Overseas banks feel the pain of Irish property downturn

IT’S not just Irish investors who are being stung by the collapse of the property market in what was once western Europe’s most dynamic economy.

Royal Bank of Scotland, which bought First Active in 2004 in what was the largest overseas takeover of an Irish bank, has said it will cut 750 jobs. Danske Bank said provisions for impaired Irish loans rose by more than 10 times in the third quarter.

“They were chasing the bubble, and now they are paying the price for it,” said Alex Potter, an analyst at Collins Stewart in London.

“Their timing was absolutely wrong-headed.”

Our economy is shrinking at the fastest pace in the euro area as the property market dives. The demise of the Celtic Tiger forced the Government to seize control of Anglo Irish Bank, which lends mainly to property developers, and to promise AIB and Bank of Ireland, the two biggest lenders, at least €4 billion.

Irish gross domestic product more than doubled in the decade ending in 2006. The economy is set to slump 5% this year, the most in Western Europe, the European Commission forecasts.

“We’re no longer flavour of the month,” said Ray Kinsella, professor of banking and insurance studies at UCD.

“There was a time when, because the Irish economy was powering ahead, everybody wanted exposure to it.”

Edinburgh-based RBS, now majority-owned by the British government following a rescue package, acquired First Active for €887million. It already owned Ulster Bank, which has branches throughout Ireland. RBS said it will cut as many as 770 jobs in Ireland in response to “prevailing market conditions.” Ulster Bank had its credit rating downgraded by Moody’s last week because of its exposure to the crumbling property market.

In the North, unemployment is rising at the fastest pace in 28 years and property prices sank 34% in 2008.

Ulster Bank faces “depressed profitability” and “substantially” higher provisions for souring loans over the next couple of years, Moody’s analyst Ross Abercromby said.

In December 2004, Copenhagen-based Danske paid £967m 1.047bn) to buy National Australia Bank’s units in Ireland and Northern Ireland. Danske’s Irish unit lost €49m in the first nine months of 2008 as it set aside €93.6m for potential bad loans. The Irish operation accounted for a quarter of the bank’s impairment provisions in the first nine months of last year. It accounts for 5% of its loan book.

“Ireland doesn’t seem to be anywhere near the bottom,” said Andreas Hakansson, an analyst at UBS in Stockholm who recommends investors sell Danske Bank shares. “A lot of people made the same mistake by buying into Ireland around that time.”

Edinburgh-based HBOS, now part of Lloyds Bank Group, paid £120m to buy former electronics stores across Ireland in 2005. The bank then converted about a third of them into Halifax bank branches as part of a plan to tap Ireland’s booming property market.

Ireland’s house prices quadrupled between 1997 and early 2007. They have since lost 15% in two years, as credit froze, unemployment surged and emigration resumed.

HBOS said in October it did not need to join the Irish Government’s guarantee of all bank deposits and borrowings, citing the bank’s strong “financial position.” Lloyds is now 43% owned by Britain.

KBC, which has operated in Ireland for more than 30 years, said in November that Ireland has the highest share of non-performing loans across eight countries in which the Brussels-based bank does business.

Arrears on home loans at its Irish unit rose to 2.5% of its mortgage book in the country, double the 1.2% across the company. Moody’s downgraded its rating on KBC partly due to its exposure to Ireland.

KBC said last week it will get €2bn from the Flemish government to boost capital after a full-year loss of about €2.5bn.

“Given the problems these banks have at home, it’s inevitable there’s going to be less emphasis abroad,” said Scott Rankin, an analyst at securities firm Davy.

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