Lender that burst its own credit bubble

ANALYSIS:Halifax led the lending boom – and has fallen victim to tight margins and the property bust

IT IS yet another of the ironies of Irish banking. The lender that helped inflate the credit bubble with cheap, easy mortgages became a victim of the tight margins it squeezed so aggressively.

Bank of Scotland (Ireland) chief executive Joe Higgins said the bank was closing its Halifax retail banking division in Ireland – with the loss of almost half the bank’s 1,600-strong workforce – saying that it was loss-making and would be “for the foreseeable future”.

Describing Halifax as a “fledgling” start-up business, Mr Higgins said the prospects for the business had been “fatally undermined” by the sharp and sustained downturn in the Irish economy.

BoSI entered the Irish mortgage market in late 1999 selling home loans through brokers with aggressive offers that shook the traditional lenders. It sold mortgages that were 1 per cent cheaper than its rivals and introduced the highly competitive tracker mortgages.

Flush with funding from its spendthrift parent, Halifax Bank of Scotland (HBOS), BoSI forced down margins across the Irish banking industry as competitors chased it to keep up. This helped stir the lending boom and the property-buying frenzy that characterised the heady 2003-2007 period. BoSI stepped up its interest, entering retail banking in 2005 and opening a branch network in 2006 after buying the ESB’s network of stores for €120 million, all spearheaded by former chief executive Mark Duffy.

Operating on ever-tightening margins with little or no new lending and a parent bank in UK group Lloyds that was 43 per cent state-owned and focused on its home market, Halifax’s time is up.

Mr Higgins said it was a case of “back to the future” as the bank would revert to business lending. BoSI grew out of the former Irish State-owned bank ICC, a specialist commercial lender it acquired in 2001.

The closure of Halifax had been expected last summer after BoSI carried out a review of the business following Lloyd’s rescue of HBOS the previous January. The planned closure was put on ice as the bank’s local management in Dublin considered other options.

Last September The Irish Times reported that BoSI had signalled it wanted to be part of the so-called “third force” in Irish banking in a merger, with Irish Life Permanent’s bank Permanent TSB, and Irish Nationwide and EBS building societies being mooted at the time.

BoSI offered a business-lending dimension to the other three savings and home loans institutions, and informal discussions took place between some of the parties.

A merger would also have provided a future exit for Lloyds from the loss-making Irish market, but the manoeuvres came to nothing.

Mr Higgins said the bank had considered all options facing BoSI during the seven-month review, including the third force, before it decided to exit retail banking.

The retail end of the business accounts for about €10 billion of BoSI’s overall €33 billion loan book. Given that the bank has stopped mortgage lending, this part of the book will be run down over time.

The remaining €23 billion comprises about €10 billion in property loans against which the bank has taken heavy write-downs, forcing Lloyds to pump €3.45 billion into the bank, including €2 billion as recently as mid-December.

BoSI’s decision is likely to extinguish hope of being part of any third force that may emerge following the merger of Irish Nationwide and EBS, though the bank may still try to argue that its business lending would be attractive in an enlarged banking group.

However, given that more than 50,000 credit card and current account holders must move elsewhere from May as Halifax closes, BoSI will also lose short-term variable rate deposits, making it a less attractive partner in the long run.

For a lender that broke moulds in Irish banking, ultimately its own business proved to be broken following the collapse of the economy and the property market.