DUBLIN (Reuters) - Ireland’s banking sector is set to shrink further as major lenders contemplate winding up or exiting Ireland, and government hopes of consolidating the sector through mergers and acquisitions could go up in smoke.
With some of the main local players fighting for survival as independent entities after years of excessive lending to property developers, the government is reorganising the sector through a radical “bad bank” and recapitalisation plan.
Its aim was to showcase Bank of Ireland and Allied Irish Banks as examples of how to survive the crisis with state help, and then cobble together a “third force” to compete with them.
Bank of Ireland has presented a plan to raise private capital and avert majority state ownership after selling loans to the National Asset Management Agency (NAMA), the “bad bank”, and Allied Irish is trying to follow suit.
But the third force idea has made little progress due to the absence of suitable candidates, while foreign lenders like Lloyds and BNP Paribas have already beaten a retreat from Ireland, undermining any recovery in sentiment.
The two building societies that were supposed to form the basis of the new entity, EBS and Irish Nationwide, have to wait for an EU verdict on their individual recapitalisation plans, and have suspended merger talks to allow EBS to pursue negotiations with private equity investors.
“I don’t get the sense that it was a well thought-through process,” one analyst said of the “third force” which Finance Minister Brian Lenihan last year described as being the desirable outcome of consolidation in the sector.
“I didn’t think the two building societies put together would have made a very strong third force. It would have still been a relatively weak franchise given its funding structure and asset base,” the analyst, who declined to be named, added.
The two building societies – or a larger entity including the bank arm of bancassurer Irish Life & Permanent would together create a big mortgage lender but not a force to be reckoned with in commercial banking.
FOREIGN PARTICIPATION UNLIKELY
“A third force would have to involve subsidiaries of non-domestic banks,” said Frank O’Dwyer, chief executive of the Irish Association of Investment Managers, whose members manage assets worth 250 billion euros.
Executives at Irish Life have mentioned Ulster Bank as a possible partner in the “third force” but the Irish arm of Royal Bank of Scotland could not get involved without consent from its majority owner, the British government.
“That clearly is a more complex proposition,” O’Dwyer said.
National Irish Bank, a unit of Danske Bank, the Nordic region’s No.2 lender, says it is committed to the Irish market but is cutting almost half of its Irish branch network.
Analysts see further shrinkage in the sector with units of Dutch lender Rabobank and Belgian banking and insurance group KBC looking the most likely to retrench among the foreign operators.
The domestic landscape will undergo even more drastic change as lenders begin to move assets to NAMA, the “bad bank” set up to rid balance sheets of 81 billion euros of loans dating from the property bubble.
THIRD, FOURTH, FIFTH AND SIXTH BANKING FORCE
Bank of Ireland and Allied Irish are expected to survive but will shrink substantially as they sell valuable units to satisfy demands by EU regulators in return for state aid and to meet stricter capital standards imposed by Dublin.
An earlier candidate for the third force, nationalised Anglo Irish Bank, posted the biggest loss in Irish corporate history in March and will at best carve out a small “good bank” from some of the assets remaining after the NAMA transfers. An orderly wind down is now seen by the government as a possibility in the long term, however.
Irish Nationwide, which like Anglo is being propped up solely by massive sums of state capital as it moves the bulk of its loans to the “bad bank”, is also looking at a wind-down as an option in its plans prepared for the EU Commission.
The chief executive at EBS – which is hoping to meet its capital needs through a mix of private and public funding – says that instead of a “third force”, Ireland may be left with smaller players concentrating on serving niche markets.
“It depends what the country and society needs. You may not have a third banking force, you may have a third, fourth, fifth and sixth banking force,” Fergus Murphy told reports at the society’s results presentation last week.
That may ruin the government’s plans, but as one analyst points out, it was ferocious competition and oversized lenders that brought Irish banks to their knees in the first place.
“If there wasn’t so much competition during the boom years, then margins would have been more appropriate and these banks would have had better capital bases,” the analyst said.
“Having a period of reduced competition is not necessarily a bad thing for these banks we’re trying to help.”
One of the government’s arguments for rescuing the Irish banks was that to do otherwise would leave the country without a viable banking system.
What a surprise that their plan has backfired. Such heavy state subsidy to Irish banks has left other more viable banks unwilling to compete with them for what is left of our hollowed out economy.
Had AIB, BOI, Anglo, and INBS been shut down as soon as it became apparent they were bankrupt the market would have been opened up for healthy banks to replace them. Instead the healthy banks are withdrawing and we are left with the zombies.
You can’t really blame EBS for not wanting to merge with Irish Nationwide.