EBS could have survived crash if it avoided ‘property lending’

The former head of EBS building society Fergus Murphy has told the Oireachtas Banking Inquiry there was a "very reasonable chance" the institution could have made it through the crash without being nationalised and merged with AIB if it had not got involved in land development and commercial property lending.

"They got into it because they felt they were losing relevance" and "needed to create new profit pools", Mr Murphy told the committee on Wednesday.

EBS became involved in commercial property lending in 2001/02 and in land and development loans in 2005. The combined loan book amounted to

€1.7 billion by the end of 2007.

Mr Murphy took over as chief executive of EBS in January 2008 and ceased its lending to commercial property and land development projects.

Mr Murphy said about 60 per cent of its €2.375 billion State bailout related to commercial property and land and development lending. He said €425 million was required following the transfer of about €900 million worth of loans to the National Asset Management Agency at a haircut of 57 per cent.

Mr Murphy confirmed EBS held discussions with Irish Nationwide Building Society in November 2008 about a possible merger. He said some “mutual basic due diligence” of each other’s portfolios took place but a deal could not be struck.

“It became very clear, very quickly in those generic discussions that the balance sheet of INBS was not of a state that one could recommend to one’s board or its members that there should be a co-joining of those two societies,” he said.

Mr Murphy said he did not agree with 100 per cent residential mortgages and “did away with them” after taking over at EBS in the beginning of 2008.

He said nine “formal changes in credit policy” took place at EBS during his time in charge of the society.

Mr Murphy told Fine Gael’s Kieran O’Donnell that he did not receive a bonus with EBS from the time he took over in early 2008. “I can confirm that I didn’t receive a bonus,” he said.

He added that no retention bonuses were paid to staff from 2008 onwards in spite of this being mentioned in the minutes of a board meeting.

Mr Murphy told the Oireachtas Inquiry the capital impact of losses generated from property lending before 2008 was the “dominant reason” why Irish building society EBS ultimately ended up in State ownership.

He said that between 2009 and 2011, EBS held “continual talks” with third party investors, to the stage of agreeing a preferred bidder in February 2011.

However, the National Treasury Management Agency (NTMA) decided against accepting this offer and EBS was then merged into AIB into a "pillar" bank alongside Bank of Ireland.

He said there were “viable” alternatives to its merger with AIB in 2011 but that this transaction has proved to be “credible” given the recovery that has occurred in the merged institution since then.

“I believe the bank [AIB/EBS]is very well positioned to return capital to its shareholder, at the State’s discretion,” he said.

Mr Murphy said the “complete dislocation” of the global wholesale funding markets in the latter half of 2007 prevented EBS from securing any long term funding.

And EBS faced significant refinancing requirements in the first half of 2008. “By the time I joined EBS [as CEO in January 2008], the damage had been done and could not be corrected in the short term,” he said.

Mr Murphy said EBS had traditionally pursued a conservative funding strategy with retail deposits as its primary source of funding in the late 1990s.

By the start of 2008, EBS’ funding profile consisted of 26 per cent retail deposits and 74 per cent from various wholesale sources and corporate deposits, with an over-reliance on wholesale funding at 36 per cent.

“By the time I joined EBS, the contraction of the global funding markets that began in mid-2007 was significantly impeding EBS’ access to the wholesale and corporate funds,” he said, adding that he sought to immediately shift management’s focus to improving liability management in order to mitigate its funding difficulties.

He said that on joining EBS, he identified a number of concerns with “respect to risk appetite and property lending strategies”.

The EBS total loan book had grown from €5.7 billion in 2001 to €15.9 billion by the end of 2007. Its residential mortgage lending book grew from €5billion in 2001 to €14.2 billion by 2007.

EBS entered commercial property lending in 2001/2002, a departure from its core business, and it also entered land and development lending over the period 2005 to 2007.

Those two books had grown to a combined €1.7 billion exposure by the end of 2007.

Mr Murphy said he set about “pursuing a significantly more conservative credit and risk appetite” with 11 actions taken to address these issues. This included ceasing lending for land and development and commercial property.

He said on joining EBS he “soon realised” the extent of the problems facing the institution, but did not predict that the “downturn would be as severe as it has been” and thought that EBS was “fundamentally sound and would survive”.

Mr Murphy said he was not a party to the Government’s blanket bank guarantee decision of September 2008. He heard of the decision on a “short call” with his chairman on the morning of September 30th, the day the Government announced its decision.

The Central Bank told EBS that it would have to avail of the guarantee.

Mr Murphy, who is now an executive with AIB, told the committee that he recommended to the Government that it institute a five-year guarantee to give the Irish banks “more line of sight”.

When asked if EBS was insolvent on the night of the guarantee, Mr Murphy said it was “doing ok” at the point in time.

Mr Murphy noted that EBS’s retail deposits grew by €2 billion between January 2008 and December 2011.

“EBS was also the most successful of the covered institutions in retaining customer deposit funding, losing just 4 per cent of its total deposits in 2010,” he said.

EBS actually increased retail deposits by €531 million in 2010, despite the Greece debt crisis that year, which destabilised global markets.

“The programme to seek new capital partners for the bank in 2010, to decrease the potential cost to the taxpayer, could not ultimately alleviate the damage that was done by the excessive property lending which had taken place pre 2008,” he said.

“When in 2010 €836 million of property loans, originated in just two years between 2005 and 2007, were transferred to NAMA at an average discount of circa 60 per cent, the resulting capital loss on those loans was very damaging.”