Mistakes by Irish banks

Mistakes by Irish banks

The banking system in this country is broken at present

I can’t help but wonder if there is some link between saving Irish banks and the way they then act after the fact, do they become grateful for the salvation or morph into ongoing prodigal sons?

The recent issues with AIB are a case in point. They have been rescued several times now, most recently with a payment totalling €21,000,000,000 which is made up of money from our sovereign wealth fund and borrowings.

As recently as April the bank repaid €3,100,000 to 11,500 customers over errors on insurance policies. They are still keeping busy though, underwriters in Irish Life tell me they are getting a lot of applications in from AIB so people still obviously trust them.

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This is the same company that ended 2010 with losses of €12,100,000,000. Who only cost €8 billion less than Anglo and who broke records for Central Bank fines in 2010 when they were hit with a €2,000,000 bill for overcharging.

So is it any surprise when we now find that 12,000 people had their records potentially mismanaged resulting in possible Irish Credit Bureau problems? It isn’t a surprise, it is a disappointment.

And yet Irish people don’t move bank, research conducted by Bank of Ireland several years ago showed that you are more likely to leave your spouse than your bank, and any bank that has come here has found it hard to gain a foothold. Even indigenous players have a hard time increasing market share – in particular in the current account space.

Some like NIB have given up the ghost with branches, all 27 of theirs will close and be replaced by a few regional service centres and almost every other bank seems set to close branches.

How many are set to close?  About 210 branches of various banks. At present there are just under 850 branches, bringing that down by almost 25% will leave about 640 branches.

AIB will shut 70 of their 270 branches. They now own EBS who have 84 branches – most of them are owner operated and set to close, they will also be laying off 2,500 staff. Ulster Bank will close 40 of their 146 branches and PTSB is going to shut 25 of their 92 branches. It is likely that many regional towns that have enjoyed having one of every bank will now be left with one or two banks.

Banking is broken unfortunately, as of now they can still make more money by lending to the State than they can to individuals which shows that pricing is upside down. Not only that, you don’t have to post collateral to lend to the state, with mortgages you do – which means you must put money aside (that you can’t utilise) in order to provide a mortgage.

That is what made AIB raise their rates recently. They were losing money when they lent, which is no different than a corner shop buying milk at €1 and selling it for 50c – eventually something will go wrong.

And yet in this broken credit market, which seems tempted to under perform even last year’s record-breaking credit drought, the worst in 40 years, there have been some uplifts in interest.  Estate agents are reporting higher activity in city housing, mortgage applications are coming in thick and fast, although many have little hope of obtaining credit, and cash buyers seem to be coming out of the wood work when the price is right.

These things would lead me to believe that in Dublin we are at the front of a period of stabilisation in the housing market (strip out apartments). How long that lasts is likely depending on credit which is the missing ingredient.

And between me and you? I think we’ll be heading into another boom bust cycle (property goes through them with regularity in many nations) quicker than we suspect we will!

@karldeeter

Irish Mortgage Brokers

There are 10 comments for this article
  1. keith dovey at 2:14 am

    I live in australia and we have the same problem here. Banks caused the price increase in homes years ago and now have crashed the market.
    The old system of years ago allowed people to own their own house as the repayment level was 25% of their weekly wage not taking into account their
    spouses income. Allowing people to borrow more than they can afford to pay forced up the price of housing and this can be laid totally at the feet of the banks. I would also say no bailout for the banks and law passed to allow people who are now struggling to return to 25% of wages at the bank or governments expense.

  2. mysocialspidersphere.blogspot.ie at 10:24 pm

    What about Nama: the biggest baddest bank in the whole dame town!! Do you trust it?

    From the start it was criticised for lack of transparency and accountability and so far its lived up to all that was expected of it. The difference with Nama is it is protected by the State.

    Someone good at numbers try calculate this and see if if makes you smile a little!

    8billion cashflow currently in Nama: a minimum of 10billion if all assets were sold as distressed sales and Nama closed down with no further running costs.

    Try invest the 18billion+ now at 6% recent yield on bond auctions(considering also compound interest rates on initial sum and also present value currency exchanges) and see what figure you come up with.

    Frank Daly (nama: publicly stated) hopes to get the loan values back 32billion by 2020. Nama has already taken a 4billion write-down on property values… reducing the portfolio to 27.8billion.

    Any takers on the sums? Any takers on a ongoing discussion on this issue?

    A bird in the hand is worth two in the bush!
    Spidertap.

  3. liam at 4:07 pm

    Give a man a gun & he can rob a bank. Give a man a bank & he can rob a country !
    Unfortunately we Irish are too apathetic and we must take ownership of what we have allowed to happen. We have allowed a “ruling elite ” to develop. This “elite ” views Ireland it’s resources & most of it’s people as purely a source of wealth & income . Look in the first instance at the banks. Why were they saved, Ireland Inc. could have set up another good bank from scratch for the all the money pumped into the existing zombie banks. So who benefited and why – follow the money trail ?
    The top layer of civil servants are paid significantly more than any of their counterparts in Europe- why – Are they worth more ? – Do they do a better job ? If pay were cut to European levels would they get up & leave ? Do we need as many as we have ? Again follow the money and ask who & why.

    Look at the ESB- what other company in Europe pays the type of salaries it does ? It is subsidised by the only wealth producing part of Ireland – the private sector.

    Look at the top trade Union officials ( most representing Civil Servants ) with their pay tied to the top civil service rates of pay ? When you have a job from which you cannot be fired and earn more than your equivalent in the private sector or indeed in Europe, why do you need an overpaid union official to “ protect your job ” ?
    Our ruling elite ( how I hate the term but it accurately describes them, ) have their snouts so deep in the trough that not only can they not see what is going on but they cannot even hear what is being said and what do we do about it ? nothing .

    When are we going to get off our buts & say – That’s it- you have gone to far, now get out !

  4. Aidan at 2:35 pm

    Why would anyone want to trust banks or any financial institution that sell us products or services they are in existence to make money and the more gullible there customers the more money is made.
    As we have seen in the last few years the rooted cause is that there is zero accountability in nearly every level of so called professionals here in ireland managers fail, auditors fail, regulators fail and all are rewarded with huge payoffs and pensions in both public and private sectors
    Trust has been destroyed at so many levels it is very hard to see how it can be rebuilt.
    The only conclusion that can be drawn from this total lack of accountability and no willingness on the part of government to change anything is that if you start making people accountable in the private sector then it is only a matter of time until people will expect the same accountability in the public sector and that can’t be allowed or can it?

  5. whistlingjacksmith at 2:30 pm

    say what you like but it was Sean Fitzpatrick and his dynamism that shook up Irish banking in the eighties. We need more business minded people like him to get the country moving again.

    The boards of the banks are once again stuffed with government nominees and ‘public interest’ directors.

    The banks are turning into self serving semi state monopolies, top management on enormous salaries declaring ever increasing losses.

    Why does the state own or part own five different financial institutions and run them all at massive losses?

  6. Greg Stevenson at 1:24 pm

    I would imagine many people would move their accounts if they believed that there was a morally acceptable alternative. In the meantime, banks continue to charge their customers monopoly prices to underwrite their own mis-management.

    I’m looking at you AIB for charging me 2.50 Euro per photocopied page per statement per account for having the bad manners to apply for a mortgage with one of your competitors. Move my account? I most certainly will be…

  7. Michael Hunt at 12:31 pm

    Well said Karl, I am sick of bailing out these banks, while the bosses of these so called banks still command huge salaries, and they have the cheek to try and state ” We don’t want moral hazard”, when it comes to strategic defaulting, I think the banks need to look at their own morals first before they start preaching from the pulpit.

  8. Karl Deeter Author at 12:18 pm

    @Patrick I share that frustration,it’s hard to compete with a company when they get €21,000,000,000 of a competitive advantage.

    Just to explain that point to other posters: A large portion of banking business and profitability is from wealth management and life assurance (for instance AIB recently tied up with Irish Life which had a huge impact on Aviva who they left – this goes to show the size of the business they do).

    This non-core banking activity is indirectly supported by bailouts that mean the units doing this work don’t have to close down, then intermediaries (who receive zero support but who are still more than half the market by volume) have to compete with them. I wish the bailouts could have been contingent on booking losses in a set amount of time and upon condition that non-core business of the banks would have to shut. Doesn’t work out that way I guess.

  9. Frank Bodley at 12:04 pm

    Karl, I could not have put it better myself. Also with large Commercial properties being offloaded by Nama and AIB at knock down prices this is creating havoc for people trying to sell similar properties, putting pressure on stable Businesses operating out of properties whose values are being brought down by Nama and AIB. Their policy of getting working capital in at all costs especially in the Hotel area/tourism is hitting existing Guest Houses who are unable to compete.
    Frank Bodley

  10. Patrick O’SULLIVAN at 11:47 am

    Bankers are aloud rule OK. We are queried on our standing with regards our solvency status, our audited accounts, our compliance with regulators and Central Bank. We are prevented from carrying on our business should we fall at any of these hurls. However, if you’re a bank and become insolvent, the taxpayer bails you out, and you carry on your business as usual. Should you have any defaulters you can make them insolvent, even though they may be the biggest contributors as taxpayers in keeping you(the bank) in business.

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