Small firms feel pain of loans crisis

ACC and Danske banks have delivered another blow to the Irish banking sector, while SMEs struggle to get loans, just as the economy begins to improve, writes Kyran FitzGerald

IRISH bank customers can be forgiven for wondering if they are now playing parts as extras in a horror movie scripted by Stephen King and directed by John Carpenter.

There are no masked faces, no blood, no gore — but the pain, the uncertainty and for some borrowers, the raw terror, is all too real.

Over the past 10 days the announcements from the sector have been coming thick and fast.

Those to catch the popular imagination have come from two of the smaller players in Irish retail banking, Danske Bank and ACC. Both confirmed their exit from a market that has already been impacted by the departure or disappearance of the Postbank, Bank of Scotland Ireland, Irish Nationwide and Anglo Irish Bank.

The news brought a strong reaction from the finance union, IBOA, representing staff affected, and from organisations representing small to medium enterprises, concerned at the prospect of further hikes in charges and lending rates and a reduction in overall competition.

A total of 330 jobs will almost certainly disappear following the latest two announcements, the impact of which may be somewhat diluted by confirmation that Ulster Bank owners, RBS, remain committed to this market.

Danske took over National Irish Bank in 2004, NIB having hit the buffers in dramatic fashion following disclosures by RTE reporters George Lee and Charlie Bird of major malpractice, culminating in a court-appointed inspectorate and the application of severe sanctions on key executives.

The bank could trace its origins right back to 1824 when as the Northern Bank it opened its doors for the first time. The Northern Bank name only disappeared in the Republic in the late 1990s and the Northern Bank will continue in operation, unaffected, in Northern Ireland.

Danske had run a high profile ad campaign, sponsoring RTE’s Drivetime radio programme. It had closed its branch network, but appeared to be carving out a future, here, despite the financial bloodbath endured by it as a result of boom era lendingdecisions.

However, the changes were rung at its HQ in Denmark, culminating in the departure of its CEO. His successor, Thomas Borgen, decided that the group should cut its losses in the Republic. As he put it succinctly : “the economic environment in Ireland is very challenging and we are not really able to make a decent return for our shareholders.”

The timing of the decision from an Irish perspective may seem curious.

Danske, saddled with a high proportion of loss-making tracker loans, has continued to make losses, this year and the group management may well have decided that the Irish operation is simply a distraction it can do without.

One of its customers was the disgraced solicitor, Michael Lynn, who took the Ronnie Biggs route to Brazil.

Depositors have nothing to worry about. Borrowers may be less well placed as they set out to negotiate new loan arrangements.

Danske will now shrink back into being a provider of services to already well serviced large corporates and institutions — such organisations are generally well looked after.

The position of ordinary customers and of SMEs in particular is less enviable.

The closure of the ACC Bank branch network by its Dutch owners with the loss of 150 jobs will come as a blow to the farming community and it coincides with a decimation in rural bank branches, a development which concerns very many small communities.

The concern is that as a branch goes, so does the consumer spending that goes with it.

The continued survival of Ulster Bank is vital to the Government strategy of promoting a degree of competition in banking.

It is often said that what we now have are two and a half retail banks along with bit players.

Ulster is seen as the ‘half bank’ player — this may be a bit harsh on Permanent TSB which is making a decent run in the mortgage market.

We are still just part of the way through a process of financial deleveraging, promoted by the troika, but also grounded in reality. That process is set to last years.

It will involve a continuing attack on the cost base, involving many more job losses. Charges are on the rise and will increase further.

There are plenty of signs of modest recovery, with falling unemployment, rising job creation and a rebound in the Dublin property market, but the truth is that the banks are barely sitting up and eating an egg.

Fewer than 2,000 mortgages are being given out, just one fifth the number handed out at the peak of the boom in 2005 and 2006.

Eamon Hughes, banking analyst at Goodbody Stockbrokers, points out that margins enjoyed by banks here are a fraction of those overseas. In the US, margins are around 3% ; in the UK, 2% to 2.5%. Bank of Ireland enjoys a margin of 1.75% with AIB at just 1.35%.

Out of €140bn lent out by way of mortgages in the economy, 50% is in loss-making trackers (where repayments are fixed at a low rate). While the banks are starting to put the variable mortgage rate up, the greatest progress in pushing up margins will be achieved through new loans at higher rates above Libor.

The problem is the shortage of funds for such loans (not to mention the fact that the banks are running scared after years when they ran amok) Ideally, what is needed is foreign capital.

US and Canadian institutions have taken over Quinn Group and Irish Life, with the latter fetching €1.3bn.

Overseas players like the Californian group, Kennedy Wilson, are investing directly in Irish property, but overall, the business and personal wheels are simply not being greased.

Hardest hit by the lending shutdown are SMEs, employers of around 600,000 people and the greatest potential job creators in the economy.

Last month, Bain Capital released a report called, ‘Restoring Finance and Growth to Europe’s SMEs’. The report’s authors concentrated on six countries, including Ireland.

They pointed out that SMEs accounted for two in every three jobs and for 58% of gross value added.

Since 2008, new lending to SMEs — that is, small to medium sized enterprises — had fallen by 47%, almost by a half.

However, new lending to Irish SMEs crashed by 82%.

Clearly, this is unsustainable. Many of the engines are revving up for growth, with indigenous exports regaining momentum, but no vehicles can travel without petrol or diesel, or some form of fuel in the tank.

Likewise, Irish exporters or would be exporters.

Bain Capital recommends the creation of a guarantee scheme to enable banks to lend to smaller riskier business customers as well as the creation of more accessible sources of information on SMEs.

By the time the Fifth Cavalry arrives to the rescue, will many members of the besieged business garrison already have starved to death? ISME chief executive, Mark Fielding, fears so, pointing to ongoingdifficulties being faced by his members in their dealings with banks.

“The cost of lodging cash has jumped from 17 cents to 47 cents per transaction. It is open season on anyone trying to get foreign exchange fast. Fees for renewals of overdrafts are significant. Bank managers are charging for their time. The interest margin on SMEs is far higher than it is for larger customers. It has climbed steadily.

Small firms are resilient, he adds, recalling lending rates of 18% to 22% in the Eighties and early 1990s. Such resilience will, it seems. be called upon for quite some time to come.


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