Bank customers will pay the price for shrinking competition

So, we now know why Bank of Ireland boss Francesca McDonagh was keeping a low profile while rivals in AIB and Permanent TSB donned the green jersey in February to enter talks to carve up Ulster Bank between them, as the UK-owned lender confirmed it was quitting the market.

Bank of Ireland made an approach the same month to Brussels-based financial services giant KBC Group about the prospect of taking over its Irish loan book, according to sources, after hearing whispers late last year that the Belgians were feeling queasy about remaining in what has increasingly become a challenging market to do business.

KBC Bank Ireland has battened down the hatches – beyond a joint statement on Friday morning with Bank of Ireland that they are exploring a deal – and its chief executive, Peter Roebben, turning up briefly on RTÉ's Morning Ireland, where he gave little additional colour.

But his view of the market was clear when The Irish Times asked him in early February, as the bank reported full-year results, about what the then-heightened speculation about Ulster’s future said about banking in this State.

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‘Challenge’

“It tells me that it’s a very tough market, a very competitive and complex market to operate in – and you need a lot of stamina,” said Roebben, who has led the unit for less than two years and, as it emerged last month, is set to move on again to run the group’s Bulgarian arm.

The “bigger challenge”, he said, is the level of expensive capital that Irish banks must hold in reserve against mortgages, which is almost three times what KBC has to apply against home loans in its other main markets – eating into the parent group’s chances of getting an acceptable return on its investment in the State.

Aside from its main business in Belgium, it also operates in the Czech Republic, Slovakia, Hungary and Bulgaria.

The Irish capital requirements are a direct result of the level of losses on loans endured by banks during the financial crisis and the actual extent of the property crash, which saw house prices slump by almost 55 per cent from their peak.

Roebben said the high capital levels of Irish banks, of course, left them in a good position to set aside large provisions for expected loan losses stemming from Covid-19. “It tells you that you have a rock-solid banking system,” he said. “But how hard does the rock have to be?”

In entering talks to sell its €8.9 billion of performing loans and €5 billion of deposits to Bank of Ireland, KBC has clearly decided there is little prospect of regulators easing the capital requirements of the State’s lenders any time soon.

Rates

While average Irish mortgage rates remain among the highest in Europe – at more than double the EU average of about 1.3 per cent for new loans – all banks in the market are struggling to make the kind of profit returns on shareholders’ money that is regarded as acceptable by investors.

It also became clear in recent months to the KBC Group that its Irish unit – while more focused on a digital offering, with only 12 branches – was going to be reduced to being even more of a bit player in a consolidating market. The bank’s loan book was already subscale, at just €10.3 billion, having contracted by more than 40 per cent over the past decade.

Meanwhile its closest rival, Permanent TSB, which also has a small loan book of about €16.4 billion, is looking to grow by more than 50 per cent by taking on much of Ulster Bank’s loan book.

KBC Group, which entered the Irish market in 1978 by acquiring Irish Intercontinental Bank (IIB), was forced to inject €1.4 billion during the financial crisis to keep it afloat as loan losses spiralled. It has only managed to claw back a little over €400 million of the rescue funds.

After reaffirming its commitment to the Republic in early 2017, following two years of heightened speculation, it appeared last year to be prepared to double down here by launching a life and pensions offering to become a fully-fledged bancassurer (a bank that sells insurance products), and so replicating a model in its other markets.

It didn’t last long.

While banks across Europe grapple with ultra-low interest rates, muted loan demand and the ongoing impact of Covid-19 on income, KBC Group has had more reasons – some self-inflicted – to take a jaundiced view of the Republic.

Apology

In late 2019, group chief executive Johan Thijs was forced to issue a grovelling apology after letting rip on an analysts' call at the Central Bank for its continued focus on the tracker mortgage scandal and lenders' other past sins, saying this "nitty-gritty stuff" was holding back the industry.

“What is still an annoying thing is all the tracker mortgage stuff and, honestly, we would recommend to Central Bank of Ireland: ‘Come on, guys, turn the page’,” he said on the call.

The regulator ended up fining KBC Bank Ireland €18.3 million last September for its role in the State’s tracker mortgage scandal, concluding that the bank devised a strategy to move borrowers off cheap loans and “persistently” resisted as regulators pushed it to admit its failings. Borrowers lost some 66 properties, including 11 family homes, as a result of the overcharging. It’s pretty egregious stuff.

In late 2018 its Dublin headquarters and two branches were subject to arson attacks after it moved to repossess a farm in Co Roscommon, almost a decade after it took proceedings to try and recover money that was owed.

Some €1.43 billion – or 14 per cent – of its loan book was still classified as impaired as of the end of 2020 amid the difficulties faced by banks in the country, for various reasons, on getting hold of the underlying collateral even after years of non-engagement by borrowers. KBC Group would be forgiven for considering Irish mortgages little more than unsecured lending.

With KBC Bank Ireland and Ulster Bank joining a raft of overseas banks that have exited the Republic over the past decade, the market is now left with lenders that cannot leave. And customers that will pay the price for shrinking competition.