Friday 18 October 2019

Merger of AIB and BoI is the only way to save sector

In his first interview since leaving Bank of Ireland, former CEO Mike Soden tells Nick Webb how to fix the financial crisis

IT looks like Mike Soden was right all along. Before his sudden resignation as chief executive of Bank of Ireland made headlines in 2004, Soden had sought to create a "super bank" which would keep Irish banks safe from international predators. With the stock market suggesting that Irish banks are only hanging on by their fingertips, it looks like his plan was ahead of its time.

Soden is one of the few people in the country who actually understands the full complexities of banking. More importantly, he's not trying to save his job by offering half baked suggestions.

Speaking exclusively to the Sunday Independent, Mike Soden explained how the financial crisis destabilising the country can be fixed.

The first step is well under way, with the introduction of state guarantees. But it's only the first part of the solution.

The creation of a company to buy up distressed property assets, changing the accountancy laws, big state cash injections and (most controversially) the merging of BoI and AIB all need to be done. Soden's plan is big, it's ballsy and it's brave -- but it might just work.

STEP ONE

Create a state-backed property company

Soden believes that distressed property assets -- such as unsold office blocks or repossessed shops -- need to be moved into a company initially owned by the Government, banks and property.

For the sake of argument, let's call the proposed company New Co.

"The purpose of New Co is to create an entity that is accredited with placing value on property in Ireland," says Soden, speaking over lunch at Espresso Bar in Ballsbridge, where fellow diners include Leinster and Ireland centre Gordon D'Arcy, Daniel Ryan from The Thrills, Fair City's Orlaith Rafter as well as a couple of well-known faces from property and the oil business.

"This company will then become the principal marketplace for buyers and sellers in the future.

"When the market recovers New Co can be unwound as we return to a traditional free market situation. Initially this company will only concentrate on commercial property until such time as circumstances permits it to include residential property," he explains.

This is how it would work: New Co would buy properties from struggling developers or from banks that have repossessed assets. Crucially, New Co would determine a price for these properties. The developers and bankers could take the price or lump it.

The property would be sold at a price that is equal to the outstanding bank loan or less.

"This will lead to the establishment of a mechanism for valuing property in the current market," according to Soden.

"The effect of this will be to take assets off the balance sheets of the banks and infuse a substantial amount of liquidity back into the banks and hopefully into the marketplace," suggests the sports mad globetrotting Soden (Lions Tour to New Zealand, Ryder cup, Bledisloe Cup and so on). "This process should enable the property bubble to deflate slowly and create a softer landing for the economy," says the former banker.

"In time, confidence will be restored and the credit markets should reopen and the construction industry should be revitalised," he predicts.

"With deposits guaranteed by the government there should be no reason against the development of an active inter-bank deposit market among the Irish banks."

This distressed property holding company is going to need a huge lump of dough. Soden believes that it could be funded by the ECB or Central Bank of Ireland.

The former bank chief suggests that the ownership of New Co could be structured by direct equity, preferred stock, guarantees or stock options.

"It is too early to say how this would evolve but it is not beyond the ingenuity of the parties involved to come up with a workable formula," he says.

"If New Co is successful, there is no reason why an IPO or flotation could not be launched as an attractive investment opportunity.

"This solution will cost the three constituents in varying degrees but should provide a platform for a strong recovery in the future," suggests the banker, who was National Australia Bank's Executive general manager of Global Business before beating Brian Goggin to the top job at Bank of Ireland.

Goggin became chief executive when Soden left four years ago. The Blackrock educated Dubliner was also head of Citicorp Canada and managing director of Security Pacific Hoare Govett in London. Putting it simply, there just isn't another banking CV like that in Ireland.

STEP TWO

Hire one tough nut to manage it

It would need a real bad ass to run it. Someone not afraid of tough decisions, making enemies or telling politicians to shove it.

"The New Co management would need to have a strong skill base in property, finance and in negotiating. They would likely be viewed by many as being autocratic," suggests Soden.

One name springs to mind. But could O'Leary be lured from Ryanair? Sacrificing Aer Lingus mightn't be such a bad thing after all.

STEP THREE

Change accounting regulations

Without getting too technical, Soden believes that accountancy regulations must be changed to help create confidence in the bank balance sheets again.

He feels that banks should be allowed to take general provisions instead of specific provisions, which would enable them to write down the value of their bad debts over a period of time rather than in one big, market shocking lump.

STEP FOUR

Create a 'national champion' by merging AIB and BoI

The most controversial part of the Soden plan is to merge Bank of Ireland and Allied Irish Banks, the state's big two banks over a two- to three-year period.

One of the key problems facing the Irish banks is that they are now too small. The combined market capitalisation of the big four -- Bank of Ireland, Allied Irish Banks, Irish Life & Permanent and Anglo Irish Bank -- is less than €9bn.

When Soden ran Bank of Ireland it was -- by itself -- worth nearly double what all the Irish banks are worth today. He is aware that fewer people will invest in small cap banks than in the dominant players.

The number of international shareholders of Irish banks has tumbled, leaving the way open for hedge funds to come in and short the market. We need a bank with bigger assets and a market capitalisation of closer to €25bn, he claims.

"Every country has a national champion, and some even have two or three," he explains. "It is vital to retain Irish control of our banking infrastructure otherwise it will lead to a haemorrhaging of high-end jobs in finance, technology, HR and other sectors. We could become a branch economy, where Irish banks would just be another branch of Lloyds, Barclays or Citibank."

STEP FIVE

Deal with all the competition isssues

The price for this financial stability and the creation of a "national champion" is a big hit for competition and consumer choice. But Mike Soden feels that this problem can be overcome.

"If you have the two banks with 600 or so branches now, at the end of the process they would have to selectively cut this number down to 350 or 400 branches. Those branches could go to another newly created bank -- or to whichever other banks had survived the crisis," he says.

Competition is only important in the retail banking for mortgages, savings and that sort of thing. It really doesn't matter if one bank is dominant in capital markets or fund management.

STEP SIX

Recapitalise the banks

The State must also plough money into the banking sector or, rather, this newly-created national champion.

"It could be through non preferential shares or by taking a 25 per cent or 30 per cent stake," he says. "But the banks have to be capitalised properly. if you don't put enough in, then the market will sell it off."

Nobody knows how much the banks need. NCB recently suggested that the four big players might need as much as €14.1bn over the next couple of years. Sweden's bank rescue in the early 1990s cost the equivalent of 2 per cent of the country's GDP.

AND FINALLY

If we do...

"If the downturn can be arrested through a concerted effort as we have outlined, there ought to be a capacity for optimism in the economic future of the country.

"If the downturn is halted and reversed the benefits experienced through the revitalisation of the construction industry and the property sector will be substantial for the country," he forecasts.

"The sharing of the pains and the potential gains will be a very delicate balancing act. No one wishes to give up or take losses at this point but everyone will have to endure some pain, however shared, before a resolution to the property bubble is found."

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