Oireachtas Joint and Select Committees
Thursday, 1 November 2012
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Discussion with Bank of Ireland
I welcome Mr. Richard Boucher, chief executive officer of Bank of Ireland, Mr. Liam McLoughlin, chief executive of the retail Ireland division, and Ms Lynda Carragher, head of credit.
I remind members, witnesses and those in the Visitors' Gallery that all mobile telephones must be switched off. This meeting is being broadcast by UPC on channel 207. If a mobile telephone is switched on, it will interfere with the broadcast, sometimes to the extent that it will be seriously disrupted and those watching cannot follow or hear the questions asked or answers given.
I wish to advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If witnesses are directed by this committee to cease giving evidence in regard to a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence.
They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable. Before I invite Mr. Boucher to begin his presentation, is it agreed that the witnesses' presentation will be published? Agreed. That said, I thank Mr. Boucher, Mr. McLoughlin and Ms Carragher for their attendance this morning. I invite Mr. Boucher to make his opening statement.
Mr. Richie Boucher:
I thank members for the opportunity to update the joint committee on Bank of Ireland's progress since we last met. I am accompanied by my colleagues, Liam McLoughlin and Lynda Carragher. We have provided the joint committee with a presentation in advance, which hopefully provides a reasonably comprehensive picture of our position. The bank is a public company that is subject to the listing rules of the Irish, London and New York stock exchanges. The presentation is a public document and is presented under the rules of the aforementioned stock exchanges. All comments I make are governed by the stock exchange disclosure rules. As the Chairman has suggested we keep this relatively brief, if it is acceptable to members, I would like to go through the presentation relatively quickly. Clearly, however, if I have skipped or have not paused for long enough on any particular part of it, I am sure that will come up in our questions and answers session.
I will turn to slide four of our presentation, which sets out, from Bank of Ireland's perspective, its strategic goals. It is important to bear in mind that the bank raised a significant amount of capital in 2011. Virtually all this equity capital came from the private sector and was provided by investors who believe that the Irish economy is recovering and that Bank of Ireland can support and benefit from that recovery. The investors' investment case is that Bank of Ireland can become the pre-eminent bank in Ireland and they have provided the capital and endorsed the use of the bank's funding and infrastructure in support of this goal. We in Bank of Ireland believe this is a time of both challenge and opportunity. We believe that if we are the most focused bank, if we engage heavily with and work with our customers and if we derive new lines of business in our franchises, then we can establish ourselves as the pre-eminent bank in Ireland. We are extremely well positioned in our core markets. We have had agreed a European Union restructuring and viability plan and are the only Irish bank that has had such a plan agreed. Under that plan, it is clear what businesses we have exited and what businesses we are in. In accordance with the plan, those businesses that we are in, and in particular our Irish franchise, are those businesses to which we can devote capital and funding. It clearly is one of our key goals to be strongly capitalised, thereby reducing our reliance on monetary authority and Government guarantees. At 30 June 2012, our core tier 1 capital was 14%, which is a very strong capital ratio well in excess of any regulatory requirements. Over the period since 2009, we have generated equity capital of €10 billion, of which approximately €1.5 billion net has come from the State. We must ensure that, in the future, our businesses are sustainable and, in particular, sustainable from a funding proposition. Over the past three years, we have worked very hard to grow our customer deposit franchises. Our deposit franchise in Ireland has proved to be highly resilient and, in particular, we have grown a retail deposit franchise in the United Kingdom, primarily through our relationship with the United Kingdom's Post Office.
Over the past three years, we have continued to reduce our cost base and costs are down by approximately 20%. The stock market is expecting our costs to be approximately €1.5 billion within the next couple of years and we believe this to be a sustainable target. We are in the middle of a redundancy programme within our business and have taken a €66 million charge in the first half of the year, which we expect to have been utilised by the year-end. At the same time, we are continuing to invest in our businesses because we wish to ensure we are here for the long haul and it is not just about cost-cutting. Therefore, we are investing heavily in payment systems and in branch networks in Ireland and in other parts of our franchises. From our perspective, the raising of capital, restructuring and deleveraging our balance sheets and reducing our costs will not achieve our goals unless we grow revenue. It is extremely important that we grow revenue as we cannot cut or restructure our way to glory. In simple terms, the way in which we grow our revenue is to sell more products to our existing customers and to get new customers. This is a key focus in those core franchises we have decided we are in and which have been endorsed under our European Union plan. The Irish taxpayer has taken a considerable risk in supporting Bank of Ireland and has provided investments to Bank of Ireland. Clearly, as an investor, it is our absolute goal that we reduce the Irish taxpayer from any support provided to Bank of Ireland, we reward any taxpayers' investment in Bank of Ireland and, ultimately, we repay the investment in Bank of Ireland. As a public company, my colleagues and I work for our stockholders and our job is to ensure we have a sustainable business into the long term with good sustainable returns for those who have provided us with capital.
As for the restructuring of the balance sheet shown on slide five, we have achieved our business sale targets. We were required to sell €10 billion of loans and we have sold those well within the discounts assumed for the prudential capital assessment review, PCAR, 2011 exercise and well ahead of the schedule that was set therein. A total of 50% of our assets are outside of Ireland and our deleveraging initiatives are all outside of our Irish businesses. I have touched on our deposits franchises, which have remained very strong and resilient. Based on both the deleveraging and the deposit, at 30 June our loan-to-deposit ratio, which is a key target, was 136% and based on developments since that period, our loan-to-deposit ratio will have reduced further. As I mentioned, our capital ratios remain strong. Our market positions in our Irish and United Kingdom franchises are strengthening. In particular, in July 2012 we signed an extension of our very important franchise with the United Kingdom Post Office, which extends our contract with the Post Office beyond 2023. A total of 21 million people per week visit a post office in the United Kingdom and we are the chosen financial services provider.
Turning to slide six, I mentioned that we continue to work on our cost programmes. We have a redundancy charge, which we took in the first half of the year and, as I mentioned, I believe this charge will be fully utilised. From the bank's perspective, the repayment period and payback on a redundancy charge of that note is approximately 11 months. As I mentioned, we continue to invest strongly in our core franchise and in particular in payment systems. The key task we have is rebuilding the profitability of the bank. We believe we have made significant progress in capital raising, in deleveraging and in our cost initiatives but, ultimately, our route to profitability to repay taxpayers' investment and to provide a return to our other shareholders is through increasing the profitability of the bank and that is our focus in the future. On slide seven, we explain in particular our balance sheet targets and as I have just advised, I believe we are well on the way to progress in that regard. The rebuilding profitability targets are more influenced in particular by interest rates, economic growth and the self-help initiatives we are undertaking.
Slide eight demonstrates the pressure under which our income has been in the first half of the year and the initiatives we are taking as a bank to try to enhance our operating profits. The most important focus for us is to reduce the cost of raw material. The cost of raw material to the bank is influenced by the cost of wholesale funding, by deposit pay rates in the markets and in the Irish market in particular, as well as in the cost to us of the Government eligible liabilities guarantee, ELG, guarantee. We are taking a number of initiatives to reduce that cost of raw material. Slide nine shows the breakdown of our portfolios, both between the different business segments and on a geographic basis. Approximately 54% of the group's balance sheet is in mortgages, of which approximately half are in the Republic of Ireland and half in the United Kingdom. The rest of our business is spread between Ireland, the United States and the rest of the world. It is likely, in accordance with our strategic plan, that the proportion of our balance sheet in Ireland will increase and the proportion of our balance sheet outside Ireland will reduce, which is in line with our deleveraging plans. Slide 11 demonstrates the impact that low interest rates, which are not reflected in the cost of money to the bank, are having on our net interest margin. Our net interest margin reduced from the second half of 2011 to the first half of 2012. We are taking a range of initiatives to try to address this and to improve our net interest margin.
We anticipate that that margin will gradually start to improve.
Slide 12 deals with our costs, which I have already touched upon, but I am obviously happy to discuss that in more detail.
Slide 13 looks at our provisions and impairment charges in the first half of 2012 compared to the first half of 2011. It demonstrates where the provisions are taken between our different loan books. We provide significant further detail in our interim accounts. Based on the trajectory of what we anticipate and if the economic environment, both in Ireland and the UK, continues at its current pace, we believe our loan loss charges will reduce further in the second half of 2012. Key influences on our loan loss charges are commercial real estate in the Republic of Ireland and our Irish mortgages. As regards the Bank of Ireland commercial real estate book, we have estimated for our provisions a peak-to-trough fall in commercial real estate prices in Ireland of 65%. We see evidence of the market stabilising at that level.
At the interim results announcement in August, I advised the market that from Bank of Ireland's perspective the pace of increase in the formation of arrears in our Irish mortgage book was reducing and that continues to be the case.
Our assumptions for our loan loss provisions are based on a peak-to-trough fall in house prices in Ireland of 55% and then another 10% on top of that for sale costs, etc. From our perception, the market appears to be stabilising at current levels. Obviously the market is a mix of a number of different micro-markets, but our experience in the main urban areas - both in terms of our own existing book and the flow of new business - is that house prices seem to be stabilising at current levels.
Slide 15 demonstrates the mix of our deposits, in particular between Ireland and the UK. The rationale is that we can fund our UK business through retail deposits and therefore it is a sustainable business going forward. Our deposit target of €75 billion to €80 billion by December 2014, based on our experience in the period up to 30 June and since, looks eminently achievable.
I will now turn to slides 17 to 20, which deal with the two aspects of our business upon which there was a particular focus in the committee's invitation. We have tried to demonstrate in pictorial form how we see our different tasks and initiatives. One of our most important tasks is continuing to provide new mortgages in the market. That is because it is a sustainable part of our business going forward. We strongly believe in Ireland and that the Irish economy will recover. We were provided with capital liquidity by our investors to support that recovery and to benefit from it.
In the first half of 2012, mortgage demand remained relatively muted in the economy. We did about 40% of the flow of business in that economy and we have been heavily advertising our products and services. In the period since, we have seen a noted pick-up in mortgage demand and activity in September and October. We have come out with a wide range of new products and services, both for existing customers and to deal with customers who are facing financial challenges. We have a significant number of staff involved in working on short-term and long-term solutions for customers. We have more than 16,000 customers who are currently subject to mortgage forbearance or who have had their mortgages restructured. Our mortgage forbearance and mortgage restructures are based on customers who can meet, in our estimation and theirs, at least the full interest on their mortgages. Some 86% of those customers who are subject to forbearance or restructuring are fully meeting the revised arrangements. While it is early days yet, we believe that our restructuring approach is benefiting a significant number of our customers, which is evidenced by the low level of re-default.
We could probably spend a little more time on the SME sector. A key part of our future business strategy is to be the pre-eminent bank in Ireland. We are currently number two in business banking in Ireland, and it is our goal to be the number one bank. A particular focus we have is on the SME sector, where we are number two. We have a wide range and are a universal bank. We have a distribution system in every part of Ireland, primarily through our branch network, which tries to reach out to our customers. We have an internal target, which is also a target agreed with the Government, that we will provide €3.5 billion of new lending to the SME sector. From a Bank of Ireland perspective, we measure this target on the basis of new and increased lending. From our perspective, new and increased lending is what derives revenue, and that is why it has our focus.
We obviously have a number of customers in the SME sector who face different challenges and we are working closely with them to help them restructure their businesses and look at their propositions going forward. From our perspective in Bank of Ireland, we have a risk appetite in every sector because we believe that in every sector good business people can make money and can develop good businesses. We are not closed to lending in any particular sector. We have identified certain sectors which we feel have higher growth potential and we are devoting more resources to product innovation in those areas.
In slide 26, we try to demonstrate both for the market and for the committee where the different divisions are in the second half of 2012. We have tried to point out that certain of our divisions have moved more quickly towards profitably. Our Irish division continues to require the most work and therefore the contribution of our overseas and corporate divisions in rebuilding profitability for the group as a whole, as we restructure our Irish division, is extremely important.
I will now move to slide 27. As investors and representatives of the taxpayer, we try to demonstrate what the taxpayer is getting out of its support for Bank of Ireland. Our first task is to reduce the risk to the taxpayer from support provided by the taxpayer. We believe that the capital we have raised, the restructuring and deleveraging, the cost-reduction programmes we have undertaken, the agreement of our EU viability and restructuring plans, and the enhancement of our franchises - including the franchise in the UK, further protected by an extension to post office contract - have been a very important part of reducing the risk to the taxpayer. The most significant contingent liability the taxpayer has is in respect of the eligible liabilities guarantee or ELG. Through a range of initiatives, particularly deleveraging and increasing our deposit franchises, we have reduced the liabilities under the ELG from €136 billion at their peak in September 2008 to €36 billion at the end of June. They will have reduced further since that date. Bank of Ireland notes that the ELG is due to expire on 31 December and we are prepared for that.
The State invested €4.8 billion in cash in Bank of Ireland in the period up to 30 June 2012, and Bank of Ireland returned €2.5 billion in cash to the State in that period. The State's current investment in Bank of Ireland is a 15% shareholding, preference shares of €1.8 billion which bear a coupon of 10.25% per annum, and a contingent capital instrument which is not part of our core tier one, which bears a coupon of €1 billion per annum.
In summary, we are making progress against the priorities we have set for ourselves and that we have shared with our investors. It is a very challenging environment, but one that we believe creates opportunities for us. We will continue to build our businesses in Ireland and invest in our Irish franchises. As regards our progress on deleveraging our balance sheet, it is self-evident that deleveraging is outside Ireland and outside our core franchises. We will continue to reduce our reliance on the ELG and we are actively reducing the cost of money to us. We have significant enhancements of some of our key franchises and our capital remains robust. We are on track to achieve our goal of becoming the pre-eminent bank in Ireland. The most important thing we can do in Bank of Ireland is to have a strong focus on all of the objectives that are under our own control and that we can influence. That is our target going forward.
I will be pleased to take questions now.
As this meeting has to come to an end at 1 p.m., the first round of questions will be for 15 minutes, the second round for ten minutes and remaining questions for six minutes. Supplementary questions of one minute will be allowed if members indicate.
Does Bank of Ireland have 40% of the mortgage market?
I apologise for the absence of my party colleague, Deputy Michael McGrath, this morning. I thank the delegation for attending this meeting as I believe an important public service is being provided by the committee, particularly with the live broadcast on television. Many citizens watching this meeting believe it is important to hear the answers from the banks because they have had significant support from the State and its citizens. The people feel they should be the boss. We, their representatives, are asking the questions.
One issue not dealt with in Mr. Richard Boucher’s presentation on revenue growth was standard variable rate, SVR, mortgages. Is that part of the bank’s strategy in revenue growth, on top of selling new products and getting new customers? Yesterday, AIB gave a fairly stark outline of where it sees SVRs going in the short and medium term. What is Bank of Ireland’s assessment of this?
Bank of Ireland’s mortgage resolution options seem to be mainly concerned with moving people out of their houses. In its submission, the terms “assisted sales”, “voluntary sales” and “trade down” are used. Surely, we should be trying to keep people in their homes. There are other options open to the bank such as the shared equity scheme. Has it considered this as a way of keeping people in their homes? I do not see any mention of a deferred interest initiative which was a recommendation of the Cooney report, commissioned by the previous Government. How many mortgage-to-rent arrangements has the bank undertaken? That has been flagged as a major answer to mortgage difficulties but it does not seem to be happening.
Mr. Richie Boucher:
Our SVR is designed to be competitive in the marketplace. It is our desire to continue to grow our business. To do so, we need to cover the capital we deploy, potential loan losses as well as costs and overheads. Our current rate is competitive as evidenced by the flow of business we are getting. Our rate is not the only criterion but also the terms and conditions of our mortgages. Our products are designed as such that they are commercially sensible for the bank but also help in growing a long-term franchise.
I cannot predict where mortgage rates will move. The primary driver of mortgage rates in our case is the cost of the raw materials – money – to us. We also try to provide different ranges of products to customers including fixed-rate products which allow people to protect themselves from further interest rate rises.
Mr. Richie Boucher:
We have no plans to do so but I cannot rule it out in the future. It is determined by the cost of the raw materials - money - to us.
I would be very disappointed if we gave the impression that our primary focus in restructuring mortgages is to move customers out of their homes. Our primary focus is to maintain them in their homes as it is in their interest and commercially sensible for us. The mortgage solutions we provide to our customers are primarily designed to maintain them in their homes. In particular, we look at the level of sustainability of the debt. We have invested much time, effort and money in getting external advice to look at solutions which are commercially sensible for us and our customers. The evidence of our focus on keeping people in their homes is the 16,000 mortgages we have restructured and modified, of which 86% are meeting the full terms of their revised arrangements.
We continue to look at a range of other solutions available to us. We are required by the Central Bank to have a long process of engagement and go through various phases of pilots. We have piloted several solutions. Based on our evidence, what we believe can work for our customers and what is commercially sensible, we will be rolling out several of these schemes over the next several months.
Mr. Richie Boucher:
A split-interest mortgage provides a moratorium on capital repayments. From our perspective, a restructured and modified mortgage can only be done on the basis the customer is able to meet the full interest payments. The majority of our customers who have arrears or difficulties can have their mortgages restructured. A significant issue we face in working with our customers to restructure their mortgages is the extent of unsecured debt outside of the mortgage that was provided by the bank or others. Bank of Ireland’s primary focus is on the mortgage repayments.
I will push Mr. Boucher a little further on the mortgage-to-rent programme. A reply to a recent parliamentary question I tabled shows that only one mortgage-to-rent application has made it completely over the line and the indication is that it was done by a sub-prime lender, neither by AIB nor Bank of Ireland. It would be an observation that maybe the sub-prime lenders are more realistic about current house values than the two pillar banks. Has a difficulty for Bank of Ireland in the mortgage-to-rent scheme been, because a price must be arrived at with the housing agency, whether the local authority or one of the voluntary agencies such as Clúid agrees the valuation of those properties?
Only one financial institution has completed a mortgage-to-rent application and it is a sub-prime lender. From outside observation, this would seem strange because the sub-prime lenders are very much the pariahs of the sector. They seem to have a more realistic view of the property values. Mortgage-to-rent is critically about realising the true value of the property because it must be converted from a mortgage and sold to a housing agency, with the tenant who was previously the resident remaining in the property. Key to that is realising the real value of the property. Is Bank of Ireland struggling with that? Is Mr. Boucher of the view that property prices in the residential sector are approaching what might be considered normalisation, they are not undervalued and they are at their real value?
Mr. Richie Boucher:
Moving from budget-specific, on a general basis we are required on an ongoing basis - as we look and report to the market and from an accounting standards point of view - to look to the value of our collateral. From a market point of view, it is important that we disclose to the market the assumptions we have made. The assumptions we have made is a peak-to-trough in Irish house prices-----
There are no assumptions. The price of an average house in this country is based upon the average wage by a certain multiplication. Since 2009, the Central Bank has given direct guidelines to Bank of Ireland and other banks as to what are lending practices. If one takes the average house in the country, applies the average industrial wage and multiplies that by three or four because one must allow for an LTV of 90%, my observation would be that we are at proper house price values, not at an undervalued market.
Mr. Richie Boucher:
I beg the Chairman's pardon. I should have made it clearer in my opening remarks that we believe that house prices are stabilising. Our assumption was at 55% plus 10% in the event of a realisation. We believe that as a realistic assumption. It is not a homogeneous market. There are a number of different micro-markets. There are different prices. We believe that prices in particular urban areas have stabilised. In some rural locations, it is more difficult. Price discovery is difficult. One of our issues, because of the low level of transactions in the market, is ascertaining an appropriate price discovery. It is important that we take a realistic view.
Working with customers who are builders or developers, or in terms of repossessions, Bank of Ireland has been involved in the sale of more than 1,000 houses in this market and we are informing ourselves on those views. We look not only at what house prices are stabilising at, but at the rental markets. We have a buy-to-let book. We obviously keep a close eye on rentals in the buy-to-let book, and we see that rental levels are stabilising. Those are all indicators to us that they are stabilising, but I would concur with the view that in certain rural locations it is very difficult to get a market-clearing price because there is not enough liquidity. We try constantly to take a realistic view of the value of our collateral.
What I try to say in the assumptions is important. We cannot absolutely predict at a future point in time where we go. It is important that we try to demonstrate to our investors, and for anyone interested in our stock, or as creditors, what are our assumptions underlying our provision and forecasting.
I welcome Mr. Boucher and his colleagues here this morning. Clearly, we have a significant vested interest in seeing Bank of Ireland's recovery but we have a much smaller shareholding in it than in the other banks.
Yesterday AIB told us that it expects to be back to profit in 2014 and IBRC gave us a schedule of its perceived reduction in exposure to the State. Has Bank of Ireland a timeline for its return to profit and when and how there might be a return to the Exchequer of the investment made in the bank?
In a different context, when Mr. Boucher was in before my party, I asked him the same question and he mentioned the profit forecast. Mr. Boucher might explain how AIB is in a position to tell us that it expects to be back in profit in 2014 and he cannot even give an indication of when Bank of Ireland expects to be back in a profitable position.
Mr. Richie Boucher:
We give guidance in terms of the restructuring of the balance sheet, the assumptions that we make and the recovery in our net interest margin. All of those would indicate, and if we look at the consensus forecasts of the stock market and the consensus forecasts of analysts, that we will be in profit within that timescale. If the consensus forecasts of the stock market were inconsistent, we would have to advise it.
I hope AIB is not in trouble today.
On the small and medium-sized enterprises, I am not sure we got to the bottom of this at all yesterday. I note Mr. Boucher's presentation states that Bank of Ireland is targeting to approve €3.5 billion in lending in 2012. I suppose my first observation is the absence of the words "new lending". As I understand it from yesterday, some of Bank of Ireland's competitors are including in the €3.5 billion target set by Government reapplications for overdrafts and for other facilities. What percentage of the €3.5 billion is new lending to SMEs, farmers and new businesses?
Mr. Richie Boucher:
The €3.5 billion is new and increased lending to customers within a statistical margin of error, which, from our perspective, is 3%. I am confident that at least 97% of the €3.5 billion will be new or increased lending to existing or new customers.
The lending will depend on the utilisation of the customers. For example, if we approve term loans to customers likely to draw it down, an overdraft, an invoice discounting facility or a revolving credit line, it will depend on utilisation. Our experience heretofore is that overall utilisation of new lending approvals is approximately 50%. When it comes to overdrafts, the utilisation is lower. Overdrafts utilisation, in our experience in the year to day, is approximately 42% or 43%.
Our goal is to generate revenue, and restructures, etc., do not generate revenue.
The €3.5 billion figure is a target that Bank of Ireland has agreed and we welcome it because we have a target for growing our business. We are not in the business of shuffling numbers to make them look good. Ultimately, we are provided with capital and liquidity to grow our business. The target is €3.5 billion and from our perspective it is new and increased in so far as we can be statistically accurate.
I apologise if I sound pedantic. How much of what Mr. Boucher describes as new lending involves existing loans, including overdrafts and term loans, that are being reapproved as opposed to specific lending for new endeavours?
Mr. Richie Boucher:
That will depend on, for example, the customers who are repaying debts. A significant number of our customers who have cash are paying down loans rather than reinvesting in their businesses. We are making provisions and, therefore, we write off certain of our loans. The stock may or may not increase. It is our ultimate goal to increase the stock of lending because this is what drives revenue from our perspective.
The most significant element of our new or increased lending is to existing customers for different purposes. Some of it involves other banks refinancing with us, including in particular customers of banks which are exiting this country. That is included in our figures. A customer who comes to us to refinance a loan from Bank of Scotland, for example, is included in our figures because this is a new or increased loan from Bank of Ireland’s perspective.
Loan demand varies across sectors and segments but the primary demand is for working capital. We have limited demand from customers for finance for mergers, acquisitions or new investment in property or equipment.
Mr. Boucher stated that 84% of credit applications are being approved. I do not want to compare but AIB’s rate was 90%. I am not sure that many of the 15 or 16 politicians in this room would disagree that the people who come to us continue to find it extremely difficult to access credit, particularly in the SME sector. Can Mr. Boucher indicate how many applications are not formal? Bank of Ireland is approving 84% of loans for those who have completed the credit application forms and have been fully vetted by branch managers or relationship managers. These applications go up the line in a protected fashion because they have been thoroughly vetted. What percentage of loans never reach the point of formal application?
Mr. Richie Boucher:
We are trying to generate new business. My colleagues who are involved in this area break our SME teams into new business generation and more challenged loans. Each of my colleagues has targets for generating new business. Much of this work involves going to their local communities to meet with accountants, lawyers or directly with customers to generate business. That may result in an inquiry which we can follow up.
It was suggested at our last meeting with this committee that we might keep track of inquiries that do not follow through. We are pursuing that suggestion and my colleagues have targets to meet in respect of such inquiries. However, it is difficult to provide a level of statistical accuracy as to what is an informal inquiry. Based on my personal experience and observations, successful business people are relatively persistent because they believe in themselves and the future of their businesses.
We are not playing with numbers. Our strategy is to grow our business and our revenues. We want to generate as much business as we can. We recognise that in a significant number of the applications we handle every week we will be making decisions on the margins. I know that some of the customers to whom we decide to advance money will have subsequent difficulties repaying their debts. I also know that we will decline some of the customers who could have repaid us. This is not an exact science. We are trying to generate revenue on an ongoing basis. Where our colleagues in the business generation side see that an application they have recommended has been declined, they have a right of appeal through a separate appeals process. We do not make money by saying “No”.
Mr. Richie Boucher:
Our job is to restructure and modify as many mortgages as we can. Our primary focus is to keep people in their houses because that works for our customers and it works for us from a commercial perspective. However, we also have a wide range of responsibilities and our policy is to maximise the recovery of moneys owed to us.
Mr. Boucher spoke about deleveraging. Since 2009 Bank of Ireland has deleveraged from €140 billion to €90 billion. How does he expect to achieve his target of deleveraging a further €8 billion to €9 billion over the next two years?
Mr. Richie Boucher:
We are currently at €98 billion. Further deleveraging will primarily come from running down books we have outside Ireland. The most significant of these is the UK mortgage book. Approximately €18 billion of those mortgages are within the UK subsidiary and a further €12 billion are outside of it. These are naturally running down. We are also running down certain corporate and business banking portfolios outside Ireland. Our deleveraging is all based on an ex-Ireland strategy. It is easier for us to pursue such a strategy because the markets are more liquid, customers have different refinancing options and we have proved that we are able to sell loans in those markets. Based on the analysis of redemptions and repayments in the two years to date, we believe the target is realistic.
On a positive note, Bank of Ireland is regarded as the bank that has best weathered the storm. There have been significant closures among its competitors. Does Mr. Boucher see an opportunity to move into the numerous locations around the country where its competitors have closed retail banking branches in relatively populated areas?
Mr. Liam McLoughlin:
The bank has 250 branches at present and we envisage retaining that footprint. We are investing millions of euro in the fit of these branches and the capability within branches in terms of in-service technology as well as online and mobile services. We are freeing up branches to provide a greater degree of high quality service advice to our customers and to work with customers in difficulty on a face-to-face basis. The feedback from our customers indicates that our footprint is important in allowing them to engage with us on a face-to-face basis regarding new mortgages and cases of difficulty.
Our focus is on reducing the cost to serve by looking to local businesses to support the branch footprint. We will merge certain branches in urban areas where they are located side by side or very close to each other. We also plan to open several outlets in the coming months, including two before the end of the year. We always keep the footprint under review. We examine our locations to ensure they are optimal and if they are not optimal we will seek to relocate. Our focus at present is on our own footprint rather than considering an expansion into other footprints.
I thank the witnesses for their very detailed presentation. Mr. Boucher said that 16,492 accounts are in arrears of 90 days or more. The presentation gives considerable detail. How many residential mortgages are in arrears of 90 days or more? How many are restructured to interest only or reduced payments?
The report outlines various options and one of the schemes, the mortgage-to-let scheme, was mentioned earlier. The information provided to the committee was that only 13 proposals are on the table.
Mr. Boucher said this is a pilot scheme and the bank was requested to look at this on a pilot basis. This scheme was announced this time last year. Would Mr. Boucher accept that the fact the bank has made only 13 proposals amplifies what Ms Fiona Muldoon had to say in questioning what the bank was waiting for as if it thought there was a magic wand to make things better? Given the enormity of the crisis and the number of accounts the bank has, is 13 applications not pathetic on behalf of the bank?
This is completely at odds with what one of the Central Bank officials said publicly about Bank of Ireland and other banks, that they are dragging their heels on the matter. What I am hearing from Mr. Boucher is that he is blaming the Central Bank for the delay and that the bank would like to process more of these if it were allowed. It is pathetic that there have been only 13 applications in 12 months. Is the Central Bank restricting the bank from proposing more of its accounts to go down this line?
Mr. Richie Boucher:
From our perspective we have made a lot of progress. We wish to make more. We have continued to invest. We have our products ready. This is not a blame game between various parties. Our focus is on Bank of Ireland. There are a number of comments, which are about the sector as a whole. Our focus is on Bank of Ireland. My job and that of my colleagues is to do what Bank of Ireland can do.
I understand, but my focus in this specific question is on why there are only 13 proposals in this scheme after one year given the enormity of the mortgage crisis. It is important for us to understand why, 12 months on, the bank has only proposed 13 accounts to use this scheme as an option.
Mr. Richie Boucher:
This is one of a range of solutions. Our prioritisation is to restructure and modify those mortgages that can be done more quickly. As in any of these situations we must try to make decisions on the best way we can prioritise our resources. As we make progress, in particular at moving more quickly through our system mortgages that can be readily and quickly modified and restructured, then we can spend more time on those that are much more complex, and in particular where there is engagement with third parties. The buy-to-rent scheme, for example, does involve a third party in terms of the Department of the Environment, Community and Local Government. There are certain things that are in our control. I am not seeking to apportion blame. The primary responsibility for managing our mortgage book, managing arrears and dealing with our customers is with Bank of Ireland.
I will leave it there, but it is quite unsatisfactory. Most people on this committee simply want this issue resolved. We need to know why the bank has taken so long to deal with the issue. How many residential mortgage customers have been assisted via the assisted sales, voluntary sales and trade-down options mentioned in the bank's report?
Ms Lynda Carragher:
In terms of the negative equity mover customers, we would have seen customer interest in that increasing in recent months as degrees of confidence are returning slowly to the market. We have had that product available for approximately seven months and it is only in the last number of months that we have seen applications for that from customers who want either to trade down or move property.
Mr. Richie Boucher:
I beg Ms Carragher's pardon for interrupting. On 30 June we disclosed in our accounts 222 accounts, €36 million, which falls in the wider category outside of interest only, reduced payment and term extension. That covers a wide range of things, including those we mentioned. We do not disclose on an individual product basis beyond that.
Mr. Richie Boucher:
We also have bespoke arrangements with individual customers. We try to deal with each customer's circumstances individually. We try to give as much disclosure as we can. We also have to be able to do it to a verifiable accurate statement for our financial statements. The Deputy asked how many residential mortgages were in arrears of 90 days or more. We disclosed in our accounts that the figure for owner-occupied mortgages 90 days-plus past due and-or impaired is €1.9 billion at 30 June.
Will the bank not disclose what has actually been written off? How much money did the taxpayer provide the bank for losses of the domestic mortgage book under the prudential capital assessment review, PCAR?
The State invested on the basis of a stress test that was carried out, which showed that the likely losses within Bank of Ireland on the domestic mortgage book were in the hundreds of millions of euro. However, the bank is refusing to write down any of that money and is hoping the customers pay every single penny of that back to the bank and will pocket the capital the taxpayer paid at the same time.
I will move on. Mr. Boucher has said the bank wants to disengage from the ELG and that when the guarantee runs out on 31 December, it is ready for this year. Is he satisfied the bank will be able to raise money on the markets without a guarantee? Is that the proposal regardless of whether the guarantee is extended? Is it the objective of the bank in 2013 to be able to raise finances without the guarantee? That obviously would have an impact on the State because last year the bank provided more than €449 million to the State as a result of the guarantee. What is the proposal from the bank? Is it to go without in 2013?
Mr. Richie Boucher:
That has been our experience. We can do it. We came off the eligible liabilities guarantee scheme. The most contentious and best example is our business in Great Britain and Northern Ireland, where we are not covered by a guarantee, yet our deposits have increased. Bank of Ireland is raising unguaranteed deposits where permitted to do so. That is our current plan.
I will try to be as brief as possible. Bank of Ireland has made provisions in respect of the expectations for 2013. Last year, the fees paid to the State amounted to €449 million. To June of this year, it was €220 million. Does Mr. Boucher expect the fees to be substantially reduced or down to zero by 2013?
Mr. Richie Boucher:
I am not permitted to give that figure. Our preparations are on the basis of the ELG expiring as intended. We expect Bank of Ireland will be able to do that. We are preparing to meet our funding strategies. I have chosen my words carefully as regards our goals. Our current estimates of deposits of €75 billion to €80 billion in 2014 are realistic. They presume that the ELG has expired.
I am a customer of the bank. In my local branch, certain transactions are restricted on Mondays and Fridays. It is the same in many other rural and urban branches. It is a cost-containment and cost-saving measure. I will not go into the details, although it impacts on rural areas in particular where branches of AIB, National Irish Bank and others have closed. Cost containment is also under way in AIB.
AIB's CEO stated yesterday that he had cut executive and senior staff pay by between 10% and 15%. Has the same been done within Bank of Ireland? What is the bank's most senior salary, expenses and pension entitlement?
Mr. Richie Boucher:
We have examined remuneration across the board. We seek to control it. A part of that control relates to pension benefits, which comprise a significant cost. Considerable reductions in pension benefits were taken by all staff in 2011 as part of our restructuring. The disclosures regarding pay and remuneration of directors are set out in our annual report.
Mr. Richie Boucher:
Investments by and cash coming back from the State are set out in our presentation. The directors' remuneration report is put to the bank's shareholders every year. As a director, I stand for election by our shareholders every year. I have stood for election in the past four years. Remuneration of directors, including me, has been in front of the shareholders for the past four years and the shareholders have been voting in favour.
That is very unsatisfactory. Along with other citizens, I am a shareholder in the bank. If we asked the shareholders who own 15% of the bank, they would not be satisfied.
I wish to raise two further issues. As Mr. Boucher may be aware, this and another committee have been considering an inquiry into what occurred on the night of the banking guarantee and the banking collapse. The heads of a Bill to give the Oireachtas the power to make such inquiries were announced yesterday.
It is important that everyone involved should voluntarily disclose all relevant information. Bank of Ireland was there on the night. Will Mr. Boucher, as its CEO, ensure all staff with information on what transpired that night and in the run-up voluntarily provide that documentation and evidence to whichever committee decides to investigate the matter?
Mr. McLoughlin outlined the relatively good news that the bank was going to keep its branch network, given the importance it attaches to same. He also stated the bank's customer analysis pointed to how important it was for customers to be able to engage with the bank face to face. In the past 12 months, however, the bank has removed a link between branches and customers. When one telephones a local branch in Scariff, Miltown Malbay or so on, one gets through to a central call centre and it is not possible to speak to the branch staff with whom one has built up a relationship. The bank has maintained the ability to telephone the branch in the Law Library, but ordinary people in counties Clare, Kerry and Donegal are unable to telephone their local branches. Does this demonstrate an ability to interact with staff? As people now realise, banking is about relationships. Does Mr. McLoughlin accept that part of the reason Bank of Ireland did not lose as much as other banks was that it maintained a more traditional practice of building relationships with customers? If so, why is it seeking to make interacting with branch staff more difficult?
Mr. Liam McLoughlin:
The background to the change in contact centres has been driven by the fact that most branch staff are engaging in face-to-face contact and, therefore, are not in a position to be able to pick up telephones to deal with other customers directly. The general sense we have from our feedback is that it is better to have the ability to speak to customers when they want. For this reason, we use contact centres, predominantly in Kilkenny, to support our engagement with customers there and then.
Mr. Liam McLoughlin:
When they speak to someone, they want to do so then as opposed to waiting for someone who is tied up discussing arrears, in a meeting on a new product or at the cashier counter. The contact centres give us the ability to deal with the customer there and then. Through these centres, we also provide customers the opportunity to have a message sent to their branches to deal with their calls at a later time. We are conscious of customers' requirements. It is not a case of locking out the customer, but of trying to deal with inquiries at the time they are made.
I am not saying this for myself. I am sure I am not unique in this regard. Ordinary people in Miltown Malbay, Scariff and elsewhere do not have the opportunity to speak to Mr. McNamara or to address these concerns. They must face bank staff who in many instances are just as frustrated by these practices.
Mr. Liam McLoughlin:
I am disappointed by the Deputy's experience. I will follow up on it. From listening to the contact centres, my experience is that customers who want to get through to their branches to speak to a specific staff member are facilitated. There is no intention to lock out customers.
This practice presupposes that, when one telephones a branch, one cannot get through to someone, whereas one can when one telephones a call centre. My experience has been the exact opposite. Whenever I telephoned a branch, someone picked up and helped with my query. As recently as yesterday, I spent 20 minutes on hold trying to get through to one of the bank's call centres. Is this acceptable? If Bank of Ireland hopes to grow its business through increasing its customer base and the services provided to same, will it achieve this aim by call centres putting customers on hold for 20 minutes? They cannot contact their branches.
Our discussion inevitably brings us back to the events of 2008. Mr. Boucher was on the board of directors in November of that year. At that time, there were reports that a former Taoiseach was working with a consortium of private investment firms to purchase a controlling share in Bank of Ireland. Was Mr. Boucher aware of this or was the board ever approached by a former Taoiseach in that capacity?
In respect of the State shareholding and the necessity for the State to invest in Bank of Ireland to ensure its survival like all the other banks at that time in 2008, since then the State has sought to obtain the former Irish Parliament building in Dublin as a cultural centre. My understanding is that Bank of Ireland has been wholly unco-operative in that regard. Does Mr. Boucher not think that if it was sold at its current market value, even if that is slightly depressed, it would provide an opportunity for the bank to mark the State's support for it by giving that building to the State as a cultural amenity or centre?
Mr. Richie Boucher:
The primary focus we have is to reduce the risk to the State. We are making considerable efforts to give cash returns to the State and, which hopefully we are, to repay the investment of the State through cash and working through our strategy. All assets of the bank are available for sale at any time at the right price. Our College Green branch is our main branch in the centre of Dublin and the main branch for the extremely important franchise of Trinity College. It has more than 35,000 customers. We have a footfall of 1,000 customers per day and it is by far our largest branch. We have reconfigured our branch network around that and it is also our cash centre in the centre of Dublin. For those reasons, it is an extremely important commercial asset to us and our customers.
In respect of the mortgage-to-buy scheme, a request was put to Allied Irish Banks yesterday, and I would be grateful if Mr. Boucher could facilitate this committee and provide it with an update at year's end as to the latest figures for the mortgage-to-rent scheme, if that is possible.
We just want the figures as to how many of them have actually been completed. It will become a matter of public record one way or another, but I would be grateful if Mr. Boucher could facilitate the committee.
I have one other item before I bring in Deputy Higgins. The issue of cash transactions also came up with AIB yesterday. I am referring to the financial connection points that companies have where one brings one's debit or credit card to a retail outlet like a shoe shop. Does Bank of Ireland provide that service to a number of retail customers throughout the country?
There is a significant difference if the device is being rented or leased, especially in the current economic environment because if a company is renting and folds next week, the rent collapses with it, but if it is leasing, it may mean that it is locked into a long-term leasing agreement for a number of years which could have several thousands of euro outstanding. AIB has a leasing arrangement. It has done something similar to that done by Bank of Ireland whereby it flipped that over to another company in the past two years. Is Bank of Ireland renting or leasing?
In the past 24 hours, it is the first time in my life I have had the pleasure of being in the company of three chief executives - IBRC, AIB and Bank of Ireland - that between them walk away with €2 million or €2.5 million per annum in salary. Considering the damage wrought on our society by banking institutions through their connivance in the speculative culture that existed during the property bubble and the rampant profiteering by both banks and developers on the backs of ordinary working people who are now stuck with the consequences - negative equity and unsustainable mortgages - what moral justification is there for bankers like Mr. Boucher to walk away with, in his case, 17 times the average industrial wage?
The shareholders are big business and, scandalously, the Irish Government. I am talking about the moral justification. Does Mr. Boucher understand the anger, outrage and hurt out there among ordinary people, including the bank's customers, that we have this massive inequality in this society of austerity and crisis as a result of the crash brought about by the financial institutions and the speculators? Does that register anything at the top of the banking fraternity?
I suppose we will get no further on that one. Mr. Boucher and the bank expressed gratitude to the taxpayers for the input of capital and taxpayer's funds. If he is truly grateful, why has the bank introduced really mean-spirited banking charges that will hit precisely the poorest and most vulnerable? For example, under the bank's new regime, customers must keep €3,000 permanently in a current account or incur charges. Agencies like the Consumers' Association of Ireland and those at the coalface of people enduring poverty and difficulty have heavily criticised these types of extra charges that hit ordinary people. How does Mr. Boucher justify them?
Mr. Boucher mentioned that about 16,000 owner-occupier mortgages have had what he describes as restructuring.
What is the nature of the restructuring? Are there interest-only arrangements in many cases and, if so, how many?
Mr. Richie Boucher:
For owner-occupier mortgages, at the end of June - the numbers will have changed since then - there were 4,386 such cases. Where there was a reduced payment but still more than interest-only, where amortisation of the principal had changed, there were 1,950 cases. In 2,267 cases, the mortgage term had been extended. There were 216 various other solutions, as I tried to outline to Deputy Doherty. Those figures are for those who are not in arrears. For those in arrears, the figures are 2,579 on interest-only, 428 making a reduced payment, 176 term extensions and 120 other arrangements. The total for owner occupiers, both not in default and in default, is 6,965 on interest-only, with 2,378 making reduced payments, 2,443 term extensions and 336 other arrangements.
Based on the available information, the quantum that have moved from interest-only to other sorts of solution will have increased as a proportion of that number.
From the point of view of the customer, these arrangements are quite depressing.
What prospects are there for those who, having lived with the stress from the difficulty of sustaining a mortgage, now face a situation in which they are shackled to the bank and just paying interest? Term extensions also lead to extra burdens of interest. We put this question yesterday to the other bankers and Mr. Boucher's counterpart in AIB had the nerve to give us a lecture on moral hazard as it pertains to owner occupiers, those people who are stuck with exorbitant and extortionate mortgages as a result of blatant speculation in building land and house prices. Why will the bank not consider a write-down for owner occupiers to the real value of their homes and a recalibration of mortgages on a monthly basis to the equivalent amount? That would remove massive amounts of stress from those who are trapped in this nightmare and release badly needed funds into the domestic economy, shops and services, which would help to regenerate the gutted domestic economy with all the downsides of mass unemployment. Has Mr. Boucher thought about this or discussed it within Bank of Ireland or with the other banks?
Mr. Richie Boucher:
We review all options available to us on an ongoing basis regarding all of our loan books, including our mortgage book. The vast majority of our customers are paying their mortgages so we have a responsibility to those customers and to all of the stakeholders in the bank, including our creditors, depositors and share holders. Our goal is to keep as many people in their homes for as long as we can. We set out for the customers what we can and cannot do for them. In the vast majority of cases, 86%, where customers have had mortgages restructured or modified, they are able to meet those terms. That is what we are doing in Bank of Ireland.
The 86% are probably relieved but some of those mortgages have 35- or 40-year terms as a result of the outrageous blackmail in the property market during the bubble. Has Bank of Ireland considered the idea of revaluation so that homes are valued according to their real value and not the outrageous speculative and immoral values that were gouged from the younger generation who had to purchase homes at the time?
In the last four years, prices have only gone one way. It would not take a financial genius to put in place a structure whereby, if there was a sudden massive spike, it could be taken into account. Is there any merit in the arguments that some of us on the left have made about a general write-down rather than this individual tortuous process for owner-occupiers who face negative equity and unsustainable monthly payments?
As part of the recapitalisation, how much money did Bank of Ireland receive to deal with distressed mortgages or mortgage losses? A specific sum was given to write off mortgage losses and debt. How much did the bank receive?
On that basis, I am at a loss. Bank of Ireland might be structurally different from AIB, but although we asked the bank to provide the committee with specific information on questions 13, 15 and 16, Bank of Ireland refused to give us that information, saying it could be sourced elsewhere or that it would not give us that information. Putting it simply, if the State had not stepped in, Bank of Ireland would be no more. I am at a loss as to why, when this committee asks the bank for information, we are not given it.
Looking at the overview of the bank, it has a balance sheet is €155 billion and also has life assurance assets and liabilities, but perhaps those could be parked to one side when looking at the banking element of the bank. With regard to liabilities, how much is included on that balance sheet of 30 June as advances from the ECB or from the Central Bank of Ireland under emergency liquidity assistance?
I am referring to the "other information" extracts from the balance sheet of the bank, page 104 - the lead sheet from that.
With regard to assets, those available for sale, financial assets and NAMA senior bonds, the indicative rate of interest return on these is 3.1%. How does this arise when, currently, three-month LIBOR - London Inter-Bank Offered Rate - is 0.6%, which is the coupon rate on NAMA bonds?
At the capitalisation in July 2011, the amount of money that came in recapitalisation from the markets was a little over €1 billion - from Wilbur Ross, Fairfax, Kennedy Partners and so on and the State invested approximately €1.5 billion. The fact is the bank is still hugely overdependent on capitalisation. Its loan to deposit ratio is approximately 136% and its financial engineering is still very fragile, even after that capitalisation. The asset side of the balance sheet shows that 73% of the balance sheet loan assets are in mortgages, property and construction related loans. This goes against a bank tradition ten years previously which was completely different. Why was there not a more open, transparent and honest discussion with the Government pointing out that until the rehabilitation and restructuring of the bank took place - for the sake of the bank and its viability rather than for shareholders - capitalisation should have been by way of creditor capitalisation rather than by bringing in a 35% shareholder which is now the dominant shareholder in the bank? The amount outstanding on the market is 50%, the amount held by the State is 15% and the amount held by this consortium of investors is 35%. Therefore, it is a schizophrenic organisation.
Mr. Richie Boucher:
I would like to mention a couple of things. Circa €5 billion of equity capital has been generated from liability management exercises with bondholders. In the capital exercise we did in 2011, circa €2 billion came from liability management exercise, circa €1.9 billion came from a rights issue with existing shareholders or participation of new shareholders, including a consortium which came together for a particular purpose, and circa €300 million came from the State. Therefore, liability management exercises have contributed a significant amount to the recapitalisation of the bank. By their nature, liability management exercises are bonds being bought in at a discount on their face value, which means the bondholders have taken a loss or have switched from a bond into equity in the bank.
The €1.9 billion raised from the bondholders in 2011 primarily came from 95% of bondholders in the first liability management exercise, who went for an equity option. Therefore, they ended up with a significant stake. My information is that many of those bondholders subsequently sold out of their shares and these have been taken up by other market participants.
That is not near enough, because the bank's balance sheet is still highly vulnerable. The bank has €7 billion in provisions against a loan book of €80 billion - about 8.7%. Considering this is all in mortgages and property and construction related lending, that is probably very light provision.
Personally speaking, those ratios are not a straightforward and robust way of looking at things. We should look at the maturity of the assets and at how easily they may be collected on. As mentioned, many of them are 35-year assets. The likelihood is that the borrowers are not in a position, based on their current, prospective and sustainable earnings, to repay their loans, whether businesses or individuals.
I would like to draw attention to the tracker element of loans. The mortgage book involves loans of a total of €27 billion. Domestic tracker loans make up 57%, €20.5 billion, and investment trackers make up 81% of a total of €6.7 billion. Tracker loans are very expensive for the bank to carry. Yesterday, we discussed the point that if average interest rates, at 4% on the standard variable and non-tracker loans, rose to 6%, that would be a 50% increase, but borrowers are only barely hanging in as matters stand - after restructuring, continuing on interest only loans, stretching out the loan or other strategies or non-appropriate restructuring. This means the bank is in a perilous position on €27 billion worth of loans. It is not impressive.
People are in a dire position. I would like to echo the sentiments expressed by Deputy Higgins. It is time to look long and hard into the worthiness or unworthiness of the behaviour of the institutions over the past number of years. There is time to do some rehabilitation as well as restructuring. It is not all about numbers; it is about people's lives, families and businesses. Private debt, in addition to national debt, is a huge millstone around the recovery of the national economy.
We must be brave. It is about time the precedent set yesterday by the chief executive of Bank of Ireland's competitor bank, who took a reduction of 15% from the capped ceiling, was followed.
The Taoiseach, who spends every single day, from 6 a.m. until midnight, working for the people of this country is on a fraction of the salaries and pensions of people in the banking sector.
Does Mr. Boucher feel any discomfort whatsoever when his bank is involved in repossessing homes or putting extreme pressure on people to pay mortgage arrears that they cannot manage, many of whom are in difficulties because of the activities of banks like BOI, while he is earning in excess of half a million euro per year? Can he understand why people are angry about that?
Why would Bank of Ireland not consider writing off that negative equity, which would put the vast majority of approximately 16,000 mortgage holders who are in arrears into a sustainable position? It would also put those whose accounts have already been restructured into a more favourable position whereby they could free themselves of a huge debt burden sooner. Why would Bank of Ireland not consider writing off the negative equity, which would help the country and the tens of thousands of distressed mortgage holders, many of whom are in distress through no fault of their own? Indeed, some of the distress was caused by the activities of Bank of Ireland.
Bank of Ireland is claiming success because it has restructured quite a lot of mortgages. However, as Deputy Higgins has pointed out, a lot of those people are in pretty miserable circumstances, even though they may just be able to manage the restructuring arrangement the bank has agreed with them. The bank has the whip hand, let us be honest. However, it is not a very good situation and it means that such people are trapped in a pretty awful debt situation for a very long time to come. In addition, if I understand correctly, there are approximately 16,000 restructured mortgages and all of those people would not be in restructured arrangements were they not in some difficulty. Most of that difficulty arose from the bubble period and the consequences of the property crash. In addition, approximately 9.22% of the bank's overall mortgage book is in arrears and that figure is rising, year on year. It has risen from 5.89% in June 2011 to 9.22% this year, which is a very dramatic increase.
It is a very significant challenge. I estimate that Bank of Ireland has 32,000 mortgage customers who are either in restructured arrangements or in arrears now and a significant number of additional customers who are getting into distress. Mr. Boucher says that the problem is slowing but I do not see the evidence for that. Why does the bank not consider writing off the unsustainable portions of these debts that arose during an exceptional period, namely a property bubble, which Bank of Ireland helped to stoke up?
Does Mr. Boucher think there should be a dividend as an expression of that gratitude? I put it to him that he should re-engage with the Minister for Arts, Heritage and the Gaeltacht in regard to the bank premises on College Green. Tourism has a major role to play in Ireland and if the State had control over Grattan's Parliament, it would help us to develop our tourism industry. If the bank is not prepared to do that, I ask Mr. Boucher to consider a building swap with the Central Bank further up the street. I am simply asking him to consider the matter and am not looking for an answer now.
Bank of Ireland wrote to several of its customers in October and sought to share information in respect of a RED C opinion poll. To me it seems like trying to trick people off trackers. The letter from Bank of Ireland implies that there are better products available and that Bank of Ireland will be in contact. If the only information relates to RED C research, does that amount to misleading Bank of Ireland customers about tracker mortgages? Is Mr. Boucher aware of this letter?
Mr. Richie Boucher:
We look at the demand for certain types of products on an ongoing basis. We perceive that interest rates are relatively low in the market whereas the cost of money to the bank is high. The take-up of fixed rate mortgages in Ireland is low. Should interest rates rise then the customers and the bank are exposed.
There was an ugly face of banking previously and I would hate to think we are going back that way. The beginning of the letter states that the bank wishes to share with its valued mortgage customers some interesting findings from research carried out recently among similar homeowners who have mortgages on a tracker rate. The research was conducted by RED C in August in 2012. To be honest, from reading the letter it appears to try to trick people with tracker mortgages into engaging with the bank to move to lesser or higher interest rate mortgages. To me that is the ugly face of banking that we have seen.
Let me finish the question. Tracker mortgages are currently between 1.75% and 2.75%, assuming 1 percentage point above the base rate. Is there a better package than that at the moment? Does Bank of Ireland have a better package at the moment?
In the medium term tracker mortgages are the best for Bank of Ireland customers. Mr. Boucher stated earlier that trackers are non-profitable. It is in Bank of Ireland's interest to try to push people off trackers. To me RED C data is not something that should be used to make a decision on what interest rates one pays.
I put it to Mr. Boucher that Bank of Ireland is trying to trick or push people on tracker mortgages onto a higher interest rate mortgage. This will push more people into debt stress. I do not believe Bank of Ireland is acting in good faith with these customers. I put that to Mr. Boucher directly.
The letter states:
The letter continues: "We will be calling you over the next week to discuss the options and to answer any questions you may have. If this timeframe is inconvenient...we will contact you...please contact the following phone number." The date of the letter is October 2012.
As a valued mortgage customer we want to share some interesting findings from research that we have carried out recently with homeowners like you who have a mortgage on a tracker rate. The data conducted by RED C in August 2012 on behalf of the Bank of Ireland found that customers on tracker rates believe that lower payments and rates of interest are the most appealing feature of their mortgage. A significant proportion, 75%, of our customers with tracker rates believe the ECB rate will increase in the next five years. The majority of customers, 84%, are concerned about the resulting increase in mortgage repayments. If, like these customers, you have concerns about increasing mortgage repayments we may have options that can afford you more certainty of repayments at affordable rates, giving you the benefits your current low rate but without the risk of increases over the next five years.
I will summarise my reading of the letter. Deputy Humphreys, you are saying that the letter gives the impression that the variable rates will be better when measured against tracker rates at some time in future. Is that correct?
Mr. Liam McLoughlin:
The nature and background of the letter relates to research we did with customers on ECB rates in the coming years and they are an important element of a tracker rate. The feedback from customers was that ECB rates would increase in the next five years. As Mr. Boucher said, we are trying to ascertain customer interest in fixed-rates to protect against an increase in ECB rates.
It is somewhat like the packages one gets for a telephone or mobile phone. I have asked the question and Mr. Boucher understands it. Overall, does Bank of Ireland have a better rate than the 2.75% rate? The person that brought this letter to me believes that he was being tricked to engage with the bank to come off his tracker rate. That is a reasonably fair interpretation of the letter.
Did Bank of Ireland send it to those with buy-to-let trackers or was it simply sent to ordinary people who own their own homes and who have trackers? Did Bank of Ireland send it to people with buy-to-let mortgages?
My understanding from the figures is that there is just over €17 billion in outstanding tracker loans and just over €10 billion in outstanding non-tracker loans on Bank of Ireland's mortgage book in the Republic. With rounding, this comes to some €28 billion in outstanding mortgage loans. The figure given for the amount of negative equity was €4.3 billion. Does that figure apply only to the Republic?
Is Mr. Boucher saying the bank's best estimate at the time is that against the approximately €28 billion in mortgages outstanding in the Republic of Ireland, there are realisable assets at today's market value of just under €24 billion?
Does that mean the €4.3 billion in negative equity is not the bank's estimate of the difference between the total amount of mortgages outstanding and the total amount of asset value against those loans?
Mr. Richie Boucher:
The disclosure is the negative equity. That is what we do; we do not do a realisable value. The vast majority of our mortgages are being repaid on time. Customers are able to meet their obligations and a primary assessment of our ability to have mortgages repaid is the customer's ability. We do not see a correlation between negative equity and ability to repay.
I am not talking about ability to repay. I am trying to understand whether, when he says "negative equity", Mr. Boucher means the difference between the total amount of loans outstanding and the realisable assets against those loans. If someone has a mortgage of €500,000, for example, and the market value of the property is €300,000, the negative equity is €200,000, that is, the difference between the loan outstanding and the market value of the asset.
Using the same example of a mortgage of €500,000 against a property that is worth €300,000, is Mr. Boucher saying the €200,000 difference between the mortgage and the asset value is not what he means by negative equity?
I go back again to the example of an outstanding mortgage of €500,000 and a current market value of €300,000. Putting it very simply, would the bank consider the negative equity in that case to be €200,000? I ask Mr. Boucher to answer either "Yes" or "No".
Mr. Richie Boucher:
If the negative equity is the €4.3 billion on the book, based on indexation across all mortgages, on an individual basis, the answer is "Yes". However, the customer's ability to repay is different from the security piece. We assess on the basis of a customer's ability to repay. This is not a pawnbroking business. We look at the customer's ability to repay.
I understand, but there seems to be a very clear difference of opinion. My understanding of negative equity is that if a person owes the bank €500,000 and his or her asset is worth €300,000, whether he or she is on the dole or earning €1 million per year, that loan has a negative equity of €200,000 attached to it.
In the context of the figure of €4.3 billion provided by the bank and sticking with our example of a loan of €500,000 on a property with a market value of €300,000, am I right in saying there is a risk assessment of the ability to repay and the declared negative equity is adjusted accordingly?
I apologise for interrupting. As I can barely follow the discussion, I am concerned about how listeners at home are faring. Is Deputy Donnelly referring to the bank's mortgage lend book or the total lend book?
Mr. Richie Boucher:
It is a lending book. We assess the customer's ability to pay and look at his or her cash flow. We disclose on an ongoing basis if a customer is going to be impaired. However, we expect the vast majority of our book to be repaid. It is a lending book. As such, it is an assessment of potential future cash flow, security in a default and assumptions made on the basis of that security.
The last time Mr. Boucher appeared before the committee, he told us that the total amount which Bank of Ireland had surrendered in terms of mortgage debt in the Republic of Ireland was zero.
Is that still the case?
Just for the record, Mr. Boucher, as chief executive of Bank of Ireland, is refusing to tell the Oireachtas Joint Committee on Finance, Public Expenditure and Reform how much the bank has surrendered. Bank of Ireland has taken a write-down of €1.4 billion. Deputy Pearse Doherty asked how much had been-----
Yes, I understand. The bank has made a provision of €1.4 billion. On the previous occasion on which he was before the committee Mr. Boucher said the bank had not surrendered anything. He is now refusing to tell the committee what is the actual number. That is fine.
In terms of the personal insolvency legislation being brought forward-----
I thank the Chairman. If someone enters into a debt settlement arrangement on secured debt, particularly in respect of a house, and if an agreement can be arrived at by the bank, the personal insolvency professional and the borrower or borrowers, at the end of the debt settlement period - under the proposed legislation this will be up to six years - is it the bank's understanding that the borrower or borrowers could keep the house? Is it also its understanding that, as part of a debt settlement arrangement, an amount of debt could be surrendered by the bank to the borrower or borrowers?
Yes, I understand that. We are in the Republic of Ireland and can state all sorts of truisms. I do not know what Mr. Boucher is doing here if he is refusing to answer questions. For the record, he is refusing to indicate to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform whether the bank will even consider debt surrender in the context of the upcoming personal insolvency legislation. I thank him very much for his time. This has been a most illuminating experience.
I shall try to use even less time. The document with which we have been supplied indicates that the underlying loss between December 2011 and June 2012 increased from €722 million to €907 million, a rise of 24%. Therefore, the most recent figures supplied to the committee indicate that the position on the investment the taxpayer made - involuntarily - in September 2008 has depreciated by 24%. The document also indicates that impairment charges rose from €901 million in the first half of 2011 to €978 million in the same period in 2012. This is despite the fact that on page 8 of the document a statement is made to the effect that "Impairment charges below the level incurred in H2 2011 but remain elevated", whereas, in fact, they increased. A similar statement is made on page 13, namely, "Impairment charges remain elevated but have reduced from the level in H2 2011". Someone who stopped reading at page 8 or page 13 and did not read as far as page 26 would have obtained a completely different view of the position on impairment charges. Such charges have actually increased by 9% or €77 million.
Mr. Richie Boucher:
We have provided a graph which shows the position in H1 and H2 2011 and H2 2012. On the basis of accounting convention and from a presentational point of view, we are obliged to report half-year on half-year. We also show the trajectory for the second half-year period. The graph tries to illustrate, clearly, what we are talking about.
The point I want to make is that the figure is increasing. Unlike the statements to which I refer on pages 8 and 13, when one reaches page 26, one realises that the amount rose by €77 million. The overall performance of the bank is also in decline and that is of concern to the people who made the investment, particularly in the context of the fact that the underlying loss increased from €722 million to €907 million.
I am concerned by the statement on page 9 to the effect that Bank of Ireland is 73% a property-based institution. That is exactly what got the country into the trouble in which it finds itself.
Mr. Richie Boucher:
The directors' remuneration is set out in the annual report. I do not have the information, but I can supply a page number. Under company law, the directors are all obliged to work in the best interests of the company. The Minister for Finance made an announcement in that regard in answer to a question in the Dáil. All the directors are expected to challenge and contribute to the board.
Mr. Richie Boucher:
If I might move from the particular to the general, Bank of Ireland's future is tied up with that of the country. We have a vested interest in the recovery of the country. Our business will not recover unless the country recovers. I suspect that we are 80% to 90% aligned in respect of these goals. We would have different-----
That is not the question Senator Barrett posed. He inquired as to what made personal interest directors different from other directors on the board. Mr. Boucher's response was that under company law, they were required to behave and display a duty of care in the same fashion as the other directors. They are not, therefore, really any different from the other directors.
Which is a great position in which to be. In terms of their day-to-day work, they do not do anything different from the other directors. I would love to be in a position where I would not be obliged to stand for re-election at the conclusion of the term of each Dáil. However, that is not the way it works. There are rules to which the people concerned are obliged to adhere and, as such, there really is no difference between them and the other directors other than the fact that they are not obliged to stand for re-election.
I wish to make a proposal to the effect that we should call the public interest directors to come before us at the earliest opportunity. Is that agreed? Agreed. Does Senator Barrett wish to add anything?
I take it that the performance of the bank is declining, as shown on page 8, that the underlying losses are up to €907 million from €722 million and that the impairment charges are rising, as shown on page 26. Will Mr. Boucher confirm the figures?
Limited time is available. I know Mr. Boucher well because I brought the CEOs of the banks before the finance committee in 2008. I am struck by their lack of moral compass. Nothing has changed although we are in a completely different space now. Mr. Boucher is not answering questions. I will put a couple of questions to him. First, have the top level CEOs in the banks taken any reduction in salary to date?
Is it correct to say that some taxpayers’ money that went into Bank of Ireland is going to fund the deficit on a pension scheme that is paying €650,000 to the CEO that was in place at the time the bank had to depend on the kindness of taxpayers to bail it out?
Given the situation, does Mr. Boucher not find that mind boggling? He has the distinction of being the only top level management CEO still in place from the time of the crisis.
When did Bank of Ireland introduce 100% mortgages for home owners?
In terms of the loans in arrears for more than 90 days I see a spike in 2006 and 2007. In 2005 it was 9.8%. In 2006 it was 12.3% and in 2007 it was 12.5%. Bank of Ireland is responsible for many of those people being in arrears. It is not good enough to come before the committee and say that the bank must recover the maximum amount of loans. The bank irresponsibly gave out 100% loans at that time. Has the bank given any write-offs to mortgage holders recently?
A portion of the €4.8 billion is funding a pension of €650,000 a year to Mr. Brian Goggin, former CEO, and the salary for Mr. Boucher, who was previously deputy CEO with responsibility for retail mortgages, to the tune of approximately €620,000 plus benefits, which would bring him close to €900,000. Mr. Boucher is probably in line for a pension of the order of €400,000. He is clearly well prepared on a PR level to answer no questions. Where is his moral compass in all of this? The problem is that Bank of Ireland sold products during the boom that people could not afford.
The question is whether the bank will deal with mortgage holders to ensure their mortgages are sustainable. The second question is important. It has not been asked previously. How much of the €3.5 billion target for lending to SMEs was new lending not restructured lending?
Mr. Richie Boucher:
Some of it may be but to a statistical margin of error, which in our view is less than 3%. I can say with confidence that 97% of the total is new lending. I believe it is 100% but I cannot verify that. This is a market disclosure. Any comments I make in a public forum are market disclosures.
That question has been put before. The Gallery has heard it enough this morning. Before I bring in Deputy Shane Ross, Mr. Boucher must clarify a few points. There has been wide acceptance that his engagement with the committee on a number of questions has been at a minimalist level, if I could even call it that. I wish to put that on record.
An issue has been outstanding since Mr. Boucher came before the committee and I still have not got my head around it. A question was put to Mr. Boucher, as it was put to AIB, on the absolute cost of the institution reducing the standard variable rate on domestic mortgages by 0.5%. The figure we got from AIB yesterday afternoon was that private dwelling houses on its domestic book is worth approximately €14.3 billion and a 0.5% reduction would result in a loss of €71 million to AIB. On the figures Mr. Boucher gave us this morning, the domestic book of Bank of Ireland is approximately €21 billion and if the bank reduced its standard variable rate by 0.5% its loss would be €29 million, approximately a third less than AIB. Could he explain to us how it is the case that a smaller loss would be incurred following a 0.5% reduction given that the loan book is bigger?
Mr. Richie Boucher:
The trackers are excluded. We have fixed-rate mortgages and standard variable-rate mortgages. We disclose the trackers. With regard to the standard rate and variable rate, our figure may be lower than that of Allied Irish Banks, but I am not familiar with the numbers of the latter.
Another issue relates to a question put to Mr. Boucher by Deputy Donnelly. Yesterday afternoon, AIB was asked the number of mortgages with a shortfall that it has allowed to be surrendered voluntarily and its policy on shortfalls. We seem to have received a very vague response from Bank of Ireland on the matter. The AIB officials advised us yesterday afternoon that 140 properties were surrendered with a mortgage shortfall. The response of Bank of Ireland to date has been that it has a responsibility to maximise the recovery of all moneys owed by customers and that it has a comprehensive arrangement and process to work with customers to find solutions that can work for them and the bank in this regard. Bank of Ireland states that, as a last resort, it may have to instigate a formal legal process. That is not answering the question; rather, it is symptomatic of some of the replies we received this morning. It indicates the bank is not really engaging with the process in a serious manner. It also means it is not engaging with this committee in a serious manner, which is of equal concern to me. What is Bank of Ireland's position on the issue of voluntary surrenders where there are mortgage shortfalls? What is the bank doing in this regard?
Why could the delegates not have given us that answer at the start of this morning's proceedings without our having to endure a lengthy rigmarole? The question was put to the delegates very simply and we now have the answer.
Mr. Boucher has still not answered the question that specifically concerns surrender. The delegation listed a total number of surrenders or repossessions but did not answer the question on the level of debt surrender involved.
Mr. Richie Boucher:
We have a nominations and governance committee. It went to an external third party, which identified potential candidates. The potential candidates were reviewed by the committee and a recommendation was put to the board. When the candidate agreed to be considered, there was consultation with the FSA, because we have a large business, and then the candidate went through the process to meet the fitness and probity requirements of the Central Bank of Ireland.
Mr. Boucher, therefore, was happy to appoint someone who lost a bonus in a bank, which, as Mr. Boucher will know, is very difficult to do. I refer to the appointment, as governor of Bank of Ireland, of an individual who lost a bonus at the time of an emerging mis-selling scandal. Today, it has been revealed that the payment protection insurance bill of Lloyds has ballooned to €5.3 billion. Is Mr. Boucher aware of that?
It is absolutely extraordinary that Bank of Ireland should appoint as a governor somebody who had lost his bonus in Lloyds in a payment protection insurance scandal. There are now circumstances in which the bank is investigating itself in respect of payment protection insurance. The board made its appointment in the full awareness that the individual concerned, while not necessarily culpable, was the director in charge of insurance when the scandal arose. That should be noted by this committee.