It has been 10 long years since the financial crisis that led to the nationalisation of Ireland’s banking system.
Despite huge taxpayer bailouts that have put most institutions back in profit in a slow return to private ownership, the country’s banks still have some distance to travel to overcome the legacies of the crisis.
“Elevated levels of non-performing loans on bank balance sheets pose a substantial financial stability risk,” Philip Lane, governor of Ireland’s central bank, told a parliamentary committee in recent days.
Ireland’s two biggest banks are facing a testing period.
With leading positions in many market segments, the coming months will determine the next phase of recovery for Allied Irish Bank and Bank of Ireland as the government considers selling another stake in the former and a new chief executive prepares to set out her master plan for the latter.
In Europe’s biggest initial public offering of 2017, the Irish government cut its AIB stake to 71 per cent from 100 per cent and used the €3.4bn proceeds to pay down debt.
The government is examining another share sale this summer or autumn but plans to hold on to a majority stake.
Whatever the timing, AIB is ready. “I think everything is in a good position from a market point of view to go again whenever they wish,” Mark Bourke, AIB chief financial officer, told a business dinner last week.
The prospect of another share sale comes as Bernard Byrne, AIB chief executive, presses ahead with the disposal of a big impaired loan portfolio that is crucial to cleaning up its balance sheet.
At one point, market analysts expected AIB’s so-called Redwood loan package — comprising commercial property, buy-to-let and land assets — would have a face value of €3.8bn. But with the sale expected to close imminently, a valuation just above €1bn is more likely now.
AIB’s aim is to cut the €9.2bn in non-performing loans that make up to 14 per cent of gross lending. Under pressure from regulators, it has targeted a non-performing loan rate of 5 per cent by 2019 to bring it within European norms.
“Delivery on non-performing loans remains mission critical to AIB,” said Stephen Lyons, analyst at Davy stockbrokers in Dublin. “It remains the key to AIB’s normalisation and to unlocking . . . substantial excess capital.”
The challenge is different at the 14 per cent state-owned Bank of Ireland, which since October has been under the command of Francesca McDonagh, a former HSBC banker. Efforts to cut costs will feature heavily when she presents her grand vision for the business at an investor conference in mid-June.
Bank of Ireland’s 62 per cent cost-income ratio is higher than AIB’s 48 per cent but BofI has a lower rate of non-performing loans, comprising 8.3 per cent of the total. Investors also await a detailed update from Ms McDonagh on a €900m technology investment plan, said analysts.
Important too will be efforts boost profits in Britain, where BofI has partnerships with the UK Post Office and the Automobile Association.
BofI’s UK unit, comprising 40 per cent of assets but 20 per cent of income, is less profitable than the Irish operation. The bank’s overall business delivered 8 per cent return on equity in 2017, but the UK return was between 5 per cent and 6 per cent.
The investor event “is critical in terms of setting out the investment case and strategy for the next four or five years”, said Eamonn Hughes, analyst at Goodbody stockbrokers.
“The objective is to convince people that as a restructuring story, she can deliver on the cost side and improve the income potential, through better customer engagement, but also convince people on the ability to grow distribution in the UK.”
Economic conditions in the Irish market are benign with “robust” growth forecast. Still, the banks have found themselves in political crosshairs repeatedly.
An angry outcry against a mortgage overcharging scandal, which has cost lenders almost €1bn in redress and compensation, is just one of several controversies.
Efforts by Permanent TSB, a smaller state-backed lender, to sell non-performing mortgages to distressed-debt investors prompted a political backlash against “vulture” funds and a drive to subject global operators to Irish regulation. PTSB on Wednesday scaled back the portfolio to €2.2bn from €3.7bn.
Ulster Bank, the Irish arm of Britain’s RBS, is also selling a €1.6bn mortgage portfolio.
A committee of MPs pushed to block the offsetting of crisis-era losses against tax, hitting bank shares before the government ruled that out.
There is more. Paschal Donohoe, finance minister, quashed an AIB share bonus scheme last month, saying the moment was not right to remove stringent pay caps.
How did the 2008 financial crisis affect you?
The principal barrier to another sale of AIB shares is political. The parliamentary voting pact underpinning Leo Varadkar’s minority administration says it cannot sell more than 25 per cent of any bank — plus any small stake by underwriters — before the end of 2018.
This means approval is required from Fianna Fáil, the opposition party that supports Mr Varadkar. But Fianna Fáil’s door is open.
“We’ll listen to the arguments if the government wishes to make such a proposal and we’ll give consideration to it,” Michael McGrath, party finance spokesman, told the Financial Times. “For the time being our position is that the government should retain a majority stake.”
For its part, Mr Donohoe’s department said only that it is monitoring the market.
But there is increasing talk of a move. Conor O’Kelly, chief of the National Treasury Management Agency, the state debt office, said last month that bank share sales were one of “very few opportunities” to repay down some of Ireland’s large national debt.
“This is particularly important as we near the end of a prolonged period of asset price inflation and stock market gains,” he said in a speech. “For as long as the government keeps bank shares in its ownership, it is essentially taking stock market risk — and that risk is increasing.”
Any share sale would await the Redwood disposal and, probably, AIB’s results for the six months to June. The government would decide whether to go to market at that point or await any interim dividend that might be paid in September.
Under EU rules, dividend revenues could be used for current budget spending, a potentially big consideration amid pressure for increased public expenditure. Share sale proceeds can be used only to repay debt.
Whatever happens next, the Irish state will remain deeply involved in the banking system for years come.
How Ireland poured money into its banks
Ireland poured huge amounts of taxpayers’ money into its ailing banks after the crash of 2008 in a public bailout that came to a total of €64bn. A decade on, less than one-third of this money has been paid back and large portions of the banking system are still in state ownership.
The rescue remains a source of public anger in a country whose government recently quashed a share bonus plan at Allied Irish Banks, the largest state-backed lender.
Jim Power, an Irish economist, says the total bailout accounted for 35 per cent of the country’s gross domestic product in 2010, the worst year of the crisis. “It was more than more twice the total tax revenues collected and almost six times the amount of income tax received at that time,” he says.
Of the surviving banks, AIB received €20.75bn from the government, while Bank of Ireland received €4.67bn and Permanent TSB, a smaller lender, received €3.95bn. But the €34.7bn bailout of the defunct Anglo Irish Bank was by far the biggest, and most of that money will never be returned.
“There’s a legacy of over €30bn that was washed down the drain, that will never come back,” says Mr Power. “This year we will collect around €54bn in total taxes. Just over 60 per cent of the taxes collected this year will be the equivalent of what we gave away.”
Some €18.89bn has been clawed back from the surviving banks through share sales, fees for a state guarantee over banking liabilities and income from dividends and coupons on debt instruments. To date, the government has also received €500,000 in guarantee fees from Irish Bank Resolution Corporation, the former Anglo Irish Bank.