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Sunday 18 November 2018

'a one-man band'?

::: Newsmaker Michael Fingleton, Irish Nationwide Building Society chief executive

This week's boisterous Irish Nationwide agm marked the latest expression of dissent against long-time chief executive Michael Fingleton.

With any sale of the building society now having been postponed for at least two years, is Fingleton's 36-year reign as Nationwide boss drawing to a close?

Tuesday's meeting was a rough-house affair. Chairman Michael Walsh's admission that, due to the current credit crunch, any sale of the building society would have to be put off for at least two years, caused consternation among many of the hundreds of members who attended.

Under current building society legislation "windfalls", which members receive when their society is sold, can only be paid to those who joined the building society at least two years before the sale was announced. By delaying any sale for at least a further two years existing members were worried, not unnaturally, that even with the Nationwide's €20,000 minimum deposit requirement for new members, the Nationwide would be flooded with carpetbaggers. If this happened, the windfalls of existing members would be reduced.

So why didn't Fingleton follow the example of the Irish Permanent and First Active, both of which converted into banks whose shares were traded on the Stock Exchange and sold themselves years ago?

The 1989 Building Societies Act, which first allowed building societies to sell themselves, stipulated that a building society wishing to sell itself must first convert into a bank and then wait for five years before being taken over. Not alone was the five-year wait not to Fingleton's liking, there was also the fact that, with thousands of members, the Irish Nationwide would have to re-register as a PLC if it converted into a bank.

In practice this would have meant floating Irish Nationwide shares on the Stock Exchange.

This would have forced the Nationwide to publish a very detailed prospectus -- both the Irish Permanent and First Active prospectuses were over 300 pages long -- and it would have also subjected the Nationwide to the Stock Exchange's procedurally onerous disclosure standards.

Instead of following the example of the Irish Permanent and First Active, Fingleton spent the next 17 years lobbying for a change in the law which would scrap the five-year waiting period. In July 2006, he finally got his way.

But did Fingleton wait too long to sell the Irish Nationwide? There were predictions in mid-2006 that the Nationwide would fetch up to €2bn, generating windfalls of about €15,000 for each of its estimated 100,000 members and a reputed €15m-plus pay day for Fingleton.

If the rumour mill at the time was to be believed, the queue of would-be Nationwide buyers stretched around the block with Bank of Ireland, AIB, Irish Life & Permanent, Halifax and NIB parent Danske Bank all mentioned in dispatches.

Unfortunately, Fingleton's timing was all wrong. By mid-2006, with the ECB jacking up interest rates, it was crystal clear that the Irish property market had peaked. This was not the time to be selling an Irish property lender. With Irish banks down by 40pc over the past year, the Nationwide proved very hard to sell.

One by one the putative buyers declared their non-interest. Eventually only the Icelandic bank Landsbanki, which already owns Merrion Stockbrokers in this country, made a serious approach for the Irish Nationwide.

Unfortunately the Icelandics were not prepared to pay the lofty valuation demanded by Fingleton.

This week's controversy should not distract attention from Fingleton's remarkable achievement in building up the Irish Nationwide from virtually nothing into a financial institution which, by the end of last year, had gross assets of €16.1bn and recorded pre-tax profits of €390m.

When the Garda's son from Tubercurry, Co Sligo, first joined the Irish Nationwide in 1971, it was one of dozens of tiny building societies in existence. So impoverished was the Nationwide, that Fingleton had to wait three years for his first company car. He has long since put such relative penury behind him, being paid a massive €2.3m by the Nationwide last year.

With the banks shunning the mortgage business, the building societies had an effective monopoly of home loans until the mid-1980s.

Throughout the 1970s and well into the 1980s, there was a chronic shortage of mortgage funds available. This led to frequent "mortgage famines" which Fingleton shrewdly exploited to build up the Nationwide's public profile. Many journalists who had worries about getting a mortgage could always be sure of getting a sympathetic hearing from Fingleton.

However, woe betide the borrower who fell behind on his or her mortgage repayments. Delinquent borrowers found themselves being hit with penalty interest rates of up to 20pc. In a 1998 court case a DCU maths lecturer described the Irish Nationwide's system of interest penalties for borrowers who fell into arrears as "pernicious".

While Fingleton has since scrapped the Nationwide's system of interest penalties, he still squeezes much higher interest rates from his borrower than most of his counterparts.

In 2007, the Nationwide received €829m in loan interest from its customers. That works out at a swingeing 7.28pc average interest rate.

The comparable figure at the EBS, the only other surviving Irish building society, was just 5pc.

Part of the explanation for the Irish Nationwide's much higher average interest rates is its very high dependence on commercial property lending.

At the end of 2007, only a fifth of its €12.3bn mortgage book consisted of home loans, with commercial mortgages accounting for the remainder.

While lending against commercial property is more lucrative than residential mortgages it is also potentially more risky, particularly now that property prices have begun to fall.

This heavy exposure to commercial property lending is almost certainly one of the main reasons that would-be buyers weren't prepared to meet the Nationwide's asking price.

Another issue confronting possible buyers is that Fingleton's Irish Nationwide looks suspiciously like a one-man band. While this has allowed the Nationwide to keep its costs down with a 2007 cost/income ratio of just 10pc, what happens when Fingleton, who turned 70 last January, eventually retires?

Fingleton has never groomed a potential successor. Former AIB executive Maurice Harte, who was recruited as general manager in 2002, left after just a year.

Last year's High Court case, when its home loans manager Brian Fitzgibbon sued to stop the Irish Nationwide from sacking him, reinforced the impression that Fingleton totally dominated the building society.

In his evidence, Fitzgibbon alleged that Fingleton overruled his (Fitzgibbon's) decision not to lend money to rogue solicitors Michel Lynn and Thomas Byrne, to whom the Nationwide ended up lending over €10m each.

Fitzgibbon went on to allege that the Nationwide's lending decisions "were entirely informal and controlled by Michael Fingleton". Fitzgibbon also stated that many loans issued by the Irish Nationwide had not been approved by its credit committee, which existed only to satisfy the requirements of the Financial Regulator.

Whatever about Fitzgibbon's allegations, their existence will make any sale of the Irish Nationwide even more difficult. With any sale now unlikely before the turn of the decade, when Fingleton will be 72 years old, it looks increasingly likely that it will not be he but his successor who eventually sells the building society.

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