THE FRIDAY INTERVIEW:Gerry McGinn, CEO, Irish Nationwide
GERRY MCGINN says he’s used to fighting “firestorms” so the role of chief executive at Irish Nationwide Building Society doesn’t faze him.
His first morning as permanent secretary at the Department of Education in Northern Ireland in 2001 was trying to deal with the escalating dispute at the Holy Cross primary school in north Belfast between Catholic parents and Loyalist protesters.
McGinn is also accustomed to seeking billion pound payouts from busy public servants. His budgets at the North’s Department of Education and later the Department of Regional Development involved requests for £2 billion (€2.3 billion) from the Department of Finance and Personnel.
“It is not the first time I have gone to a government department looking for help – the irony has not escaped me,” said McGinn, drawing comparisons with his work at Irish Nationwide which, in effect, has drawn him back into the public sector.
Irish Nationwide will receive €2.7 billion from the Government to stay afloat which has led to the building society ceding control to the State. The building society reported a loss of €2.5 billion for 2009 this week after writing off €2.8 billion, mostly in property loans.
“I genuinely share the outrage of ordinary people. The taxpayer is having to pick up a very large tab and when you think that this is still described as a building society,” he said.
A “flawed” business model and “sloppy” practices has left the building society on Government life support. McGinn admits his role – after a return to banking and finance following a six-year hiatus – is trying to minimise the cost to the taxpayer.
Irish Nationwide took “short cuts” in the race to lend among the Irish banks over 13 years of increasing asset values, he said, and failed to have ever had to rely on proper security or documents because the rising property market always meant there was “an out” for the banks.
In such a market, even if a bank gave a poor loan, the rise in values was enough to cover the loan and any interest, regardless of any shoddy paperwork at the banks, he said.
“That was all fine until the world changed.” He believes “wishful thinking” convinced bankers the property market was in for a soft landing. “The level of anxiety was nowhere near where it should have been,” he said.
Irish Nationwide’s commercial property loans more than doubled in four years from €3.6 billion in 2004 to €8.5 billion in 2008 as it lent heavily to developers and land speculators. “That race to book loans, which is reflected in our numbers, inevitably meant in the case of this institution that short cuts were taken and there is a heavy price being paid,” said McGinn.
The growth of Irish Nationwide’s commercial loans was “truly incredible” to where they account for four out of every five loans. “That is so significantly lopsided it is very hard to believe,” he said. It left a “totally unbalanced loan portfolio heavily biased towards high-risk sectors”.
McGinn’s banking experience taught him the importance of methodical paperwork on loans, he said. Prudent credit approval processes – maintaining proper records on lending and ensuring you could enforce the security on your loans – was “the unglamorous side of banking but hugely important”.
“I had to do the hard yards . . . to be a good corporate or commercial banker there are no short cuts,” said McGinn.
His first receivership of a company in Dublin in 1981 during his time at Investment Bank of Ireland taught him the importance of proper loan records and security. “You learned the hard way . . . it was a depressed property market so you never had an easy out,” he said.
“Over a long period without a major recession and with a constant upward trajectory on asset values, a lot of people came into banking who never had any experience of more difficult times.”
Irish Nationwide’s problems were exacerbated by high-risk lending policies and sloppy practices followed by McGinn’s predecessor Michael Fingleton. He resigned last year after 37 years running the building society and having transformed it from a run-of-the-mill savings and home loans operation into a boutique lender to developers.
High loan-to-value ratios – up to 120 per cent of the value of the property including equity stakes taken in the deals it was financing – meant Irish Nationwide was far too heavily exposed to a collapse in the property market.
About 75 per cent of loans were in the riskiest area: development and land speculation. Some €8.7 billion of Irish Nationwide’s loans are moving to the National Asset Management Agency, representing 85 per cent of all the building society’s loans. Among that is €1 billion in interest rolled up for customers, concentrating the risk further. Irish Nationwide was hit with the highest discount of 58 per cent on the first loans into Nama linked to the 10 biggest borrowers, reflecting the catastrophic extent of its problems.
McGinn was taken aback with the practices – there were just seven people managing €10 billion in loans when he took over.
He and his team have focused on assessing the level of bad loans – covering 90 per cent of the loan book – and getting loans ready to transfer to Nama.
He has also started introducing recommendations in reports by accountants KPMG and Deloitte completed during 2008, which highlighted poor corporate governance and compliance. He declines to say why older reports on below-standard practices at Irish Nationwide were not acted upon earlier.
“Those are questions for the previous board, the regulator, the previous senior management,” he said. He has instead concentrated on introducing “more disciplined and consistent internal processes to operate the bank to the necessary standards – a lot of the unglamorous stuff”.
The next task – beyond transferring the remaining €8 billion in loans to Nama – is to draft a restructuring plan for the European Commission under State aid rules to approve the bailout.
Under the process, Irish Nationwide is obliged to assess a sale or merger of the post-Nama rump of €2 billion in home loans and €5 billion in deposits with another financial institution or even, at what might appear a stretch for a failed building society, life afterwards as a standalone entity.
McGinn believes there is a natural good bank/bad bank break once Irish Nationwide sheds its toxic development loans to Nama. This will leave behind what is “ironically, the building society” – the core savings and home loans business which began life some 137 years ago. This creates options for a future.
Under the EU viability assessment, McGinn and his team – with help from accountants KPMG in Germany – must also assess the cost of a wind-down but he insisted this is not part of the plan as the Government is pressing for a quick sale or merger. “Wind-down is something that will have to be formally and fully assessed as part of this process – we are obliged to do that,” he said.
The size of Irish Nationwide has prompted debate about whether the building society could be run down over time in contrast to Anglo Irish Bank, which is almost five times larger and is deemed too “systemic” to be run down because of the ripple effect. McGinn points out that the Government deemed Irish Nationwide systemically important under the guarantee.
“Undoubtedly the sums involved here, which are obviously not as huge as Anglo’s, may or may not influence people as to why you would choose one option rather than the other,” said McGinn.
Irish Nationwide must submit a plan to the European Commission by the end of June. Given that Brussels has been reviewing Anglo’s plan since November, McGinn is not optimistic about an early ruling. “You are not in control of the timetable – it could be the end of the year,” he said.
Merger talks with the EBS, initiated by the Government late last year, have been put on hold as each must submit restructuring plans to approve their State bailouts. McGinn is quick to point out that Irish Nationwide’s shareholder, the Government, and the commission will calls the shots.
McGinn suggests that as foreign banks withdraw from the mortgage and savings market there could be an opportunity for a domestic player five years from now after the crisis. “If you look over the horizon, it is important that we start to ask the question about the banking landscape in Ireland – what is it going to look like?” he said.
With €3 billion more in deposits than loans post-Nama, Irish Nationwide would have “oodles of cash” to lend on home loans and would be “self-reliant”.
McGinn believes there could be some pointers from the utility companies he set up during his time in the Northern Ireland civil service, such as Northern Ireland Water, on how banking might be reformed.
“I don’t think we have had a huge amount of debate because we have been dealing with the issues of the day – getting our arms around and solving the problem.”
On the Record
Name:Gerry McGinn
Job:chef executive officer, Irish Nationwide Building Society
Age:52
Family:Married, three children
Hobbies:Five-a-side soccer, running, golf and reading
Education:St Malachy's College and Queen's University Belfast
Career:He was in banking from 1979 to 2001 working for NatWest and Bank of Ireland before becoming permanent secretary at the Department of Education in 2001 and the Department of Regional Development in Northern Ireland in 2005.
He joined Goodbody Stockbrokers in Belfast in 2007 before moving to Irish Nationwide in June 2009.
Something that might surprise:He was the first permanent secretary of a government department in Northern Ireland to be recruited from the private sector.
Another thing that might surprise:He attended secondary school with football manager Martin O'Neill and broadcaster and TV celebrity Eamonn Holmes.
