BANKING:Job losses, branch closures and funding issues are among the problems facing the financial sector in 2013
Irish-owned banks emerged from 2012 on a sounder footing after four years of turmoil. But a number of significant challenges face them this year as they seek to continue the process of weaning themselves off State support and returning to normalised lending.
“This year will be a key inflection point for the banking sector,” said Pat Farrell, chief executive of the Irish Banking Federation, the industry lobby group.
The changes in the sector will be many. The pace of mortgage lending is likely to increase, but deposit rates will be lowered as banks seek to reduce their cost of funding. Further forays into international markets for funding can also be expected.
Consumers can look forward to having to pay higher costs for their banking services, with Bank of Ireland’s pre-Christmas hike of credit card interest rates just a taster of what’s likely to come across the sector.
The Irish banks will continue to restructure their retail operations, with more jobs losses and branch closures likely, although Belgian bank KBC is set to buck that trend by establishing a high street presence here.
This is also likely to be the year when Bank of Ireland sells its successful New Ireland life and pensions subsidiary. The bank is a reluctant seller but the sale was a condition of its restructuring agreed with the EU a couple of years back.
The British banks – Ulster and Bank of Scotland (Ireland) – will likely offload more bad loans here, while Irish Bank Resolution Corporation will continue its wind- down of the former Anglo Irish Bank and Irish Nationwide operations.
The sector will also be forced for the first time to face up to the problems presented by bloated and underperforming mortgage books with the introduction of the Personal Insolvency Bill, which was approved by the Oireachtas in late December.
And if all that wasn’t challenging enough, the Central Bank will subject the various banks to another round of capital adequacy and liquidity assessment reviews. However, this shouldn’t prove a problem given the healthy buffers put in place last time around.
The much-maligned Government bank guarantee, otherwise known as the Eligible Liabilities Guarantee, is also likely to go. The European Commission extended it late last year until the end of June 2013, but the expectation within the sector is that it will be wound up in the first quarter of this year.
This should please Bank of Ireland in particular. In December, its chief executive, Richie Boucher, voiced his criticism of the decision to extend the scheme, which cost BOI €449 million in 2011 and is hampering its attempts to return to profitability.
“Bank of Ireland is ready to come off the guarantee and we were prepared for coming off on December 31st,” Boucher told the Financial Times.
“The delay in timing is frustrating for the bank and is something we are keeping a very close eye on and we are having dialogue with the authorities on.”
Boucher has a return to profitability in 2014 within his sights. While this will depend in large part on economic activity, getting free of the guarantee is important if Bank of Ireland is to return to the black.
The guarantee was introduced by the Government in 2009 to protect deposits above €100,000 – sums below that are already covered by an existing deposit guarantee scheme run by the Central Bank – and restore confidence in the banks at a time when they were shut out of international markets and losing deposits.
Willing to lend
Global investor confidence in Ireland has gradually returned to the extent that Bank of Ireland and AIB were able to raise funds via the markets last year.
Last month Bank of Ireland raised €250 million via subordinated bonds. The interest rate was a tasty 10 per cent but it signalled that markets are increasingly willing to lend to Irish banks without the support provided by a Government guarantee.
Mortgage arrears are likely to feature prominently in 2013. This will be brought into focus by the long-awaited personal insolvency legislation, which will reform our bankruptcy laws and provide solutions for those who are heavily indebted.
It is difficult to quantify the potential impact that this legislation will have on the Irish banks, according to NCB Stockbrokers economist Philip O’Sullivan.
“I think we will be into the third quarter of 2013 before we get any sense of what’s happening,” he said.
At the end of September last year, 86,146, or 11.3 per cent of owner-occupied mortgages were in arrears of more than 90 days. This is a significant figure, although the pace of increase in arrears slowed in the quarter, according to the Central Bank.
O’Sullivan believes that, following the introduction of the personal insolvency bill, repossessions of family homes are unlikely to increase significantly from the current low levels.
Just 154 properties were taken into possession by lenders during the third quarter, of which 47 were repossessed on foot of a court order – the remaining 107 were voluntarily surrendered or abandoned.
There will probably be a greater impact on the buy-to-let space, O’Sullivan argues. The residential buy-to-let mortgage market is valued at €31 billion. Central Bank statistics shows that 17.9 per cent of mortgages in this area are in arrears.
According to the Central Bank figures, there were 566 buy-to-let cases in which a rent receiver had been appointed by the banks as at end-September. In 103 of these cases, the rent receiver was appointed during the third quarter of 2012.
The Government expects more than 15,000 applications to be made under the new personal insolvency legislation in its first year, but it could be six months or more before the new Insolvency Service will be able to begin processing those applications.
It won’t be established until some time in the first quarter of this year and it will take some time to get its IT infrastructure up and running.
O’Sullivan believes there might be reticence on the part of borrowers to engage with the service until news of what arrangements are being struck emerges – an important factor to consider given that engagement is voluntary.
In December, Bank of Ireland’s Boucher said there would be no debt forgiveness for lenders. Ray MacSharry, a public interest director of Permanent TSB, made the same statement when grilled by an Oireachtas committee before Christmas, although he conceded that some writedowns would probably be necessary.
Political hot potato
There is a subtle difference. Writedowns will only be applied after borrowers have been through exhaustive and thorough reviews with their lenders. Such engagements are now more commonplace as the banks have put in place specialist arrears or settlement teams to deal with customers.
It remains to be seen what level of writedowns will ultimately be applied and it is unquestionably the elephant in the room for the banks as they seek to return to some form of normal lending.
It will also remain a hot potato politically given that the State effectively owns AIB, EBS and PTSB.
Ironically, while the banks come to terms with their mortgage arrears, increased lending for home loans is also likely to be a feature of 2013, albeit on a modest level when compared to the bubble years.
This process arguably began in 2012. In the second quarter of last year, the number of new mortgages advanced to first-time buyers and movers was up 10 per cent and 6 per cent year-on-year respectively – the first quarter since March 2006 that lending to these two segments had showed an annual increase.
In the first half of 2012 about €1 billion was advanced in new mortgage lending across the industry, with 5,855 new home loans issued.
Ireland’s biggest estate agent, Sherry Fitzgerald, said 2012 was a turning point for the housing market. After five consecutive years of contracting prices, the average price of a property in Dublin rose, it says, albeit by a moderate 1.5 per cent.
The rest of the State also benefited from greater stability, with prices falling by 3.3 per cent in 2012 compared with a decline of 16.2 per cent in 2011.
Permanent TSB, once the biggest mortgage player in the Irish market, expects to increase its lending to about €500 million this year compared with about €70 million in 2012, which was the equivalent of about 350 mortgages. This will be across all categories, primarily mortgages.
At present, Bank of Ireland and AIB have a 40 per cent share of new mortgage lending, due to the inactivity of others in the market and the fact that demand has shrunk significantly in the recession.
Such market shares are neither desirable nor sustainable in the long term and increased lending this year from the likes of PTSB and KBC will be welcomed.
Ultimately, the pace of lending will depend on the recovery of the economy and an increase in employment levels. When that will happen is anyone’s guess.
