THE BANKS:NO other sector among the top 1,000 companies has endured such erosion in shareholder value over the last year as the financial services and banking industry.
Take, for example, the top four Irish quoted banking and financial services groups - AIB, Bank of Ireland, Anglo Irish Bank and Irish Life & Permanent, which all fall in the top ten. The four have lost 47 per cent of their value in the last year, falling from a combined market capitalisation of about €55 billion at their peak this time last year to €28 billion.
The US subprime meltdown has turned banks and financial institutions around the globe on their heads. The Central Bank and Financial Regulator in Dublin have continuously pointed out that Irish banks remain robust with no direct exposure to the toxic subprime assets.
However, the US subprime meltdown was merely the spark for the crisis. The tinder that caught fire is the stockpile of securitised assets held by banks and financial institutions around the globe that fuelled the boom in credit and lending over the last two decades.
Financial institutions stopped passing on assets in return for loans in the international money markets fearing they would get burnt. This has driven up the cost of money. Only in the last two months have we seen retail customers of Irish banks being affected by the high cost of money as Irish lenders reduce the amount they are willing to lend in mortgages and increase the borrowing costs for new customers.
The flames have died a little since the credit crunch began last August but there are still embers burning. Wholesale money rates have remained stubbornly high over in recent weeks and if they remain where they are now, then further costs will be passed on to customers.
Irish Life & Permanent chairman Gillian Bowler said at the company's recent annual meeting that its share price, which has almost halved from €20.60 to €10.86, over the last 12 months had not been affected in isolation. She said all financial stocks have been hit in value by the crisis. This was "deeply disappointing", she said, but added the price would improve as markets improve and "a bit of patience" was needed because "it will take some time to filter through". Financial stocks are unlikely to be loved again by investors for quite some time.
In the meantime, Irish banks have acknowledged that their lending growth is slowing from the meteoric levels of recent years as the economic and housing downturn kicks in.
Tracking new lending at Anglo Irish Bank, which powered ahead fuelled by the decade-long Irish property boom, provides a good snapshot of the slowdown.
Over the bank's last three half-year reporting periods, new lending has fallen from €9.3 billion to €8.7 billion to €6.1 billion for the most recent period, to March 31st, 2008. And the slide doesn't stop there - the bank expects new lending to fall further to €4 billion in the half-year to September 31st, 2008.
In these changed times, lenders are becoming more prudent and discerning, tightening loan criteria, vetting asset quality and increasing borrowing costs. As the wholesale funding marketplace becomes more expensive and securitisation markets - where banks sold on their parcels to fuel lending in recent years - remain largely closed, the push is for deposits.
All the major retail banks in the top 20 have introduced new savings packages to bring more cash onto their balances. In the current precarious world of wholesale funding, cash is king and Irish banks have pulled out all the stops to get customers upping their deposit balances.
Irish Life & Permanent was one of the most recent to move. It launched a new set of savings products offering higher deposit rates and, like most international banks entering or eyeing the Irish market, is targeting the cash-rich wealthy Irish customers and big ticket deposits.
The State's only remaining mutual building societies - Irish Nationwide Building Society and EBS Building Society - together with National Irish Bank and Halifax, the retail operation of Bank of Scotland (Ireland), have been most active in introduced competitive savings rates.
Irish Nationwide, which is in 19th position in our list, has arguably been the biggest Irish casualty of the credit crisis. It is a victim of timing, rather than any cash losses. It enjoyed a bumper year in 2007, increasing its pretax profits by an impressive 64 per cent to €391 million, but the society has put the sale of the business on hold until the markets improve and the value of financial stocks start to rise again. The building society will be holding out for some time to wait for at least €1.5 billion, the society's current net worth.
It is hard to assess whether the distressed value of Irish financial stocks will mean consolidation in the market. Talk of a so-called "third force" being created in Irish banking to challenge the might of the two dominant Irish players, AIB and Bank of Ireland, had largely fallen off the agenda as international giants Royal Bank of Scotland, which owns Ulster Bank and First Active, Danish bank Danske (National Irish Bank) and HBOS (Bank of Scotland (Ireland) and Halifax) brought greater competition to the Irish market in recent years.
However, harder economic times may renew talk of mergers and acquisitions in the Irish market, especially when the likes of Permanent TSB, the banking operation of Irish Life & Permanent, is trading near its book value and the overall company has a lucrative franchise in the growing pensions and investments market. Joining a larger group may make sense for the company, which relies on the uncertain wholesale markets more than any other Irish-based financial services company. It sources two-thirds of its funding in these markets.
The fear that grips most senior Irish bank chiefs is the potential for Ireland to have no major banking force headquartered in this country and that the Republic would become just another outpost for a major international bank. Anglo Irish Bank chairman Sean Fitzpatrick raised this as a concern eight years ago and, for many senior bankers, the fear still lingers.
The Irish Banking Federation has in the past called it the "New Zealand syndrome", where no banks operating in the country have their management's headquarters there. This would be a nightmare scenario for Irish bank customers as competition could dry up. Certainly, the property lending over the last decade would have been heavily curtailed had developers would have had to wait for loan approval from overseas for big ticket property deals.
However, on the flipside, Ireland's low corporate tax rate, financial services industry and growing wealth has acted as a magnet for most international banks. Giants such as Citigroup, HSBC and Merrill Lynch have increased their presence in Ireland in recent years.
Amid a more testing economic climate and a global financial crisis, more international players are likely to consider Ireland as a place to locate and grow their operations.
In belt-tightening times, the tax benefits on offer in the Republic could be a short-term panacea for international banks still nursing substantial subprime losses.
