Shaking things up

THE FRIDAY INTERVIEW/Mark Duffy, chief executive of Bank of Scotland (Ireland):SOME RIVALS in larger financial institutions wonder how Mark Duffy manages to attract so much attention, saying his media profile is larger than merited for the size of his bank.

This view is hardly surprising. While most bankers prefer to keep their heads down (particularly now that they have become the whipping boys of the recession), Duffy is an outspoken and polished media performer whose mission at Bank of Scotland (Ireland) and its retail bank, Halifax (HBOS Ireland when combined), has been to eat into the market share of the existing players, particularly the big two - AIB and Bank of Ireland.

Also, he does not avoid controversy to make his point. Duffy lobbied the Government hard when his bank, HBOS Ireland, was initially excluded from the State bank guarantee, but later declined to join the scheme and publicly criticised it, describing it as "discriminatory" and "a completely disproportionate solution".

Instead, he chose to rely on the UK rescue plan that involved a guarantee and state capital of £17 billion (€19 billion) for his UK parent, HBOS, and Lloyds TSB, the bank with which it is merging.

"We have taken our medicine," he says.

His criticism coincided with an advertising campaign that sought to show why HBOS Ireland rebuffed the scheme. The bank said its guarantee to customers was to ensure competition by staying outside the State scheme.

Duffy still doesn't bite his lip when discussing what else needs to be done to safeguard the future of Irish banking. He has strong views - on why the State needs a national champion created through the marriage of the two big banks, and why some of his counterparts may not be in their jobs for much longer.

He says the Government is "flat-footed" and "behind the curve" when it comes to injecting fresh capital into the banks to absorb rising losses on loans, particularly in the declining property sector.

"They need to get a move on," he says, though he believes the Government has diverted criticism away from itself to bankers.

"I am not a great defender of the banking industry; bankers are fair game at present. But I think the politicians have been slightly disingenuous in deflecting a lot of the criticism of them for being behind the curve to the bankers."

Duffy says it is also unfair for the Government to suggest that banks should lend and that it will be different when the State eventually invests capital in the banks.

"When the Government does get involved, it will be much more difficult for them. They will realise that their capital, taxpayers' capital, will be at risk, and they will be singing a different tune."

He believes putting capital into the banks alone - AIB, Bank of Ireland and Anglo Irish Bank need an estimated €10 billion to absorb projected loan losses - will not increase the flow of credit into the cash-strapped economy. Instead, banks will hoard any capital they receive, he says, to absorb higher loan losses "coming down the tracks" as they "deleverage" by curtailing new lending.

Duffy says the Government needs to do three things. First, the State should invest capital in the banks in return for preference shares, charging an annual coupon (dividend) of 8 per cent. This compares with 12 per cent charged by the UK for its capital.

He says the State "can be clever" by co-investing with the private equity and institutional investment managers' groups currently circling the banks, with the taxpayer taking a "meaningful" stake of between 15 per cent and 20 per cent.

Second, it should set lending growth for each bank and "ratchet up" the coupon it earns if they do not achieve this.

Third, the Government must consider guaranteeing new bond sales that will allow the banks to raise loans due after the State guarantee expires in September 2010. This will help them raise much-needed longer-term funding. Duffy says it's "silly" to be raising money for just 21 months when some loans are for 10 years.

"If you put the new bonds in place, you get new lending. If you put that type of ratchet on lending, you benefit the taxpayer when the banks' fortunes pick back up and you incentivise them to lend with the threat of increasing the preference rate, say from 8 to 10 to 12 per cent, if they don't lend."

Duffy says HBOS Ireland has done its part to inject new loans into the system by launching a €1 billion lending fund last week for consumers, particularly first-time buyers, and small and medium-sized enterprises (SMEs), with €100 million earmarked for hotels.

He says the fund was not money the bank would have already been lending and was "not a stunt" to garner publicity. It's "an accountable figure", he says.

State-owned ICC Bank, which Duffy acquired in 2001, was set up 75 years ago this month because credit had frozen in the 1930s and the government at the time saw that SMEs could not secure business loans, he adds. "It sounds awfully familiar - it is like going back to the future," says Duffy.

HBOS Ireland was also among three lenders to pass on last week's 0.75 point interest-rate cut from the European Central Bank (ECB) the day it was announced.

Duffy says the bank will also pass on all future cuts expected next year.

Permanent TSB said it might not be able to pass on future rate cuts, while Ulster Bank-First Active chose not to pass on the full 0.75 point cut to borrowers.

"The problem with those banks not passing it on is that they have a problem with their funding model," says Duffy.

"It's a bit of a bad deal if the banks you have supported aren't passing through the ECB rates.

"The clear message from us is we have and we are and we will be [passing on rate cuts], and we want people to switch over."

Duffy believes the Government has "a once-in-a-lifetime opportunity" to fix and strengthen the Irish banking industry. He says some banks "need more corrective action than others" and private equity, if it invests, will demand a change of management.

He says the Government should seek management changes too and believes senior bank chiefs will have to step down, following the likes of Duffy's boss in the UK, HBOS chief executive Andy Hornby.

"Here is an opportunity for the Government to get professional managers in who will bring discipline, accountability and good practice to the banks," says Duffy.

The banks need "the discipline of private equity", he continues, adding that he detests the "old boys' club" association with the group of domestic fund managers, mostly existing bank shareholders, that is seeking to invest in the banks as an alternative to private equity interests.

"The reason why the [banks'] management would be in favour of the investment managers going in is that it is part of the golden circle and it is a little self-serving," he says.

"The private equity boys will come in and run the bank like we would run the bank. It is a tough business and we are uncompromising. If I don't do my job, I will be fired. I understand that. That is the type of environment that will come in place.

"Some of our competitors are not as well run as the others. There needs to be a detachment between what's good for the management and what's good for the shareholder, particularly given that the taxpayer has a huge vested interest."

Duffy believes that, of the seven guaranteed banks (he includes Postbank, An Post's savings bank, in what he describes as the "Magnificent Seven"), "three, four at a push", will emerge. They will be "fixed, but battered and bruised", competing with two major foreign banks in the market - HBOS Ireland and Ulster Bank-First Active.

Duffy says that, if private equity invests, it will seek a profitable exit and this could attract a large foreign bank to one of the big players. However, he is not sure this would be in the national interest.

"What's good for Ireland is that we have a strong banking industry. There are three rocks in the Atlantic and we are one of them - I don't want to see the industry go the way of Iceland," he says.

"The rational thing to do would be to put the two big banks [AIB and Bank of Ireland] together and create a national champion that absorbed the other smaller banks and you will end up having three or four banks in a market for four million people - that is quite reasonable."

Name:Mark Duffy

Position:chief executive, Bank of Scotland (Ireland) and Halifax

Age:47

Interests:sport

Background:Joined State-owned ICC Bank in 1981, left to join venture capital firm 3i in 1983 and moved to Anglo Irish Bank in 1987, working there until 1992 when he took up his current position.

Something you might expect: Yesterday marked his 16th anniversary as chief executive of Bank of Scotland (Ireland), which was rebranded from Equity Bank in 2000.

Something that might surprise:He is training for the Vasa long-distance cross-country skiing race in northern Sweden in 2010.