The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand

Fiona MuldoonDirector, Credit Institutions & Insurance Supervision 11 April 2013

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Key Industry MetricsNumber of Firms Regulated in Ireland 2012¹

Irish Licensed Banks 32

Designated Credit Institutions (ACS issuers) 5

Building Societies 1

Branches 35

Total 73

Solvency (as at Dec. 2012) €m Domestic Market 2 Others 2

Total Assets €429 bn €570 bn

Total Own Funds €36 bn €31 bn

Total Capital Requirements (Pillar 1) €18 bn €9.5bn

Overall Sector Solvency 15.6% 26.4%

1. As at 31 Dec 20122. Data does not include branches

Safeguarding Stability, Protecting Consumers

Domestic Market 16

International 57

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TO BE UPDATED FOR 31 DECMBER DATA in EARLY APRIL

Snapshot of Irish Banking as of 31 December 2012

Domestic Market Credit Retail InstitutionsTotal Assets: €429b

Business Lines1. Retail Deposits and Loans2. Corporate Deposits and Loans3. Commercial Lending4. Mortgage Lending5. SME Lending6. Credit Cards

Other Credit InstitutionsTotal Assets: €570b

Business Lines1. Corporate Loans2. Structured Products/Lending3. Corporate Trust Services4. Custody Services5. Wealth Management6. Debt Securities

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Key Industry Metrics: Balance SheetKey Balance Sheet Statistics as at 31 December 2012

Retail Institutions

Others

Total Assets €429b €570b

Of which

Loans and Advances €299b €122b

Debt Securities €93b €84b

Derivatives €11b €353b

Asset Quality

Non-performing Assets €98b €0.8b

Impairment Provisions €52b €0.9b

Coverage (Provs/Non-Perf) 52% 108%

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Key Industry Metrics: ProfitabilityProfitability (as at 31 December 2012) Retail

institutionsOthers

Operating Income €3.5b €1.9b

Fees and Commission Income €0.9b €1.0b

Total Income €4.4b €3.0b

Operating Expenses -€4.7b -€1.9b

Operating Profit -€0.3b €1.0b

Impairment Charges -€9.8b -€0.2b

Profit Before Tax -€10.1b €0.9b

Safeguarding Stability, Protecting Consumers

The challenges facing the retail banking industry are acute and can be divided into two broad areas

1. Work-out of distressed credit portfolios

• Implementing resolution focused Mortgage products and offerings with properly trained staff and efficient processes and systems

• Developing longer term and incentivised debt restructuring options for viable SME businesses

2. Future viability

• Restoring interest margin; paying less for deposits, re-pricing existing loan books and increase new lending at rates that restore profits

• Reduce cost base and develop less costly distribution channels and mechanisms

• Designing a business model for the new ‘business as usual’ including increased capital requirements (Basel III)

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Economic contraction

Domestic demand

SME capacity to pay

Distressed Loans

Bank profitability

Bank capacity to lend

Consumer & SME

confidence

The challenges faced by the domestic banks matter in a real way to ‘ordinary’ SME borrowers and to consumers

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SME’s are critical to the Irish economy and to Irish recovery

SMEs in Ireland

99.8% of enterprises

47% money

70% of workforce

• SME make-up >99% of businesses in Ireland¹

• SME account for 70% of people employed in the private sector ²

• 64% of private sector workers are employed by indigenous non-exporting firms, with 56% working for indigenous, non-exporting SMEs¹

• SME Gross Value Add is 47% (€84bn)²

• SME Turnover is 51% of Turnover (€314bn)²

• Core SME is dominated by 4 sectors (76% of lending) Hotels & restaurants/ Wholesale & Retail/ Agri / Manufacturing

Source:¹ DoF Budget 2013 Assistance for SME Sector Presentation ² CSO: Business in Ireland Report (published Nov12)

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SME

Personal guarantees 70% employer : repayment capacity for mortgages

Cross guarantees on collateral

No single definition of SME

Cashflow supports direct trading & “indirect” debt

Business property is part of a larger

premises

PDH debt serviced through drawings

Multi-banking

SME Arrears: Complex issues and a high level of inter-connectedness

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1. Governance & Execution framework of SME Support Unit organisation

2. Quality of Implementation plan and progress made

3. Restructuring – assessing and distinguishing viable and non-viable borrowers

4. Re-underwriting – disentangling viable debt from unsustainable property-

related debt

5. Credit Assessment Tools & Policies (Debt/ Financial/ Collateral)

6. MI/ KPIs/ key milestones and timelines

7. Operational plans/Skills/ Resources and Training/Execution ability

8. Level of external assistance / sectoral/ restructuring expertise

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SME Arrears: Central bank areas of regulatory focus for 2013

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SME health and stability links directly to Mortgage arrears issues

• Employment in SMEs = repayment capacity for employee mortgages

• Many distressed SME borrowers also hold a number of BTL exposures

• Banks consider distressed SME borrowers at a total borrower exposure level (excluding PDH)

• Public targets & audits of result

• Multi-indebted mortgage borrowers require resolution too

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SME Gross New Lending constant since 2010

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Direction of SME new lending is realigning away from Property(4 quarter moving average to Q3 2012)

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The sectors seeing reduction also have high levels of default: Causality?

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Micro SME book, June 2012. Total Balance €~5bn

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Is demand for credit weak in Ireland? ECB survey: Asks firms for Net % increase in financing needs in previous 6 months

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Economic growth

Economic growth is linked to supply and demand for credit. Health of Banking sector is linked to wider ‘real economy’ & vice versa

Banks: Capital & Provisioning helps but leaves non-performing asset on banks’ books

Banks: Work out and restructuring is necessary

Regulator: Audit & oversight work taking place. Monitoring, measuring & consequence.

SME’s: Increase in receiverships, liquidations necessary and inevitable to allow leanest and fittest to emerge and compete

Europe: Banking union and European Stability Fund offer opportunity to break damaging link between Sovereign & Banking Sector

Ireland: Better oversight, better regulation, safer banks prevent recurrence of past mistakes

What can be done to change the cycle?

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