BUSINESS OPINION:Can the minor banks be consolidated without creating a semi-State Frankenstein's monster?
WHEN THE Bill to establish the National Asset Management Agency is introduced into the Dáil on Wednesday, the focus will be on the valuation methodology to be applied to the two big banks’ property and development portfolios. From that will flow the answer to the two big questions: what sort of losses they will have to absorb and how much Government money they will need.
The sideshow will be what the Minister for Finance has to say about the second-line banks – Irish Life Permanent, the EBS building society and Irish Nationwide. They are set to learn their fate as regards Nama, but the Minister is also expected to indicate his plans for a consolidation of the sector.
With that in mind, the proposal which emerged last week from Bank of Scotland Ireland (BoSI) that it should form the basis of any consolidation of the second-line banks is worth considering. BoSI – which includes Halifax in Ireland – is not part of the Nama process. It comes under the UK treasury’s rescue plan and is now owned by Lloyds, which took over its parent, Bank of Scotland, at the request of the British government.
As a result, BoSI’s bad loans will be dealt with under the UK toxic asset scheme. Its new owners are understandably nonplussed about the Irish arm’s future, but appear to have agreed an 11th-hour reprieve, having previously been expected to shut up shop here entirely.
The possibility that it may have to sell the Halifax to satisfy competition concerns was one factor in this change of heart apparently. But there also appears to have been a rearguard by the Irish management who are now enthusiastically seeking the embrace of the Irish State.
Despite all this, the proposal has a good deal to recommend it and BoSI does have something to bring to the party.
There is a real danger that consolidating the second-tier banks will create some sort of semi-state Frankenstein’s monster. The presumption is that it would be an amalgamation of the non-toxic bits of Irish Nationwide, the EBS and Permanent TSB, which would be split off from Irish Life. This would in effect be a super mutual, involved almost exclusively in residential mortgage lending and retail financial services. Some variations of the plan include merging bits of Anglo Irish Bank as part of an attempt to create a new bank for small business.
The first point in favour of BoSI’s counter-proposal is that it is clear Anglo Irish should not be let near the new bank. This is right. Anglo is finished as a franchise and its concept of business banking is completely discredited. BoSI would argue it has a much-better track record of lending and banking small and medium enterprises, going back to its origin as the State-owned Industrial Credit Corporation.
It also argues it is very well-placed to “anchor” the consolidation because of its own experience of integration and consolidation in Ireland. But more significantly, it would be in a position to avail of Lloyds’ vast experience in this regard. It says it will be able to deliver the new bank within 24 months.
In fact, much of the BoSI case rests on the reputation of Lloyds which – where it not for its shotgun marriage with Bank of Scotland – would probably have emerged from the credit crisis as the strongest of the British banks. Hence BoSI’s reference to its own adoption of Lloyds’s operational risk capability and culture. The inference is that the new entity would not repeat the mistakes of its constituents.
One suspects this has some resonance with the Government, as will the continued involvement of Lloyds in the new bank. It would have about 20 per cent of the new entity. Lloyds’ involvement would also ease the path towards a flotation of the new bank, which is seen as the medium-term objective.
There are, however, plenty of problems with what is being proposed. The dominant entity – in size terms – will actually be Permanent TSB, which will account for about 40 per cent of the new bank. There would be something of the tail wagging the dog if BoSI was seen to be calling the shots.
There is also the issue of BoSI’s credibility. Not withstanding the influence of Lloyds post the takeover, the management of BoSI did not cover themselves in glory as far as the Irish commercial property market went. Permanent TSB, on the other hand, has yet to take any money from the Government and stayed out of the commercial property market.
There must also be a question mark over Lloyds’ commitment to making the merger work. It has much bigger fish to fry and although it presumably endorses the current initiative, it will be secondary to other issues, such as the need to restructure the group to reduce its dominance in the UK market. For all that, it is worth considering.
