Text book banker

THE FRIDAY INTERVIEW/John Reynolds, KBC Bank Ireland:FEW EXECUTIVES would want to take over the running of an Irish bank at this time of crisis in the industry, but John Reynolds isn't deterred from this task at Belgian-owned KBC Bank Ireland.

Reynolds and his counterpart at Bank of Ireland, Richie Boucher, both of whom earned their stripes at State-owned ICC bank in the 1980s, are the only new bank chief executives appointed this year.

There are still vacant chief executive posts at four other institutions, including Allied Irish Banks (AIB) where Eugene Sheehy said yesterday he was standing down.

It’s undoubtedly a rotten time to become a top banker.

“I am delighted to be taking the job on because the bank is in good nick,” said Reynolds, who succeeded long-serving chief executive Ted Marah in the hot seat at KBC last month.

“It is no fun these days. Taking on the role of chief executive is manageable. I have an absolute conviction we will weather through the storm of 2009 and possibly the first half of 2010, and come out one of the competitors to whatever status quo is there.”

Like most bankers, Reynolds’ primary headache has been the bank’s €600 million loans to developers and land speculators, a sector KBC started avoiding in early 2007, though he concedes that the bank “didn’t avoid the party” as it enjoyed double-digit growth in the boom years.

Most institutions now regard development loans as toxic following the collapse in the house building sector, but for KBC the problem is not as large as for other lenders – in terms of the proportion of the loan book. Development accounts for just 3 per cent of KBC’s €18.8 billion total loans, reflecting Reynolds’ point that the bank didn’t milk the building boom.

“The stuff we did was by and large relatively conservative. That said, some of it is causing us a level of grief,” he said.

The creation of the State’s “bad bank”, the National Asset Management Agency (Nama), to buy bad development loans from the Government-protected lenders, the guarantee club that KBC decided not to join last October, poses a dilemma for foreign-owned banks with the same problems as the Irish-owned institutions.

Reynolds says he’s not yet sure whether KBC would want to solve its development loans problem by selling its assets into Nama, if such an opportunity were afforded it.

“Thankfully we were adjudged relevant for the purposes of being eligible for the guarantee so one might deduce from that that if we put our hand up we could have a conversation,” he said.

“From our perspective, the maths of our business is that we don’t have a particularly large exposure so it’s not make or break for us on what happens with that book over time.

“Inevitably, there are unresolved issues where an asset is multi-banked and what happens in that situation. I suspect that is something on the list of things to be evaluated by the relevant people. We will see what happens – I need to see what pans out.”

Reynolds expressed serious concern about “clustering” of such large levels of bank loans, between €80 billion and €90 billion across the seven guaranteed lenders, into Nama, saying it would create “a greater risk of a greater loss”.

“Breaking up the task into component parts is better,” he said.

“I would have a concern that the sheer scale of the endeavour would blunt the objective.”

KBC had to shoulder bad debts of €55 million in 2008, primarily due to losses on development loans. Absorbing a further €35 million on higher funding costs, pre-tax profits came in at €115 million, down 25 per cent on the previous year. The bank, the country’s fifth largest mortgage lender over recent years, has a 9 per cent share of this market, with home loans of €13.7 billion, sold primarily through brokers. Most of the €6.1 billion in commercial loans were made to small and medium-sized businesses, an area the bank will focus on more closely in future where the spoils are lower than in property finance of the recent past.

“We think 2008 was a decent result. You really lose the plot if you don’t really angst over €55 million in bad debts. That meant the profits were down for the first time in the history of the bank. That didn’t sit easy on us. But to turn out a decent profit in 2008 wasn’t bad,” he said.

Reynolds believes the growth in development lending, the cause of so much turmoil in the banking sector currently, is derived in part from what he described as “the Anglo (Irish Bank) phenomenon” – where the marketplace started to buy into the bank’s non-diversified business model, putting pressure on the likes of diversified AIB and Bank of Ireland to follow suit.

“The text book would always say that, if you don’t diversify your asset exposure, you are going to have at some point a cyclical problem,” he said.

Reynolds said that rival banks found it difficult not to mimic Anglo’s model when it was reaping big rewards with large profits and a surging share price. “There was a huge desire on the part of borrowers to access property finance at what we saw as aggressive terms. Maybe the agenda was being set by a single institution.”

The 50-year-old banker said that it proved difficult during the property boom to avoid some of the lending excesses of the market when KBC’s customers expected the bank to be “at least as forthcoming as your peer group”.

“Obviously you have got young executives who are trying to compete for business with similarly ambitious people in other institutions. There is a sort of collective pressure to do so,” he said. “During the very bubbly times, a bank with our credit philosophy has to adopt a very tough discipline internally to try and stay away from the herd, and we didn’t always succeed.”

Reynolds said that KBC, known as IIB until it was rebranded under its parent bank’s name last year, has adopted a middle of the road approach to lending going back to the 1970s and 1980s, prudently watching risks.

“People ask: ‘is it a dog-rough time to be taking over this new job?’ For us, because of the way we do business, we didn’t really have a rock and roll time during the good times,” he said.

Reynolds said that business customers started feeling the economic pain in the middle of last year. Since then the pressure has been growing on mortgage customers as unemployment rises and incomes are set to fall. “Our expectation is that our customers, a portion of them, will suffer,” said Reynolds.

The behaviour that emerged at Anglo was “surprising” but the perception that Irish banks were more risky than their international peers was “very disappointing” and “ill-deserved”.

He said there was “a degree of puzzlement and surprise” internationally about the controversies within the Irish banks. “Unfortunately, and wrongly, they don’t seem to distinguish between Anglo and the other banks.”

Reynolds is not fazed by the low regard for bankers currently held by the general public. “Would it have been easier to take over the reins three or four years ago? The approach we take, it wasn’t much fun during the good years.”

On the Record

Name:John Reynolds

Position:Chief executive, KBC Bank Ireland

Age:50

Home:Sandycove, Dublin

Family:married with two sons

Hobbies:music, reading, watching sport and hillwalking

Education:originally from Culdaff in Co Donegal, Reynolds was educated at Presentation College in Bray, Trinity College and University College Dublin

Background:joined IIB, as KBC Ireland was known until last year, in 1985. Appointed to the board of the bank in 1996 and became chief executive of KBC Ireland earlier this month, succeeding Ted Marah

Something you would expect:like many senior Irish bankers, Reynolds started his career at State bank ICC in 1980

Something that might surprise:He worked as a DJ in a pirate radio station in the 1970s