The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand Fiona...
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Transcript of The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand Fiona...
The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand
Fiona MuldoonDirector, Credit Institutions & Insurance Supervision 11 April 2013
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Key Industry MetricsNumber of Firms Regulated in Ireland 2012¹
Irish Licensed Banks 32
Designated Credit Institutions (ACS issuers) 5
Building Societies 1
Branches 35
Total 73
Solvency (as at Dec. 2012) €m Domestic Market 2 Others 2
Total Assets €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 20122. Data does not include branches
Safeguarding Stability, Protecting Consumers
Domestic Market 16
International 57
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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 InstitutionsTotal Assets: €429b
Business Lines1. Retail Deposits and Loans2. Corporate Deposits and Loans3. Commercial Lending4. Mortgage Lending5. SME Lending6. Credit Cards
Other Credit InstitutionsTotal Assets: €570b
Business Lines1. Corporate Loans2. Structured Products/Lending3. Corporate Trust Services4. Custody Services5. Wealth Management6. Debt Securities
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Key Industry Metrics: Balance SheetKey Balance Sheet Statistics as at 31 December 2012
Retail Institutions
Others
Total Assets €429b €570b
Of which
Loans and Advances €299b €122b
Debt Securities €93b €84b
Derivatives €11b €353b
Asset Quality
Non-performing Assets €98b €0.8b
Impairment Provisions €52b €0.9b
Coverage (Provs/Non-Perf) 52% 108%
Safeguarding Stability, Protecting Consumers
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Key Industry Metrics: ProfitabilityProfitability (as at 31 December 2012) Retail
institutionsOthers
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
Safeguarding Stability, Protecting Consumers
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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Economic contraction
Domestic demand
SME capacity to pay
Distressed Loans
Bank profitability
Bank capacity to lend
Consumer & SME
confidence
The challenges faced by the domestic banks matter in a real way to ‘ordinary’ SME borrowers and to consumers
Safeguarding Stability, Protecting Consumers
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SME’s are critical to the Irish economy and to Irish recovery
SMEs in Ireland
99.8% of enterprises
47% money
70% of workforce
• 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 & Retail/ Agri / Manufacturing
Source:¹ DoF Budget 2013 Assistance for SME Sector Presentation ² CSO: Business in Ireland Report (published Nov12)
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SME
Personal guarantees 70% employer : repayment capacity for mortgages
Cross guarantees on collateral
No single definition of SME
Cashflow supports direct trading & “indirect” debt
Business property is part of a larger
premises
PDH debt serviced through drawings
Multi-banking
SME Arrears: Complex issues and a high level of inter-connectedness
Safeguarding Stability, Protecting Consumers
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 property-
related 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 Arrears: Central bank areas of regulatory focus for 2013
Safeguarding Stability, Protecting Consumers
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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Direction of SME new lending is realigning away from Property(4 quarter moving average to Q3 2012)
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The sectors seeing reduction also have high levels of default: Causality?
0.1
.2.3
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Bus A
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Hotel
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ail
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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Economic growth
Economic growth is linked to supply and demand for credit. Health of Banking sector is linked to wider ‘real economy’ & vice versa
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
What can be done to change the cycle?
Safeguarding Stability, Protecting Consumers