Cantillon: Banking on the SME sector

The head of our largest bank, State-owned AIB, was asked yesterday about the recent comments by economist Morgan Kelly on the threat SME debt posed to the Irish economy.

As you might expect, chief executive David Duffy didn't agree with the man who famously called the bank bust before it happened.

While the economist’s dire prospect for the Irish economy might indeed come about if the pending ECB stress tests prompted the banks to lay into the SME sector, closing down businesses here, there and everywhere – our words, not Duffy’s, or indeed Kelly’s – Duffy made the point to the Oireachtas Committee on Finance, Public Expenditure and Reform, that the objective of the ECB’s banking strategy was to secure lending to the SME sector.

This is because it is seen as crucial to economic growth, Duffy said.

He was “comfortable that the SME universe will not be affected as articulated” by the economist, who has raised concerns that the ECB stress-tests of Irish banks, will involve the calling in a large number of troubled SME loans.

The AIB boss, in his opening remarks to the committee, took the opportunity to make the point that SME arrears receive a disproportionately small level of coverage in the national debate, as compared with the mortgage issue, despite their resolution being critical for the long-term sustainable growth of the country and, in monetary terms, being the larger proportion of AIB’s troubled loan book.

He said the bank has made strong progress in resolving its SME loan problem, and that there was a much higher rate of customer engagement relative to the situation with the mortgage book.

Duffy said it is his plan to be in charge of a profitable bank by the year's end, which would leave the way open, should he so wish, for Michael Noonan to make a few preliminary moves in the process of selling the State's massive AIB shareholding.

Butter mountains and milk lakes
Next year will see the end of milk quotas, with dairy farmers becoming free to expand and increase their milk production.

The EU created its quota system in the 1980s to combat overproduction of milk, as farmers were generating “milk lakes” that could not be consumed. However, since then, demand for milk products has increased, both in Europe and globally.

Considering Ireland is unlikely to consume any more dairy products than it currently does, being at saturation level, will the increased milk production result in the return of milk lakes and butter mountains?

Farmers’ co-operative Dairygold doesn’t think so.

Dairygold’s farmer members have forecasted a 55 to 60 per cent increase in milk output by 2020, over the 2011 base year. That means Dairygold will have 550 million more litres of milk to process by 2020.

However, it says the likelihood of butter mountains and milk lakes returning is slim due to an increase in demand from the east.

Global demand growth for dairy products is currently dominated by developing markets where population increases, rising disposable income and urbanisation are driving demand for food and, in particular, the animal protein and calorie-dense foods enjoyed in western diets.

While countries such as China and Japan previously consumed very little in the way of dairy products, this is changing. For example, China imported 50,000 tonnes of milk powder in 2008. Last year, it imported more than 600,000 tonnes, and this is set to increase further.

Dairygold said it will target emerging markets such as Asia, Africa and the Middle East for its additional product, post quota.

The long-term outlook for dairy products globally is thus positive, driven by population growth, higher incomes and increased urbanisation, combined with changes in eating habits.

A bad case of 'deliberate neglect'
"Deliberate neglect." That was the damning opinion of a High Court judge yesterday as he made an award of €2.1 million against stockbroker Davy in favour of James Haughey, a young, mentally impaired client. The broker had nudged him towards trading in risky financial instruments that he did not understand, and he lost a fortune as a result.

Compared to its peers, Davy has emerged from the crash in an almost unassailable position. It is now the untouchable big beast of the Irish broking scene, mopping up much of its competitors’ wealth management business and surfing the recent rebirth of Irish equities and bonds. It has had a good crisis.

Davy also sees itself as a venerable institution. A case such as this, involving a “vulnerable” young man who was orphaned as a child and entrusted the broker with his inheritance, is potentially very damaging to its brand.

It is unlikely to cause Davy too much trouble with its corporate clients, but trust is everything in the more personalised wealth management business. Haughey trusted Davy, and it let him down badly.

The broker yesterday released a statement stressing that this was a “unique” case, and reaffirmed that it had stopped selling the risky instruments, known as CFDs, years ago. The statement was also notable for its lack of contrition towards the young man whom the court found was a victim of Davy’s actions.

Its rivals should not revel too much in the negative attention the case has brought upon Davy, however. It is in the ha’penny place compared to some of them when it comes to defending court cases taken by clients alleging they have lost money.

From 2012 to date, about 11 High Court actions have been opened against Davy, according to court records. Goodbody, for example, has had at least the same number, while Merrion is listed as the defendant in about 120 separate actions over the same period.