction is more like half.

If you are a bank customer that is very bad news. Even if you can persuade a bank to lend you money, the disappearance of the competition provided by the foreign-owned banks means that you will pay a much higher interest rate.

However, what's bad news for customers is potentially very good news for the shareholders of the quoted Irish banks. With most competitors removed from the market the Irish-owned banks will be able to "reprice", ie put up interest rates for their loan books much more aggressively.

All of which makes the fall in the value of Irish bank shares following the Lloyds announcement look like a severe over-reaction to what could potentially be very good news for the Irish-owned banks.

Sunday Independent

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