Today's meetings mark the start of significant consolidation within the financial services sector, writes SIMON CARSWELL
TODAY MAY mark the beginning of the end for Irish Nationwide Building Society (INBS) and the start of a new beginning for its long-term mutual rival, the Educational Building Society (EBS).
Both societies have invited their 662,000 members to attend special general meetings to be held simultaneously at 11am in Dublin to seek approval for a Government capital injection of up to €2.4 billion to ensure their long-term survival. Irish Nationwide has 200,000 members, while EBS has 462,000.
The two building societies are seeking approval from their members to issue special investment shares to the Government in return for the capital injections.
The meetings mark a milestone in the Irish financial landscape as they will start a process that will lead to what had been seen as a marriage of the two – with substantial State aid – but which is really a takeover of Irish Nationwide by its larger rival.
The capital injections will bring the running total on the State’s investments into the banking sector up to €13.4 billion.
The transfer of loans totalling about €1 billion from EBS and €8.3 billion from INBS into the National Asset Management Agency (Nama) is the catalyst for the meetings, the State investments and the potential merger of the two financial institutions.
The losses incurred by both building societies will trigger an urgent need for capital to fill the hole created from Nama’s discounted purchase of the assets.
Irish Nationwide’s rising impairments on its €8 billion development and commercial investment loans – even before the Nama transfers – make a capital injection an even more pressing issue for the lender.
EBS told members before today’s meeting at the Burlington Hotel it would need €300–€400 million, while Irish Nationwide has said it would need €1.2–€2 billion.
“The additional capital required and the amount to be transferred to Nama may vary significantly depending on how events unfold,” Irish Nationwide said in a circular.
Both lenders acknowledged in their circulars that the Government was the only source of capital and State aid was needed to ensure their financial positions.
Irish Nationwide said it was “likely to require shortly an initial injection of capital” to absorb “significant losses” on bad commercial property loans and that the State was “the only available source of such investment in the current environment”.
It is difficult to see how Irish Nationwide would have a future as an independent entity if it requires up to €2 billion in capital to absorb the losses on the Nama transfers when all that will be left behind afterwards is a rump of a €2 billion residential loan book out of an original loan book of €10.3 billion.
“Aside from merging Irish Nationwide with EBS, it is hard to see how the Government could make a return on a capital investment of €2 billion,” said analyst Sebastian Orsi at Merrion Capital.
Bank commentators are in almost universal accord that a Government injection of up to €2.4 billion into the two building societies is resolving a problem rather than creating new opportunities for the overall Irish banking system.
On that fateful night of September 29th-30th, 2008, the Government essentially committed the State to ensuring the solvency of the entire banking system.
So Nama and the capital injections required ensure that EBS and Irish Nationwide remain solvent and partly mitigates the risk assumed by the State under the terms of the two-year guarantee.
Both EBS and Irish Nationwide have urged their members to approve today the issuing of special investment shares to the Government and the acceptance of State capital.
As recently as two years ago, Irish Nationwide members may have expected a windfall of about €10,000 each from the planned sale of the business, but the market has changed dramatically in the intervening period as the building society’s exposure as a boutique lender to property developers and investors has left it desperately vulnerable.
It is hard to see members of either building society voting against today’s resolutions, given that the future of both lenders is at stake.
While EBS will be the considerably larger party entering the potential merger, Irish Nationwide has a strong branch network with 50 directly owned outlets compared to 14 branches at EBS.
Irish Nationwide’s 400 staff compares with 610 at EBS, although Irish Nationwide’s focus on commercial property makes its personnel profile less suited to the savings and home loans unit that will be created within the enlarged entity.
Then there is the prospect of Irish Life Permanent (ILP) divesting itself of its loss-making bank Permanent TSB and seeking to attach it to the merged building society, which is likely to have a State shareholding of up to 90 per cent following a possible €2.4 billion capital investment. Shareholders in ILP approved the creation of a holding company at an extraordinary general meeting yesterday that will pave the way for the possible inclusion of Permanent TSB in a new financial services group to be created in the consolidation of the sector.
ILP’s corporate structure had been “quite inflexible and quite restrictive”, chairwoman Gillian Bowler told shareholders.
The new structure would “help us to restructure any of those businesses or make strategic investments quickly and flexibly if it’s in shareholders’ interests to do so.
“There is clear consensus now that we are likely to see significant consolidation within the financial services industry in Ireland,” Ms Bowler told shareholders.
“It’s very important that we can participate fully in any such process.”
Kevin Murphy, ILP chief executive, told reporters after yesterday’s meeting that financial institutions had held talks on the potential shape of the restructuring.
Ms Bowler told shareholders: “Already we have signalled that we have begun discussions with the Government and others on the next steps in the development of the banking sector here.”
She said most of the discussions had centred on “some sort of third force” in Irish banking which has “many possible shapes” and that that is one of the possibilities that will be examined.
A merged EBS-Irish Nationwide entity post-Nama would have loans of about €18 billion but, crucially, it would have no lending capacity to small and medium-sized enterprises or commercial lending to compete with Allied Irish Banks and Bank of Ireland, or even UK-owned Ulster Bank, the existing third force in Irish banking though not a domestically controlled lender.
Adding Permanent TSB, which is primarily a residential mortgage lender, would not solve the problem of creating a full service bank and genuine “third force”.
Kevin McConnell, analyst at Bloxhams Stockbrokers, says the imminent capital injections into the building societies, particularly Irish Nationwide, mark only a temporary solution and that the Government has to devise an exit strategy on its investment to wean the lenders off State support.
Given that foreign banks are reducing their loans in Ireland, the Government will have to satisfy EU rules that they can provide sufficient competition to rival AIB and Bank of Ireland, said Mr McConnell, and this is where the Government may have to look to include commercial lending in any new third or fourth force created.
Today’s meetings are “not so much a groundbreaking moment in financial history in Ireland”, said Mr McConnell, but they do signal a significant movement by the Government to show its support for a mutual in the market.
