Northern Bank chief Gerry Mallon is cautious on scope for short-term economic improvement, writes FRANCESS McDONNELL

WHEN NORTHERN Bank chose to feature the great Co Down inventor Sir James Martin on its £100 note, who knew what an apt role model he would turn out to be for the bank in 2012.

Crossgar-born Martin was the man who invented the ejector seat, something any banker would hanker after to escape the current spiral of bad debt.

Last week the Danske-owned bank declared record net losses of £216.8 million (€259 million) for 2011.

It is not the only bank in the North with a toxic balance sheet, or the only one poisoned by its exposure to Northern Ireland’s ailing commercial property market. But it is one of the few banks that openly reports its financial results.

Other institutions, including Bank of Ireland and Ulster Bank, like to seek shelter behind their parent companies when it comes to revealing exactly what they are up to locally.

From Northern Bank’s most recent results, it is clear that some of its most pressing problems are not unique to it. Like every other bank in the country, North or South, they can be summed up in two words – impairment charges.

In Northern’s case impairment charges and provisions amounted to an eye-watering £273.9 million last year. This in itself reveals more about its competitors than they could ever hope to hide.

Traditionally Northern Bank was considered one of the more conservative banks when it came to lending money to its estimated 528,000 customers. Chief executive Gerry Mallon revealed a couple of years ago that the bank was “not quite as exposed as some of our competitors” in relation to its investments in the local property market.

"We weren't as aggressive as some of the other banks in getting into the property market," he said, though, talking to The Irish Timeshe did concede: "We were there, we did take pain and we will take more pain, particularly in exposure to residential development."

If Northern Bank’s latest annual results reveal just how much pain it has suffered in the last 12 months, just imagine the position for some of its competitors.

As Danske so beautifully illustrates in its latest annual report, impairment charges are determined “on the basis of the customer’s expected ability to repay the debt”. In Northern Ireland, as Danske is only too aware, customers’ “expected ability to repay the debt” is diminishing every day.

It acknowledges in its 2011 annual report that “the property sectors in Ireland and Northern Ireland continued to suffer from falling property prices.

It also states that at year end, exposure to the property sectors North and South amounted to 7.7 billion and 11.4 billion Danish krone respectively.

At yesterday’s closing currency exchange rates that worked out at £867 million in the North and €1.5 billion in the South.

“Property developers in Ireland accounted for DkK3.5 billion (7 per cent of total exposure in Ireland). In Northern Ireland, the comparable figure was DkK 1.8 billion (3 per cent of total exposure in Northern Ireland).”

It comes as no surprise then when Danske warns its shareholders that “loan impairment charges at the units in Ireland and Northern Ireland are likely to remain high, at least in the coming quarters”.

For his part Mallon is realistic about future prospects – and if anyone should be in a position to gauge what lies ahead it is him. A Cambridge graduate with first-class honours in economics, he has played a typically understated but significant lead role in the North’s economy down through the years.

At an early stage in his career, he was a private secretary to the minister for the economy (then Baroness Denton) and he also spent some with the predecessor of the current regional economic development agency, the Industrial Development Board.

Since July 2008, he has been chief executive of Northern Bank and would appear to have been constantly looking over his shoulder at bad debts since he took up the job.

As the chief executive, responsibility for the bank’s performance rests with him. But it would be hard to blame Mallon if secretly he bore little regard for those who made the decisions – before his time – that have landed him with seemingly never-ending impairment charges.

His plan of attack instead has been to take “a market-value approach” rather than a “hope-value approach” to tackling the issue. Mallon has had all of Northern Bank’s land bank and property assets valued to find out what they would be worth if they went on the market straight away.

In some cases this has resulted in its property portfolio being written down from between 70 per cent and 90 per cent from peak values.

Mallon warns the next 12 months will be tough. “If the last four years have shown us anything, it is that it is dangerous to attempt to call the bottom. The economic malaise has persisted much longer than most people thought it would and we’re not out of it yet.”

Mallon also believes that, without a “game changer”, there is little scope for improvement on the horizon when it comes to the local economy.

“Northern Ireland has been impacted by both the euro zone crisis and the slowdown in the global economy. It is a small economy that is always going to be heavily influence by what is going on in the national economies of the UK and Ireland.”