Transcript Fiona Muldoon Cantillon Economy & Entrepreneurship Forum

The feedback loop: Ireland’s retail banks,
regulation & real economy supply and demand
Fiona Muldoon
Director, Credit Institutions & Insurance Supervision
11 April 2013
Key Industry Metrics
Number of Firms Regulated in Ireland
2012¹
Irish Licensed Banks
32
Designated Credit Institutions (ACS issuers)
5
Building Societies
1
Branches
35
Total
73
Domestic Market
16
International
57
Solvency (as at Dec. 2012) €m
Total Assets
Domestic Market
2
Others
2
€429 bn
€570 bn
Total Own Funds
€36 bn
€31 bn
Total Capital Requirements (Pillar 1)
€18 bn
€9.5bn
Overall Sector Solvency
15.6%
26.4%
1. As at 31 Dec 2012
2. Data does not include branches
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TO BE UPDATED FOR 31 DECMBER DATA in EARLY APRIL
Snapshot of Irish Banking as of 31 December 2012
Domestic Market Credit
Retail Institutions
Other Credit Institutions
Total Assets: €429b
Total Assets: €570b
Business Lines
Business Lines
1. Retail Deposits and Loans
1. Corporate Loans
2. Corporate Deposits and Loans
2. Structured Products/Lending
3. Commercial Lending
3. Corporate Trust Services
4. Mortgage Lending
4. Custody Services
5. SME Lending
5. Wealth Management
6. Credit Cards
6. Debt Securities
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Key Industry Metrics: Balance Sheet
Key Balance Sheet Statistics as at 31
December 2012
Retail
Institutions
Others
Total Assets
€429b
€570b
Loans and Advances
€299b
€122b
Debt Securities
€93b
€84b
Derivatives
€11b
€353b
Of which
Asset Quality
Non-performing Assets
€98b
€0.8b
Impairment Provisions
€52b
€0.9b
Coverage (Provs/Non-Perf)
52%
108%
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Key Industry Metrics: Profitability
Profitability (as at 31 December 2012)
Retail
institutions
Others
Operating Income
€3.5b
€1.9b
Fees and Commission Income
€0.9b
€1.0b
Total Income
€4.4b
€3.0b
Operating Expenses
-€4.7b
-€1.9b
Operating Profit
-€0.3b
€1.0b
Impairment Charges
-€9.8b
-€0.2b
Profit Before Tax
-€10.1b
€0.9b
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The challenges facing the retail banking industry are acute and
can be divided into two broad areas
1. Work-out of distressed credit portfolios
•
Implementing resolution focused Mortgage products and offerings with properly
trained staff and efficient processes and systems
•
Developing longer term and incentivised debt restructuring options for viable SME
businesses
2. Future viability
•
Restoring interest margin; paying less for deposits, re-pricing existing loan books and
increase new lending at rates that restore profits
•
Reduce cost base and develop less costly distribution channels and mechanisms
•
Designing a business model for the new ‘business as usual’ including increased
capital requirements (Basel III)
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The challenges faced by the domestic banks matter in a real
way to ‘ordinary’ SME borrowers and to consumers
Domestic
demand
SME
capacity
to pay
Consumer
& SME
confidence
Economic
contraction
Bank
capacity
to lend
Distressed
Loans
Bank
profitability
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SME’s are critical to the Irish economy and to Irish recovery
•
SME make-up >99% of businesses in
Ireland¹
•
SME account for 70% of people employed
in the private sector ²
•
64% of private sector workers are
employed by indigenous non-exporting
firms, with 56% working for indigenous,
non-exporting SMEs¹
•
SME Gross Value Add is 47% (€84bn)²
•
SME Turnover is 51% of Turnover
(€314bn)²
•
Core SME is dominated by 4 sectors (76%
of lending) Hotels & restaurants/ Wholesale &
99.8% of
enterprises
SMEs in
Ireland
70% of
workforce
47%
money
Retail/ Agri / Manufacturing
Source:¹ DoF Budget 2013 Assistance for SME Sector Presentation ² CSO: Business in Ireland Report (published Nov12)
8
SME Arrears: Complex issues and a high level of inter-connectedness
Multi-banking
PDH debt serviced
through drawings
Business property is
part of a larger
premises
Personal guarantees
70% employer :
repayment
capacity for
mortgages
Cross guarantees
on collateral
SME
No single definition of
SME
Cashflow supports
direct trading &
“indirect” debt
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SME Arrears: Central bank areas of regulatory focus for 2013
1. Governance & Execution framework of SME Support Unit organisation
2. Quality of Implementation plan and progress made
3. Restructuring – assessing and distinguishing viable and non-viable borrowers
4. Re-underwriting – disentangling viable debt from unsustainable propertyrelated debt
5. Credit Assessment Tools & Policies (Debt/ Financial/ Collateral)
6. MI/ KPIs/ key milestones and timelines
7. Operational plans/Skills/ Resources and Training/Execution ability
8. Level of external assistance / sectoral/ restructuring expertise
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SME health and stability links directly to Mortgage arrears issues
• Employment in SMEs = repayment capacity for employee
mortgages
• Many distressed SME borrowers also hold a number of BTL
exposures
• Banks consider distressed SME borrowers at a total borrower
exposure level (excluding PDH)
• Public targets & audits of result
• Multi-indebted mortgage borrowers require resolution too
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SME Gross New Lending constant since 2010
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Direction of SME new lending is realigning away from Property
(4 quarter moving average to Q3 2012)
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Share of Balance in Default
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The sectors seeing reduction also have high levels of default:
Causality?
Micro SME book, June 2012. Total Balance €~5bn
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Is demand for credit weak in Ireland?
ECB survey: Asks firms for Net % increase in financing needs in previous 6 months
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What can be done to change the cycle?
Economic growth is linked to supply and demand
for credit. Health of Banking sector is linked to
wider ‘real economy’ & vice versa
Domestic
demand
SME
profits =
capacity
to service
Consumer
& SME
confidence
Economic
growth
Bank
capacity to
lend
Performing
Loans
Bank
profitability
Banks: Capital & Provisioning helps but leaves
non-performing asset on banks’ books
Banks: Work out and restructuring is necessary
Regulator: Audit & oversight work taking place.
Monitoring, measuring & consequence.
SME’s: Increase in receiverships, liquidations
necessary and inevitable to allow leanest and
fittest to emerge and compete
Europe: Banking union and European Stability
Fund offer opportunity to break damaging link
between Sovereign & Banking Sector
Ireland: Better oversight, better regulation, safer
banks prevent recurrence of past mistakes
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