One thing is for sure – we’ll soon have fewer banks to moan about

WE’RE going back to the future in Irish banking. We are returning to a largely two-bank economy, with only a few much smaller competitors offering bits and pieces of finance to those who need it for productive investment and necessary consumption. AIB and Bank of Ireland are going to be the only games in town but the big question is how receptive they will be to the needs of customers.

The signs are not good. AIB seems willing but it may not be able. While losses of nearly €900 million in the first six months of 2009 actually were not nearly as bad as had been expected, the bank’s losses in the future could explode again, depending on the price NAMA will pay for the property-related loans on its books.

Whatever happens will require the payment by the state of even more money to AIB as extra capital but almost no matter what amount of new money is put in, the bank will have to be cautious in its future lending, especially over the next couple of years.

It is going to be under pressure to make profits at the same time as it is being asked to support Irish business and consumers by making finance available to them, which is why interest rates are likely to rise. One problem is that many of the loans it will be asked to make may be to companies or individuals who do not look too likely to be able to repay them. The same applies to Bank of Ireland.

Unfortunately, few other banks seem willing or able to step in to do their bit. Irish Life and Permanent (ILP) is finding it very difficult to operate because so many of its customers are on tracker mortgages, guaranteeing them rates at only a little bit above the European Central Bank rate. This means ILP is finding it difficult to make profits, even before bad debts are taken into account. It was previously one of the biggest mortgage providers but is doing very little new business these days. So while AIB has not advanced much more new mortgage credit this year than it did last year, it has found itself gaining a much bigger market share, almost by default. Much the same is happening to Bank of Ireland.

Of the other Irish-owned institutions, EBS is trying its best, but it is small and has limited impact, and Irish Nationwide Building Society gave up its old role years ago as a provider of loans to ordinary people to become a financier of property speculation by the big developers. It has little else worth contributing to the economy at present. As for Anglo Irish Bank, well, let’s not go there.

Ulster Bank has a long and honourable history as the third player in Irish banking, if not exactly the third force. Unfortunately, its owner, Royal Bank of Scotland, is under pressure to concentrate its resources on the British market rather than boosting economic activity here in the Republic. Ulster’s local management might like to continue to operate in the Irish market but it may be required to serve existing customers, at best, rather than seek new ones. It may also tighten its services to customers, prompting some to look elsewhere.

This is going to be a big problem for customers, both personal and business, of many of the other foreign-owned banks, especially if they abandoned AIB and Bank of Ireland for seemingly better deals and now have to go back to their original bankers, tails between their legs. Will they be entertained?

Halifax Bank of Scotland Ireland, for example, has made major efforts in the Irish market in recent years, but its owner, HBOS Lloyds, is under enormous pressure, by virtue of the British government investment, to retrench to more profitable British markets or to make its more limited capital and resources available for British customers who claim the same need as Irish ones. It would come as no surprise if HBOS Ireland was to give up its place in the Irish market or, at best, scale it back dramatically. What happens then to its customers?

The same goes for the Danish-owned National Irish Bank and the Dutch-owned ACC Bank whose Rabobank parent seems to have decided it is getting out of Ireland in case its losses here damage its credit rating.

By calling in its loans to customers like Liam Carroll it may force rivals to buy its debts at a relatively high price so as to stop receiverships that would value properties (and the applicable loans) at lower prices than the other banks would like. But whatever about its impact on property valuations and the loans held by other banks, it is clear that it is going to be very slow to advance fresh credit in the Irish market.

Overall, the signs are not good. Fifteen years ago one of the big arguments was about the need for a “third force” in Irish banking. AIB and Bank of Ireland were too big, it was argued, and had too much control over lending. Other banks were needed to provide competition. The rainbow coalition government examined the option of a state-supported competitor based around An Post.

There were hopes that the British-owned Ulster Bank would extend its reach by opening more branches or that the Australian-owned National Irish Bank could be persuaded to do the job instead.

The debate became somewhat redundant during the Celtic Tiger boom era. There was no shortage of cheap money as interest rates fell and foreign lenders ploughed into the Irish market, seduced almost as much by local lenders as by the prospect of easy profits. Anglo Irish Bank emerged as the preferred lender to the property developers this decade and AIB and Bank of Ireland, envious of its soaring stock market valuation and determined to protect their market shares, responded by making credit more freely available to speculators.

Competition turned out to be a bad thing because nobody regulated it.

IT WASN’T just the developers who got finance. Those who wanted to buy new houses or apartments, or the commercial space these developers needed to sell, got finance readily too. Personal customers got overdrafts, term loans and credit cards almost on the nod and purchased long-term mortgages on mad multiples of their salaries.

Most businesses found it easy enough to raise money, either for working capital or for investment, often as long as it was secured on property. Now, as cashflow tightens because suppliers are making demands for early payments and customers are slow to settle their bills, they are finding the banks unwilling to take up the slack.

This is a big political issue. Once NAMA goes into action, the banks are going to come under pressure to fund property lending again. NAMA will want to get properties off its books so it will encourage the banks to lend to whoever wants to pick them up at the new lower prices.

This is money that would be better placed with productive enterprises that have real goods and services to sell, but the state will want someone to take the property burden off its books. Good businesses, and potentially good ones, will be in competition for a limited supply of bank finance with a new generation of property developers – some of whom may be those who originally caused the trouble for the economy but who will resurface once certain debts are written off.

The general public may dislike banks but it won’t be much good for us if there are far fewer of them doing business in Ireland to dislike.

The Last Word with Matt Cooper is broadcast on 100-100 Today FM, Monday to Friday, 4.30pm to 7pm.