There will be some familiar themes in Irish banking in 2017 – mortgage arrears, non-performing loans and the tracker mortgage examination – but it could also mark an important inflection point for the sector.
The coming year is likely to see a restoration of ordinary dividends by Allied Irish Banks and possibly Bank of Ireland, a net increase in loan books for the first time in eight years, and the possible return of AIB to the main stock markets in Dublin and London.
It will also decide the future of KBC Bank Ireland, and test the commercial mettle of Permanent TSB.
Equity markets have been on a strong run since Donald Trump’s victory in the US presidential election and there is confidence that AIB might get away in 2017.
A lot will depend on the market reaction to how Italy sorts out its banks. The government there has set aside €20 billion for its financial sector.
Uncertainty over Brexit might also affect the timing, along with issues around Trump’s plan to bring jobs back to the US and cut its corporate taxes, and how this might affect inward investment to Ireland.
The Government has begun to piece together the jigsaw by appointing Bank of America Merrill Lynch, Davy and Deutsche Bank as global co-ordinators to advise on a potential initial public offering (IPO). It has also advertised for a public relations adviser.
The State would be expected to sell 25 per cent of AIB, netting between €2 billion and €3 billion for taxpayers.
Permanent TSB chief executive Jeremy Masding travelled the same path in 2015, when 25 per cent of the bank was sold to institutional investors.
Prudent dividend
“I really, really hope that the AIB IPO gets away because I’m pretty sure that would give the Department of Finance the confidence to release the next tranche of PTSB,” he said. “Maybe in early 2018. I’d like to do another 15 to 25 per cent [stake]. It’s doable, you’ve got to be ambitious.”
AIB has already signalled that a “prudent dividend” is likely to be paid in the new year. This could be announced at the publication of its annual results.
Bank of Ireland had been expected to announce its first dividend since the global financial crash on announcing its full-year results in late February next. But sterling’s weakness following the Brexit vote – about 40 per cent of its balance sheet is based in the UK – and the impact of low bond yields on its pension deficit mean it will now likely be postponed, possibly for 12 months.
Ironically, Trump’s election has helped to firm up bond yields, a positive for Bank of Ireland’s pension deficit, which stood at €1.45 billion at the end of October.
Having recently completed its deleveraging programme with the sale of its UK mortgage subsidiary, PTSB will be expected to deliver commercially this year.
Cian Harty, a banking analyst with Goodbody, said PTSB has been underweight in the Dublin mortgage market and in the first-time buyer cohort, but he believes recent changes to its mortgage pricing could see it gain share next year.
“We expect that PTSB’s recently announced mortgage pricing adjustments and the extension of the bank’s 2 per cent cashback offer will aid it in growing its market share towards our 12 per cent medium-term target [from 9 per cent currently].”
Masding said PTSB has been in survival mode since 2012 with the result that its lending numbers have been “static”.
“You can’t do transformation on the scale that we did it and focus on a commercial agenda. It’s impossible.”
Mortgage applications
He said the run rate for mortgage applications has picked up steadily since the end of March. “We’ve got a pipeline going into 2017 that is 40 per cent higher than going into ’16,” he said, adding that its current run rate would give it a share of 11 to 12 per cent.
Masding accepts that PTSB has to improve its technology offering to customers and that its branches need a change of mindset. “We need to work every lead really hard. I need to re-energise the staff, which is what we’ll do.”
Does the bank need 77 branches? “Probably not. First, I’ve got to work out the economics, then I’ve got to look at demographics and then I’ve got to work out how many we need.
“The KBC model is a cool model from what I can see. It seems to work, it seems to be profitable. I suspect 15 is too few but it’s definitely a question to ask.”
Masding said a preferred candidate has been identified to replace Alan Cook as PTSB chairman with the appointment awaiting regulatory approval.
In addition, a new chief financial officer (an Irish banker based overseas) has signed a contract to join the bank at the beginning of March.
For the Irish subsidiary of Belgian bank KBC, this year will bring a conclusion to the strategic review of the business.
Wim Verbraeken, its chief executive, wouldn't comment on the review other than to say that the outcome should be made known in the first quarter of 2017. However, there is an expectation in the market that KBC will remain in Ireland and pursue a bank assurance model.
Verbraeken said there is a “great opportunity” here for a challenger bank such as KBC to take share from AIB and Bank of Ireland, who control about two-thirds of the market here.
Switching of accounts
“There has been very little switching of current accounts and other products to date, and various personal finance observers have indicated that a lot of customers would benefit by switching their current account or mortgage or other services.
“So I see my biggest challenge to make good on that promise that we’ve made to Irish consumers . . . to be that challenger bank in the Irish market.”
On a positive note, the Government’s help-to-buy scheme and the Central Bank’s decision to ease its mortgage lending rules should help first time borrowers to secure new home loans, particularly in Dublin.
Verbraeken expects mortgage lending in Ireland to increase by 15 per cent next year to about €6.3 billion.
“What we’re picking up in the market is that credit demand has increased compared to last year,” he said.
Verbraeken also sees technology playing a larger part in Irish banking. “We believe we can sharpen and improve our proposition for Irish consumers and streamline the customer experience technologically. We were the first bank along with AIB to offer Android Pay [on mobile phones] to consumers. I think we will see more of these initiatives in 2017 with innovative solutions that are valued by consumers.”
