A seismic year in Irish banking and finance

Earthquakes are really the only way to sum up the past year in the Irish banking and financial services sector.

We went into 2021 with five major retail banks, which among themselves had a large footprint in branches across the country.

And we’re going to get out of it with two of those banks on the way out and a dozen fewer branches.

In fact, a lot has happened in 2021 in the industry, and it’s hard to know where to begin.

Let’s start from the beginning, or even earlier.

Withdrawals

It was in September of 2020 when the Irish Times suggested that Ulster Bank’s parent company, NatWest, conduct a strategic review of its operations in the Republic of Ireland which could eventually bring them to a halt.

But it took senior officers in London until February 19 to finish the review, which already confirmed that after so many years of battling for a decent return for its capital, Ulster Bank would have closed here in an « orderly and measured manner ».

Despite rumors from a long time ago, The decision, however, came as a shock The bank’s 1.1 million customers and 2,800 employees.

It also upset the financial community, the government, and the broader political class.

What, after all, would you say about the banking market in Ireland if the big, well-established lenders were willing to pick up the baton and take their capital elsewhere?

Part of the announcement included news of the signing of a Memorandum of Understanding with AIB which, if concluded, would buy the competitor €4.2 billion in commercial loans from Ulster Bank.

Those negotiations continued in full swing and by the end of June the talks were over. With AIB agreeing to buy the book for €4.1 billion and take in 280 Ulster Bank employees.

Talks between Ulster Bank and permanent TSB over the other assets have taken a little longer.

It was end of July before signing a non-binding memorandum of understanding It was envisaged that PTSB would purchase the Untracked Mortgage Book, perform the SME loan business, the Lombard Asset Finance unit and 25 sub-locations in the Ulster Bank network.

Then, earlier this month, the €7.6 billion deal became binding.

When the deal ends, maybe next year, PTSB will pay 6.4 billion euros in cash financed from internal sources And NatWest will acquire 16.7% of the new, expanded shares of TSB, reducing the state’s current 75% stake in the process.

450 employees are scheduled to be transferred to the PTSB as part of the arrangement, which is expected to be completed in late 2022 or early 2023.

But Ulster Bank wasn’t the only lender here eyeing the door.

KBC eyes door

KBC announcement in April That he was also looking for a way out was a much bigger surprise.

The Belgian lender did not give a clear reason at the time, but said it had just said it had opened talks with the Bank of Ireland about a possible sale of its assets and its outstanding loan obligations and that it would look elsewhere for a buyer due to its non-performance. loans.

It was another shocker, coming from a bank with a history in the Irish market going back to 1978, 1,246 employees, 12 centers and about 320,000 customers.

As with Ulster Bank, the talks did not stop, and by August KBC has announced plans to sell its €1.1 billion non-performing loan portfolio to funds managed by the private equity firm, CarVal Investors, With loans that will be managed by Pepper Finance.

Negotiations with the Bank of Ireland took a little longer, but in October the two parties sealed a €5 billion deal in which BoI would buy essentially all of KBC’s €8.9 billion loans and €4.4 billion ledger of deposits, sealing fate. From KBC Bank Ireland.

When the two exits are completed next year or possibly 2023, they will dramatically change the Irish banking landscape, reducing choice and competition, but also providing additional scope for AIB and the Bank of Ireland that could enable them to cut costs and become stronger lenders.

For PTSB, the departure of Ulster Bank, and the deal that must follow, is potentially transformative, transforming it into the nation’s third largest retail bank and providing the foundations for what could be a long-needed third banking powerhouse.

It’s a huge gamble even though CEO Eamonn Crowley, the board of directors and the government, which still own 75% of the bank.

If announcing the planned departure of two of the top five banks here wasn’t enough, there’s a lot going on inside the remaining banks as well.

Branches closed

While the PTSB was looking to expand its branch network through an acquisition, the Bank of Ireland came under fire from community and business groups as well as politicians when it was revealed in early March. It plans to close 103 branches in the Republic of Ireland and Northern Ireland.

The bank said that a turning point has been reached in the use of digital banking services, driven by the epidemic, and as a result the turnout in some branches has fallen below sustainable levels.

However, a deal was struck with An Post to give Bank of Ireland customers banking services at more than 900 locations across Ireland.

Along the same lines, AIB has also reduced its physical footprint, revealing plans in July to close 15 branches In urban and suburban areas are integrating their operations with others nearby.

Most of the affected branches were in Dublin and Cork and like the Bank of Ireland, AIB said it would rely more on An Post to provide some of its meter-based services in the future.

A tale of two stockbrokers

In addition to the restructuring, both banks have also been on acquisitions, looking at opportunities to expand their revenue streams away from purely interest-based income.

Thus, when the second of two attempts to sell Goodbody Stockbrokers failed to separate Chinese buyers in July of 2020, AIB swooped and began talks with its owners, Fexco and Goodbody senior management.

This culminated with Announcing a deal in March that saw the bank buy Ireland’s oldest stockbroker for €138 million, which was later completed in September.

Davy has been described as a potential buyer of Goodbody, after the failure of the second Chinese deal.

But in what may prove to be a strange turn of events, on the day AIB first signed the Goodbody deal, came an announcement that would eventually precipitate the sale of Davy himself.

On March 2, the Central Bank of Ireland fined Davey €4.1 million for a series of regulatory breaches.

The penalty was imposed because Ireland’s largest stockbroker acted for a real estate developer client in a bond transaction, without telling him that the buyer was a consortium of Davy’s employees.

The controversy quickly grew and within three days the CEOs, CEO Brian McKiernan, Vice Chairman, Kieran McLaughlin, and Head of Bonds, Barry Nagel left the organization.

The broker then lost its position as a major dealer in Irish government bonds, which led to the bond office closing and layoffs.

The scandal left Davy reeling, and although all of the consortium’s participants had left the organization at this point, many continued to own a significant portion of the company, a situation externally seen as untenable.

And so, just over a week after the central bank fine was revealed, Davey was put on the market.

There was a lot of interest, despite the obvious and stinging damage to the broker’s reputation.

But in the end, it was the Bank of Ireland who would win, Securing the Company’s Wealth Management and Capital Markets divisions for €440 million plus an additional €125 million of cash that was to be earned from the sale of two other parts of the company.

This development, authorized by competition regulators in early December, marked an unusual turn of events for Ireland’s most famous stockbroker.

The unintended consequence of selling both Davy and Goodbody was that the government was forced to soften its stance on the ban on bonuses in banks, with both companies’ current pay structures remaining in place, despite the change of ownership.

fines

Davey wasn’t the only financial services company to feel the heat of the regulators though.

in March Ulster Bank has been fined a record 38 million euros For her role in the mortgage tracker controversy.

During its executive investigations, the Central Bank revealed what it described as « grave failures » by the bank in its treatment of 5940 clients over the 16 years from 2004 until last year.

The abuses included extended periods of overcharging, which resulted in the loss of 43 customer properties, including 29 family homes.

The Bank of Ireland also received a big knuckles fame from the Central Bank in December, fined €24.5 million for regulatory breaches related to IT systems and related internal controls.

All major banks continued to reduce their exposure to bad loans by selling their portfolios throughout the year.

AIB also revealed a plan to sell the UK small business loan book to Alantra for €713 million.

Reducing the state’s share

With both AIB and Bank of Ireland starting to grab investors’ attention once again, the finance minister decided it was a good time to start selling some of the state stakes in both lenders.

The Bank of Ireland was where this process first began, with the announcement in June The government will begin selling part of its 13.9% stake in the Bank of Ireland over six months.

The sale was to take place through a pre-arranged trading plan and carried out in a « calculated and orderly » manner.

The shares were not to be sold below a certain price that the Finance Ministry had to keep under review, and the number of shares sold would depend on market conditions.

The process began shortly thereafter, at which point the state’s share had fallen to less than 8%.

The apparent success of the strategy led to a similar decision regarding state ownership of 71% in the Arab Investment Bank.

On December 21, the Minister of Finance announced A similar process was to begin with that, over the next six months.

Finance Minister Pascal Donohoe said the government’s continued pandemic support for the economy was one of the factors behind its decision.

Non-bank lenders

While conventional banks were downsized and resized, non-bank lenders continued their aggressive march into the Irish market.

Revolut has expanded its Irish user base to 1.5 million driven in part by the pandemic, and N26 has continued to add more customers here.

Dutch digital bank Bunq has bought Irish SME lender Capitalflow and appears poised to enter the fray after seeking permission to bring its services to market here.

Competition has also intensified in the mortgage market, with lenders such as Avant Money and Finance Ireland introducing new long-term fixed rate offers.

With such dramatic turmoil sweeping the industry, it is perhaps not surprising that calls, led by the Federation of Financial Services, are emerging for a government-backed review of the sector’s future.

In November, the Minister of Finance published the terms of reference for this operation, which will examine where banking and financial services are today and where they may go in the coming years.

Despite the extraordinary events of the past twelve months, he would be a brave person who would try to foresee it.