The international banks operating in Ireland have had to reassess their overseas policies, writes SIMON CARSWELL

CAST YOUR memory back to last September and you may recall Minister for Finance Brian Lenihan saying that the Irish guarantee scheme to protect the funding of the Irish banking system was “a tendency towards economic nationalism”.

Lenihan said he regretted this but the Government had to act in the interests of the Irish people.

While the guarantee ultimately helps to protect Irish bank customers, the succession of Government supports and taxpayer bailouts across Europe has forced international banks to retrench and focus on home markets.

They have concentrated the tightened credit supply on the taxpayers who are bailing them out.

But this will affect long-term competition and hurt consumers.

The IMF noted in its report on Ireland last month that “deleveraging” by international banks following global losses could lead to “sizeable capital outflows” from Ireland by foreign banks with subsidiaries or branches to refocus credit “in their home markets”.

“The unfortunate thing in this crisis is that, with governments putting money into banks, banks will focus on their own markets,” said Oliver Gilvarry, head of research at Dolmen Securities.

“The dangerous thing for Europe is that it will be an Irish euro for an Irish bank, a Belgian euro for a Belgian bank and a British pound for a British bank.”

The British government owns 70 per cent of Royal Bank of Scotland (RBS) and 43 per cent of Lloyds Banking Group – both have Irish operations which were instrumental in driving competition in this market, most noticeably in the mortgage market but also in business banking, and the battle for deposits and current accounts.

Bank of Scotland (Ireland), which is now owned by Lloyds following its merger with HBOS last year, stormed the Irish mortgage market in 1999 by undercutting the cheapest variable rate mortgage and in 2001 introduced the country to the tracker mortgage.

Ulster Bank and First Active, subsidiaries of RBS, increased their share of the mortgage market to 20 per cent by an aggressive strategy which included introducing 100 per cent and 40-year mortgages into the mainstream.

Both enjoyed healthy profits as the property market boomed.

As economic nationalism has taken grip across the banking world, the international banks operating in Ireland have had to reassess their overseas strategies.

This will spell the end of the fraught competition that dominated the Irish banking sector in recent years as the two domestic banks, Allied Irish Banks (AIB) and Bank of Ireland, protected by the State guarantee and bolstered by Government cash injections, will continue to provide credit into the economy at a far higher rate.

“You can take it that it is over for competition,” said a senior executive in one of the non-Irish financial institutions. “Foreign-owned banks will be gone as a competitive force. All you will get is foreign deposit raisers and some isolated commercial banks.”

The foreign banks were “cheer-led” to drive competition in the Irish market over the past decade, he said, but this trend was being put sharply into reverse.

At the outset of the domestic banking crisis, the overseas institutions had to cope with a massive shock to their funding models following the introduction of the bank guarantee as deposits flooded to the domestic banks.

Irish deposits within almost all of the overseas retail banks fell sharply after the guarantee.

At Bank of Scotland (Ireland) and its retail bank Halifax, deposits fell 32 per cent to €6.6 billion. At Belgian-owned KBC Bank Ireland, they dropped 44 per cent to €5 billion.

They declined 9 per cent to £24 billion (€30 billion) at Ulster Bank, and 22 per cent at ACCBank, part of by the AAA-rated Dutch bank Rabobank.

At a time of financial crisis when these banks are trying to “de-risk” their overseas businesses by reducing loans to bring them as closely into line with deposits, these sharp falls in deposits pose problems for funding models.

For example, the leakage of deposits at ACCBank drove the bank’s loans-to-deposits ratio to a staggering 451 per cent last year.

It is little surprise then that the bank is aggressively pursuing debts through the courts in an effort to secure judgments against developers and appoint receivers to property firms to recover loans.

The trouble for ACC is that it is next to impossible to reduce their stock of loans when rivals are not lending, particularly into the beleaguered property sector.

In the absence of fresh deposits to replenish their funding bases, the overseas institutions have had to turn to the parents for support.

Bank of Scotland (Ireland) secured €700 million from Lloyds in addition to the €750 million capital injection into the bank last December. The bank has portrayed this as a sign of continued support of a parent to its subsidiary when the capital is largely being used to plug the hole left by the surge in losses on loans, most notably to the collapsing property sector and large developers.

The bank made a loss of €250 million in 2008 after a bad loan charge of €553 million – a near 17-fold rise on a year earlier.

Bank of Scotland (Ireland) is carrying out a wide-ranging review of its operations, with a radical downsizing or possible closure of Halifax, which the bank has spent four years and hundreds of millions developing, under consideration.

Antoinette Dunne, a long-serving executive at the bank and regarded as a rising star within the company, stood down last week after just a year as head of Halifax.

Mark Duffy stepped down as chief executive last April after 16 years with the institution, and chief operating officer Richard McDonnell is leaving at the end of the month, while Lloyds has parachuted a new head of risk into the bank from its UK operations.

Duffy’s successor, Joe Higgins, is leading the review, which will be completed by the end of August, as the bank’s old head of risk, Paul McEvoy, has taken charge of determining which Irish loans will be moved into the UK government asset protection scheme (Gaps) – the British alternative to the Nama “bad bank” plan for toxic assets.

As Gaps will operate on the basis of addressing portfolios of assets, it is likely that the €9 billion construction and property book at Bank of Scotland (Ireland), which includes €5.8 billion of development loans, will be repatriated to the UK under the plan.

Other Irish loans may also be addressed under the scheme.

RBS has shown its commitment to remain in Ireland and stand by Ulster Bank, which received €300 million in additional capital from its parent bank at the end of June.

A cursory analysis of mortgage rates on offer in the market shows that the foreign banks have effectively drawn down the shutters on their credit counters, leaving any new lending to the domestic banks, primarily AIB, Bank of Ireland and EBS, judging by the lower variable rates they offer.

Meanwhile, the retrenchment by the foreign banks in Ireland is mirrored by the domestic banks’ moves overseas – Bank of Ireland and Irish Life Permanent have cut back in their UK businesses.

“The Irish Government would give them no thanks for growing their businesses overseas,” said a senior bank executive. “This is economic nationalism at play.”