Damien English (Meath West, Fine Gael)
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We will begin our discussion with Mr. Richie Boucher, group chief executive, Bank of Ireland, on access to finance for small and medium enterprises, SMEs. We asked the witnesses from the three banks to come in a little earlier because of a clash in timing between this meeting and Question Time. I welcome Mr. Richie Boucher, group chief executive, Mr. Liam McLoughlin, chief executive of retail Ireland, Bank of Ireland group, and Mr. Pat Farrell, head of group communication, Bank of Ireland, to discuss access to finance for SMEs and all matters associated with that. I thank the witnesses for facilitating the time change and apologise in advance on behalf of members who have to leave and come back to the meeting as Question Time in taking place at the same time. Apologies for the slight confusion.
In accordance with procedure, I am required to read out the following notice. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If they directed by it to cease giving evidence on a particular matter and 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 asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity either by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I ask Mr. Boucher to make his presentation to the committee on access to finance for SMEs, following which we will have a question and answer session.

Mr. Richie Boucher:

Hopefully the members of the committee will have received our presentation in advance of the meeting. I would like to spend a few minutes giving an update on where the bank is. That is pertinent, reflecting why the SME sector is important to us and why we have the capability and there is the necessity to support that. With the Chairman's permission, Mr. Liam McLoughlin, who is head of our retail Ireland business, will focus in particular on the SME sector.

I draw members' attention to page three of our presentation. From Bank of Ireland's perspective, we are the Irish bank which has an EU restructuring plan agreed, having received State aid, and our restructuring plan confirms that we have a very significant presence in Ireland. We have very substantial businesses in Ireland and businesses outside Ireland. Also as part of our restructuring plan, we managed to negotiate that we retained our New Ireland business and, as a punishment measure in substitution for that, we have exited certain business banking activities in Great Britain.

During 2013 we were able to continue our progress in repaying the State aid and, in particular, towards the end of the year in December we raised equity and we sold on preference shares owned by the State in the market. A total of €1.8 billion worth of preference shares were dealt with from the Government's perspective. That means, from the European Commission's point of view, that all the State aid we received has been repaid.

It is important also to reflect that in 2013 the bank, and the system as a whole, came off the ELG scheme, that scheme having expired. That obviously removed a significant burden from the taxpayers and had economic benefits for the bank. Again, it is important to reflect on the fact that we were able to come off that scheme while safely funding ourselves, so liquidity is not an issue for the bank.

From Bank of Ireland's perspective, we received State aid. The total quantum of State aid that we received was €4.8 billion and we have returned €6 billion in cash to the taxpayers over that period and the State still owns a valuable 14% shareholding in the bank, which is worth somewhere in excess of €1 billion as of today.

Our progress during 2013 was also reflected in our profits. We achieved a net interest margin of 2%, notwithstanding a very low interest rate environment. Over the past five years we have reduced our costs by over €500 million while we have been investing very heavily in our businesses, in particular in our core businesses, including our branch network in Ireland and our payments and our infrastructure in Ireland.

We have had significant access to the funding markets - funding is not an issue. Our customer loans are funded by capital and customer deposits - our liquid assets - are funded in the wholesale markets, and we have termed out the funding in those wholesale markets.

Last year was also an important milestone year in that the level of defaulted loans - customers who were defaulting - reduced for the first time since 2009 and the absolute level of defaulted loans has reduced. Pertinent to the work of this committee is that defaults in commercial real estate, consumer mortgages and SME lending in Ireland came down.

During the second half of 2013, as Ireland was exiting from the troika programme, on behalf of the troika, the Central Bank of Ireland did a balance sheet and capital assessment of Bank of Ireland working to requirements set by the troika, and we came through that. There were certain observations regarding risk-weighted assets and provisioning and we addressed those at the year end. As a public company, we set out very clearly, in comprehensive detail, in December when the results came out what the findings were and we addressed those at the year end.

We have had a deficit in our pension schemes and our staff have agreed for the second time in three years to have further reductions in their pension benefits and that has been reflected in our cost base and also in the capital. We are strongly capitalised. We have a robust capital ratio of 12.3% under Basel III, which are the new capital rules for the banking system, therefore, we have the capital available. It is important, as I talk about this, to point out that we have the core franchises, our cost base has been addressed, we are funding ourselves safely, we have repaid the State aid - the taxpayers are in profit - and we have the capital that is being provided to us by the private sector by people who believe in the recovery of the Irish economy and believe that Bank of Ireland can play a significant part in that.

Our key issue is the generation of revenue and the generation of revenue means supporting our customers. All of that having come together, we had a significant improvement in our financial performance in the second half of 2013, as is reflected in the slides. As I address the committee today, Bank of Ireland is generating profits and is generating capital.

The capital we generate is available to support our growth ambitions.

I have gone through my presentation relatively quickly because I am very conscious that members are under some time pressures. Mr. McLoughlin will go through our Irish franchise.

Mr. Liam McLoughlin:

I refer to slide No. 15 in the pack we circulated in advance to the committee. The key message is very much that the bank's key focus is on being the number one bank for business and enterprise in Ireland, achieving this by approving the giving of more credit to viable businesses and having this money drawn down. Through our 250 branch network nationwide, staffed by experienced qualified business managers and advisers and supported by sector specialist teams, including, for example, our agri and food teams located across the country, we are very much open for business and focused on meeting customer needs on a commercially sustainable basis. The bank is committed to advancing €33 billion in new lending to the economy in the five years to the end of 2017. Of that €33 billion, €12 billion will be to support the SME sector, in particular.

Looking back on 2013, we received more than 1,000 applications a week. The total number of applications for the year exceeded 56,000 and our approval rate remained constant at 85%, both in 2012 and 2013. Approvals for new and increased lending were at a figure of €3 billion in value terms in 2011, €3.7 billion in 2012 and €4 billion in 2013. They are for new and approved applications, excluding restructures.

We have seen significant growth in the agri and food and export sectors. There was certainly a pick-up in manufacturing and the health care sector in 2013 and a strong start in other sectors, including the motor sector, in the first quarter of 2014. The bank provided more than 50% of all new non-property SME lending in 2013.

In regard to restructures, we have an agreed resolution programme in place for the majority of challenged SMEs. At the end of 2013 more than nine out of ten of all medium challenged cases were in end state arrangements, with the focus on working with these SME customers in implementing these arrangements as they returned to growth. This number has improved further in 2014. Consensual arrangements were sought with only 18 receivers to trading business appointed since 2009.

In regard to our outreach programme to support the economy and job creation, we have a very extensive outreach programme to encourage new lending applications. A key focus of the programme, with which people are very familiar, is our national enterprise week. The next one is the week of 16-23 May, our tenth such national enterprise week. There is a week long programme of events. In 2013 there were more than 130 business and agri credit clinics, with more than 1,500 Show your Business participants, and a further similar programme is planned for 2014.

In 2013 we supported 16,000 start-ups. We have very significant funding committed to seed and development capital funds supported by specialist and targeted funds, working closely with the likes of Kernel and Delta. We have a number of other funds aligned with this supporting specific sectors, including energy and technology.

We have been a leading provider under the credit guarantee scheme and were a key supporter of Microfinance Ireland in 2013. We have a number of other ancillary initiatives also such as the enterprise lounge on Grafton Street to support businesses - a service offered to enterprises. We sponsor a number of events, including "Dragons' Den", a significant attractor of start-up businesses. We are also looking at a number of accelerator programmes in Dublin and Cork to support start-up initiatives in that space.

In addition to our business banking sector, we also have a significant presence in the corporate banking sector in Ireland, supporting plcs, multinationals, the IFSC and foreign direct investment, which are of importance to the jobs agenda for the country. Aligned with this business within corporate banking, we have a very significant infrastructure team supporting public private partnerships, including the N11, N17, N18 and N25 road projects and schools bundles working closely with the EIB.

Damien English (Meath West, Fine Gael)
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I thank Mr. Boucher and Mr. McLoughlin. I will call Deputies Dara Calleary and Peadar Tóibín first in case they have to leave to take part at Question Time in the Dáil.

Dara Calleary (Mayo, Fianna Fail)
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I thank the Chairman for facilitating us. I apologise in advance to the delegates as it is Question Time in the Dáil. It will be like Lanigan's Ball today in that we will be stepping in and stepping out.

The context of these hearings is the huge frustration still being expressed to us about bank lending facilities and the lack thereof. Even as late as last night, I attended a meeting at which huge frustration was expressed. This is backed up by figures from the Central Bank that to year end - September 2013 - lending to SMEs declined by 4.8%, or €1.3 billion, and that lending to all non-financial and non-property business declined by 3.9%. The figure was 5.9% at the end of September 2012.

The Government-commissioned RedC report stated perceptions of bank lending were still poor and that many people would not go to the bank because they feared their existing credit facilities would be reduced. The Credit Review Office has shown that 55% of appeals to it were upheld. Under Bank of Ireland's own internal appeals mechanism, only 14% of appeals got through the system. That is the frustration of which we are trying to get to the bottom to see if there is a solution.

It was stated a sum of €4 billion was approved for SMEs last year. How much of it was drawn down as opposed to applications just been approved?

I can ask all of my questions now if the delegates like in order that we can get them out of the way.

Mr. Richie Boucher:

I am sure I will be picked up if I forget any of the Deputy's questions.

Dara Calleary (Mayo, Fianna Fail)
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We often hear that facilitates have been approved, but the draw-down time is elongated and the conditions in drawing down funding approved prove insurmountable. I would like to know the difference between the actual amount approved and the amount drawn down.
What is Bank of Ireland doing in the branch network to promote the Credit Review Office? How many applications to Bank of Ireland went to the Credit Review Office? Is there active engagement on Bank of Ireland's part in promoting the service?
On the recent comments of Professor Morgan Kelly on SME loan impairment, Mr. Gerry Prizeman, head of small business, said there was no time bomb in Bank of Ireland. Will the delegates flesh out that comment? What percentage of SME and company loans has Bank of Ireland restructured in the past few years? Has it farmed out any of its debt to outside companies for pursual?
When one speaks to business people, there is huge frustration about the increase in bank charges in the past few years - charges for basic banking services, including coins and coin lodgements. What is the average increase in bank charges to SMEs in the past three years? What other charges is the bank imposing on businesses, including loan fees? Does it charge them if members of its recovery team helps them to restructure their business?
I refer to an issue highlighted in the Entrepreneurship Forum report which was commissioned by the Department of Jobs, Enterprise and Innovation and headed by Mr. Sean O'Sullivan. There are a number of issues around finance, one of which is around the notion of personal guarantees. The SME lending code of conduct from the Central Bank states:

7. Having due regard to the nature, liquidity and value of collateral a regulated entity [the bank] must not impose unreasonable collateral requirements for providing credit facilities, having regard to the value of the credit being offered.
8. A regulated entitymust not impose unreasonable personal guarantee requirements on borrowers.

However, the lending banks in Ireland are not following this code.
For example, even for established, profitable, non-leveraged limited companies, a requirement for personal guarantees is considered normal rather than an exception. This is outrageous and Irish banks should begin to follow international standards on this issue rather than continue this current backwater behaviour.

Peadar Tóibín (Meath West, Sinn Fein)
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Depending on who one talks to, there are very different views on SME lending. It was indicated that 85% of lending applications had been approved at some level, while ISME, for example, would give a different figure of probably around 50%.

They would indicate that there has been a fall-off in lending. Is any of the new lending indicated a roll-over of debt or financing of a previous debt? What are the impediments from the SME side in terms of lending and what are the impediments from the side of the banks in terms of lending to individuals? There are informal methods by which banks do not provide loans. One of those ways would be literally an informal conversation and another could be the length of time taken to process a credit line, which it might be necessary to do very quickly. I would welcome a comment in that regard.

There is also a view that bank staff are not fully trained or sufficiently skilled to deliver SME lending. Most of them have spent their early years giving loans to the property sector. We also hear that many businesses who are looking to purchase retail premises in provincial towns find it impossible to get a loan for that purpose. What are the plans of the banks to ensure access for SMEs in the regions in terms of the geographical footprint of branches throughout the State? Do they have plans to increase or decrease the number of branches?

In addition to lending, debt distress is a massive issue for banks. We hear that 50% of SMEs are in debt distress. How many of the SME clients of the bank are in debt distress? Does the bank have figures for the past two years for the amount of businesses in debt distress that ended up closing? What solutions does the bank offer to businesses in debt distress? What kind of restructuring has it given? Were write-downs offered on certain debt distress? Debt distress in itself has a major impact on the level of employment within the State. We heard recently from Morgan Kelly that it was feared that if the ECB changed its policy on the debt distress of SMEs and sought to accelerate the cleaning up of those loans that it would have an enormous effect on the economy and employment. What are the views of the bank in that regard?

Mr. Richie Boucher:

I will go through the questions as quickly as I can but try to be comprehensive with respect to the committee. There is some reduction in credit in the country. There are banks exiting the country. It is obvious that there are banks exiting the country and the number of banks is shrinking. Bank of Ireland is not exiting. I cannot overemphasise what we have done, with support from the taxpayers, who have been repaid. We have raised the capital and we are funding ourselves. We have reduced our costs while investing in our businesses but the capital that has been provided to us from the private sector does not come from people who felt sorry for us or had to deal with a black hole. They are people who believe there is an opportunity in Ireland. My requirement and that of my colleagues is to deploy that capital with the opportunity that is in Ireland. How we will be judged by our shareholders – the people I work for – is the deployment of our capital, taking advantage of opportunities we believe are available to us in this market. The SME sector is a key sector for us. That is at the heart of our strategy. We have been consistent about it and that is what we have done. All the restructuring and everything we have done is to bring us into this position today because we believe there is opportunity.

To turn to some of the statistics Deputy Tóibín and Deputy Calleary inquired about, of the €4 billion of new and increased lending – it is not roll-over debt – we do not make money until we provide new and increased credit. Utilisation was around about 50%. That reflects some of the new and increased lending. Some of it is new and increased overdraft facilities, receivable financing or stock financing facilities, where one would expect a level of fluctuation. What we have seen happen over the past couple of years is increased utilisation of, for example, the receivable financing lines that we provide. Increased utilisation has moved from roughly the late 40s three years ago to about 60% utilisation of the average invoice discounting line.

Dara Calleary (Mayo, Fianna Fail)
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Could I just clarify whether that is 50% of the €4 billion?

Mr. Richie Boucher:

Roughly €2 billion is drawn at any one moment in time. We have seasonal facilities, stocking facilities and invoice discounting. Overdraft facilities are an element of that and some of it is term loans. Utilisation will reflect that. We do not make money unless the money is utilised. We only earn the income as the money is utilised, so utilisation is the key criteria that we look at. Increased usage of invoice discounting means to us that our customers are slowly recovering. They are selling more product and therefore have a greater utilisation factor to finance against debtors.

With regard to the Credit Review Office, CRO, we had 70 cases in which a decision was overturned by the CRO. The funds were advanced in 37 of those cases. It is important to bear in mind that in 30% of the cases in which funds were advanced after a credit decision by Bank of Ireland was overturned, those customers have subsequently defaulted. My point is that lending to SMEs is not an exact science. One is making judgments and using opinions the whole time. We will get it wrong. We assess a significant number of credits every day. We have a desire to approve the credit on the basis that it is safe for us, but we get it wrong. We will lend money to people today who will default in a year’s time and we will decline some customers who might have been able to repay us. It is not an exact science. If we just use the example of the Credit Review Office, it has independently looked at the credit and it has asked us to look again at certain customers, and one third of those customers have defaulted. That is the risk we take. We are in the risk business. We try to accept risk but we will not always get it right. We work the whole time to try to.

Deputy Tóibín asked about lending. One of the biggest issues for us in lending to SMEs is the character judgment one is making about the entrepreneur and the ability to predict future cashflow. Lending is all about the ability to predict future cashflow. We are not glorified pawnbrokers who just lend against security. One of the things on which we have worked hard and provided intensive staff training is a better ability to ask the right questions and support customers in the assessment of future cashflow. We stress the future cashflow and spend as much time on the assumptions and what would happen if it was correct or incorrect, and what is the sensitivity of the future cashflow to future predictions. That is the hardest part of SME lending. It is anticipating what might happen in the future and whether we can make an appropriate credit decision against that.

Deputy Tóibín also asked about our statistics. We are a public company so we must verify every statistic that we mention as part of a presentation to the committee or talk about to our investors because those are statements to the market on which investors are making decisions. When we say that 85% of the SME loans that come to us are approved, that is a verifiable statistic. It is something we share with the Department of Finance and the Central Bank and we give quite a lot of detail around that.

With regard to personal guarantees, we are clear that is an issue. Again, the bank’s desire is to lend money. We do not make money until we lend the money. Our job is to make money to generate revenue. A customer will decide what corporate structure he or she wants to carry on the business through. Some people will say for tax or other reasons that they want to borrow in their sole names and therefore the loan is with full recourse. Other people will want to go through a limited liability company and again they will want to make decisions which will be based on that. We do not provide 100% finance willingly. I have to be absolutely clear on that. Sometimes we end up doing it by mistake but our view is that there must be equity in a transaction that de-risks the transaction from the customer’s point of view and the point of view of the bank. If someone decides to go through a limited liability company the choice to the customer is whether they put equity in the form of cash into the limited liability company as share capital. Some customers decide not to do that.

They decide they want to keep their assets outside the company and we say that if we are to provide a loan on a basis that we can accept the risk then that equity contribution must be recognised by way of a personal guarantee. It is not something that we look for as a matter of rote, it is an assessment of the relevant level of the equity that goes into the company.

Mr. McLoughlin might want to take the question on bank charges.

Mr. Liam McLoughlin:

Deputy Calleary asked a question about coin lodgement charges. Our charges have not changed in this phase but our modus operandi is one where in support of the national payments plan we support the move towards electronic transactions and a reduction in coins and cheques in use in the economy. Clearly our fee structure certainly for personal customers favours automated transactions over coin and cash. We are making the process in branches more efficient. There is more self-serve for customers to make the process of coin, cash and cheque lodgement much more efficient. The move is towards supporting the national payments plan.

Deputy Tóibín asked a question about our branch footprint and access to SMEs. The bank took a significant, strategic position 18 months ago on our branch footprint. We have 250 branches across the country and we are strategically supportive of the branch footprint. We have not closed rural branches across the country. We have a requirement to make sure those branches remain commercially viable and that they are run efficiently and we strive to work towards that as well. As long as local businesses support the branches our objective is to make them all viable.

Another question related to SME training. We have an ongoing training programme for staff in SMEs on the job. The best training one gets on the SME sector is in the collections area. We have a lot of people working in the growth area. Initially, they work in growth but then go back to collections. Growth is very much part of our future plan. We work with the professional courses that are organised by the Institute of Banking in particular the professional diploma in SME lending that it introduced 18 months ago. A number of staff have gone on the programme.

Deputy Calleary is no longer present but he inquired about the credit guarantee scheme. There are challenges with the scheme. We agree that the number of cases that have gone through it is not sufficient. We have an automatic process in the bank where if a credit has been refused the customer is referred to the microfinance scheme for example. The credit guarantee scheme is also promoted to customers as well and we can come back with suggestions in terms of input to the debate on how that can be improved.

Mr. Richie Boucher:

There were a couple of other questions. Reference was made to Professor Morgan Kelly and defaulted loans. As I touched on in the earlier part of my presentation, as part of the troika review and following the troika’s exit from Ireland there was an asset quality review of the banks. It was a very forensic study of the credit profiles of the banks. There were significant reviews of individual SME files, corporate files, business banking and mortgage files. We reflected that at the year end. I am sorry if I do not have the customer numbers for the absolute level of defaulted loans but I have the volumes. At 30 June 2013 the number of SME – to be consistent we use the EU definition of the term “SME” - defaulted loans was €2.9 billion. Those defaulted loans had reduced to €2.7 billion by December. That reflected in part restructures but in part customers that had been restructured moving to cure. I advised the stock market when we gave an update on our results that the number of customers defaulting had reduced and I referred to the number of curing customers. The cures we set out in our accounts so the restructures that we have available to customers is that we have restructured SME loans of €1.487 billion at the end of December 2013; €679 million of the restructure was term extensions; €116 million was adjustments or non-enforcement of covenants; €278 million was reduced payment with full interest; €277 million was reduced payment greater than full interest; arrears capitalisation was €36 million and the balance was a range of other solutions.

My colleague, Mr. McLoughlin, mentioned that there were certain targets set by the Central Bank of Ireland. We met those targets. The targets are reviewed by the Central Bank. It sends in people to review how we have achieved them and we were able to again update the market on a verified numbers basis that nine out of ten of the challenged customers at the end of December 2012 had been in an agreed condition at the end of December 2013. The nine out of ten has since moved to around about 95%. Obviously, we will have some customers who will move into a default and we have to work with those customers but the most important thing was to look at what was the position at the end of December 2012 and where those customers were at the end of December 2013. I have tried to give some colour of what the restructures look like.

We also clearly do have some customers who have moved into a default position where they have gone into examination, receivership or otherwise. In the vast majority of those cases the business has survived. The ownership has changed but employment has been preserved to some extent as someone else has come on board in the business. What we are seeing is quite a lot of opportunity in the marketplace at the moment. As confidence starts to slowly come back, people who perceive themselves as natural consolidators are starting to roll out. People might have survived and now they see opportunities to buy a premises up the road or buy out a competitor. The first signs we saw of that are in the area of car dealerships. We are seeing it also in pub chains and hotel chains. As that natural consolidation takes place we are helping and supporting those customers.

Damien English (Meath West, Fine Gael)
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As a point of clarity, out of the nine out of ten cases restructured, are the majority of them long-term restructured or are some of them still in short-term arrangements?

Mr. Richie Boucher:

For some of them we hope it is what we call the end state. That is conditional on the customer performance continuing to improve. In some cases part of the end state agreement with the customer is that he or she will sell certain of their other assets and time is given to allow that to happen with milestones for achievement. The big thing for us is that the market will look, so that is why we disclosed for example that €1.487 billion was restructured. The market will then look at us each June and December to see whether the restructures are sticking because that is a key thing on which the market looks at for us.

Mr. McLoughlin wishes to correct a statement I have made. My apologies.

Mr. Liam McLoughlin:

If I may, I wish to correct some dates. At the end of December 2013 we were at 90%, that is nine out of ten and at the end of March 2014 that had increased to 95%, as opposed to December 2012 and December 2013.

Seán Kyne (Galway West, Fine Gael)
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I welcome Mr. Boucher, Mr. Farrell and Mr. McLoughlin to the committee. I apologise that I had to leave earlier. Perhaps some of the issues I wish to raise might have been previously raised.

As has been pointed out by Deputy Calleary, ISME stated that there is a disappointing increase in bank refusal rates. It also said the banks cannot be trusted. Is there independent verification of the 85% approval rates? Has the Central Bank or other body verified that they are true? If the figures are true then the banks would argue that their rates are high as well. I wonder about the entire debate because anecdotally it is suggested by ISME that the refusal rate is 50%. Could someone please clarify the issue?

The Credit Review Office has stated that banks in general, not just Bank of Ireland, have a low-risk appetite. What is the view of Bank of Ireland on increased competition from credit unions? Would it welcome such competition? Credit unions have a large amount of money to invest in SMEs.

Are decisions being made at local level or are they made in Dublin? Local branch managers have knowledge of the experience of their clients or have a feel for the people who make applications to them.

How many people are put off from making a credit application because they feel the bank will not help them? Has Mr. Boucher any figures on this?

Mr. Richie Boucher:

I do not have access to ISME’s figures, the survey sample size, etc. I know other surveys of the sector as a whole have been done on behalf of the Department of Finance. I said earlier that there are banks exiting the country and others unsure of what they are doing. I can only speak for Bank of Ireland. If I give a figure, it has to be verified because our investors and shareholders are making a decision every day of the week, every hour of the day, as to whether they buy or sell Bank of Ireland shares. It might be verified by our own auditors or separate teams in the bank. The 85% figure is a consistent figure.

Seán Kyne (Galway West, Fine Gael)
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Are they independently verified?

Mr. Richie Boucher:

Our auditors would examine that. From a Bank of Ireland perspective, we have to grow our business. There is no shortage of capital to grow our business. The private sector has provided the capital for us to grow our business. We are comfortably and safely funding ourselves. We have cut our costs. We are investing in branches and payment systems. We do not make money by saying, “No”; we make it by saying, “Yes.” We have a risk appetite but we have to be careful. Our interest margin is 2%. We have to get 98% of our decisions right. We are in the business of taking risk.

I hear sometimes that someone gets put off asking for credit. I have to be blunt. I have met few successful businesspeople who were afraid to ask for something. The secret of business is persistence and consistency. My colleague, Mr. Liam McLoughlin, has colleagues who have to get loan targets. We have to grow our business. There are people charged with ensuring they get applications in and that they are processed. No individual, myself included, has sole personal credit discretion in the Bank of Ireland. There is always a second opinion underwriter.

While other banks have taken a cost perspective that they cannot afford investing in their branch network, we have heavily invested in ours to give it a chance. We believe having a presence in a local community is vital for the growth of revenue. Small and medium-sized enterprise, SME, lending is very branch based. It is all down to the knowledge of the local manager and his or her staff, properly trained to assess future cashflow perspectives and working with their customers. Their recommendation carries a lot of weight. Underwriting is separate, however, from recommendation. It is hard to approve a loan that has not been recommended, however. The recommendation of the branch manager is extremely important, provided we have worked hard to ensure he or she has been properly equipped to assess the credit and make the recommendation. It is their personal conviction that the bank’s money, our shareholders’ and depositors’ money, is properly identified in lending to that customer. It carries much weight but it is a separate decision.

I do not have a strong view on credit unions. For us, lending to SME’s has a relative level of risk. It is about having a range of products from overdrafts to receivable finance to foreign exchange products. We have to constantly refresh our skills level. The skill we have to develop and work on the whole time is our ability to assess what might happen in the future, not what happened in the past. We have to assess how a businessperson has thought about the future for their business, how have they assessed the opportunities and the threats to it and how we can mitigate the threats and avail of the opportunities. That takes time, experience and tools to build up. We have worked hard on this and recognised that cash flow forecasting is not an innate skill. Much lending in the past was done purely on collateral. If a customer goes to our website, he or she will find a cash flow tool which helps them think about their predictions of future cash flows.

Seán Kyne (Galway West, Fine Gael)
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Does Mr. Boucher believe that if there were independent verification of lending rates across the banking sector, it would put this issue to bed and we would not be hearing ISME’s claims?

Mr. Richie Boucher:

ISME are not the only people who put out surveys. There are a range of other surveys that come out that would tend to be different. I just do not know what ISME’s survey sample was and what questions were asked. A survey also depends on the size of the base sample. We would love the 85% figure to be higher but there will inevitably be cases where we will have to say, “No”. It is human nature. Someone gets credit approval and they move on quickly. Someone who does not is more likely to go to a representative body or elected representative to see if they can get help. We have no problem with that.

Like I said earlier we do not get all our decisions right. SME lending is the most difficult form of lending we do. It involves meeting a businessperson, looking at their plan and trying to figure out how it will be in the future. It is not like one presses four buttons and the answer spews out.

David Cullinane (Sinn Fein)
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I thank the delegation for fielding our questions. One of the things banks need to do is to learn the lessons from the mistakes of the past. Mr. Boucher gave a general but helpful overview of where Bank of Ireland is now. When the Celtic tiger was in full roar, the banks were lending irresponsibly. There was far too much credit and money thrown around the place which fuelled the property bubble. We all know how that ended up for the banks and the rest of us. It strikes me that the banks are mirroring what is happening in the economy. Now, when we need capital and credit to be used as a tool to stimulate the economy, there simply is not enough of it. Maybe the banks are being too cautious. Does Mr. Boucher have a view on how cautious or not Bank of Ireland is now?

Mr. Boucher has responded to the ISME survey on SME’s gaining access to credit. He claimed he does not know what questions the survey asked. I find that incredible. If I were in his position, I would want to know what questions were asked and assess that survey. ISME was told there was a problem with credit access for SMEs. It carried out its survey and published its findings but Mr. Boucher does not know anything about it. However, he is confident that this analysis does not sit with his bank’s experience. Has the bank met with ISME to discuss this survey?

We need to break down what we mean about access to credit because that will determine the success rate. Access to credit could mean many different things.

Perhaps Mr. Boucher might outline the success rate for start-up capital. Has the bank broken down the issue of access to credit in that way? Access to credit means firms need start-up capital or funding and overdrafts to expand. What is the success rate on overdrafts? Are they being tightened up? Is that a problem for SMEs? Is the restructuring of legacy and bad debt considered an element of access of credit? The success of BOI's lending to SMEs and meeting targets very much depends on how access to credit is defined and perhaps Mr. Boucher will respond to that.

My third question relates to the number of SMEs on the bank's books experiencing debt distress. In simple terms, I would like a percentage of SMEs based on the EU definition of what constitutes an SME. Before Mr. Boucher answers that, he needs to tell the committee how the bank defines "debt distress" because that will determine whether we are on the same page. I would like to understand the bank's definition of an SME in debt distress.

Mr. Richie Boucher:

We have to use a standardised definition because obviously we are looking at accounts here. I will answer the Senator's final question first. The definition is a customer who has defaulted, that is, he has missed payments for 90 days plus or having done an independent assessment, the bank is at likely risk of loss. SME loans from the bank at the end of December amounted to €10.3 billion of which defaulted loans amounted to €2.7 billion. Defaulted loans as a percentage is 27%. The impairment provision we have made against that of potential loss is €1.4 billion. Our provision coverage ratio, therefore, is 50%. That is the definition we use. It is a standardised definition to make sure that it is consistent across the industry.

With regard to the ISME survey, my colleagues have met ISME. I am not looking to disparage it. I am just saying there is a range of different surveys. We are aware of the kind of questions-----

David Cullinane (Sinn Fein)
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Mr. Boucher said he did not seem to be aware of the questions that were being asked.

Mr. Richie Boucher:

I am personally not aware but my colleagues are.

David Cullinane (Sinn Fein)
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That strikes me as odd.

Mr. Richie Boucher:

I have a wide range of responsibilities and I have confidence in my colleagues.

With regard to the Senator's general question as to whether the bank's credit appetite has changed, I think one always has to be careful of ensuring the pendulum does not swing too far one way or the other. One has to learn the lessons the bank had in the past because we are a bank with an approved EU restructuring plan. As part of an approved EU restructuring plan, one has to confirm the mistakes one made, what one has done about them and how one has fixed them. The biggest issue we had was an over reliance on wholesale funding and running with too thin capital and that has been assessed and confirmed by the EU. Our plan had been to address those. The generation of that capital, which we have generated from the private sector, has been to meet our ambition. These are people who believe the Irish economy will recover. They wanted to put capital to work in Ireland and they felt our bank would be a good place to get that to work because they felt in a growing economy a bank that had an ambition to meet those objectives would generate profit for them. Heretofore, they have been proved right.

With regard to the question of whether our branch managers or underwriters have become gun shy, Mr. McLoughlin and his colleagues look on an ongoing basis at the credit applications as they come in. They are assessed for the quality of assessment by individual branch managers who have measures for the quality of the applications they submit. For example, where customers are asked a question today, then another question tomorrow and another the following day, a key criterion is whether the first credit application contains all the appropriate information to enable the underwriter to turn around the decision very quickly. Are we asking the right questions and are we making the right judgments? We have learned about the different dynamics of different industry sectors. For example, we look at our credit risk appetite, we say what we think is happening in a sector and we give guidance and direction to branch managers in assessing that credit. For example, in the agriculture sector, we started a process three years ago - we have a little way to go - to recruit specialist agricultural advisers who do not just look at a farm's accounts from a balance sheet or a profit-loss perspective but who understand the dynamics of what a good farm looks like. They work with people. As Mr. McLoughlin mentioned, we have people who look at a motor dealership and what is happening there. We will adjust our credit appetite as to what we want to achieve there.

David Cullinane (Sinn Fein)
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I am encouraged by Mr. Boucher's comment regarding the agricultural sector. This is a good example of sectoral lending. The abolition of the milk quota will present opportunities for farmers to expand their herds and so on and access to credit will be an issue for them. Is the bank considering this? The Government's national jobs strategy refers to emerging sectors where jobs can be created. How in tune is the bank with that to look forward to where opportunities will be created and having targets for lending into these areas?

Mr. Richie Boucher:

The agriculture sector is an important sector for us and we recognised that we had to enhance our skills base and have people who understand the dynamics because sometimes what one sees in black and white on a loan application is straightforward profit and loss and that is not necessarily a judgment as to whether he or she is a good farmer. We are a universal bank with 250 branches. There is no sector where we say we have no appetite for it because in our view good business people can make money and develop their businesses even in challenged sectors and less good business people can lose money in such sectors. We see areas of particular opportunity. For example, my colleague, Mr. McLoughin, mentioned infrastructure where we have applied skills that we developed in our international business. We have brought them back to Ireland. Public private partnerships are highly complex and it is a specialised area of lending. We have a particular expertise which we learned overseas and we are using that. Sometimes, one can become too specialist in an area and there is a danger that people become too specialist because many business people are generalists anyway but there are certain sectors such as hotels, nursing homes, motor dealerships and the pharmacy sector, which have their own dynamics and, therefore, we have specialist teams who help the underwriter by outlining the dynamic and saying, for example, we looked at the sector a year ago and it was challenged but things are improving. Our appetite will be judged on that. We will not get all the decisions right but we have to try to grow our business.

With regard to independent surveys and so on, the only proof of the pudding is we have 250 branches and they have to generate business. If those branches do not, then we have to look at our cost base differently but we want to give them an opportunity.

Mr. Liam McLoughlin:

I would like to come back to an earlier question on start-ups. We supported 16,000 start-ups in 2013. I do not have records of their success but we have a generous start-up package for new businesses and we are keen to support them. In addition to what the bank does in respect of banking arrangements and access to legal, accountancy and other advice that we offer to start-ups, we also have a number of development or start-up funds. There is €250 million available across a range of funds to support seed finance and start-up-development finance and we are keen to support and develop those. Those schemes are well used.

Mick Wallace (Wexford, Independent)
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I welcome the officials. Mr. Boucher said he will be judged by his shareholders and that is understandable, as he has a business to run. Given the fact the bank would probably be out of business but for the taxpayer, does he feel any pressure to be a service provider to the people as well as a business or does profit remain the top priority because of pressure from shareholders?

It goes without saying that the bigger the business the easier it is to get money from the bank, but the bigger businesses were those which cost the bank the most when the recession arrived. Although things might be starting to recover does Mr. Boucher agree it is more difficult for the small guy than the big guy to get help from the bank? Many small businesses might not look like a wonderful financial bet, but given some help they would come through and pay all their bills. They are struggling to get this help. Given that banks have left the market Bank of Ireland has a nicer pick which amounts to lower risk lending on its part.

Does Mr. Boucher think the pillar banks may be too big to deal with the demands of small and medium enterprises? Should we have a State strategic investment bank to answer their needs? What does Mr. Boucher think of a State strategic investment bank which would lend solely to SMEs?

Was money available from the ECB at 1% which could have gone to SMEs? Was it cordoned off for other areas? Did Bank of Ireland avail of much of the money available from the ECB at 1%? Did the bank invest some of this money abroad or did it confine it to Ireland?

Anthony Lawlor (Kildare North, Fine Gael)
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I thank the witnesses for attending today's meeting. Young entrepreneurs have difficulties as they do not have credit ratings. How does the bank deal with them? Of its 16,000 start-up businesses what percentage were started by those aged under 24? Young entrepreneurs are the future of the economy. Does the bank advise customers, whether young entrepreneurs or other people applying for loans, on what else may be available outside of the banking sector and link with other sources of funding which may be available? Loan applications are rejected because of their quality. Is assistance provided by the banks in this regard? It was stated that capital is required to grow a business. The capital invested in Bank of Ireland was in a small number of hands, including the Government's. Is there a fear that a sudden pull-out by these investors and a sell-off of these shares could have a catastrophic effect on confidence in the bank? A problem associated with the Celtic tiger was that bank branches and individuals in branches had targets to meet with regard to selling insurance and other products, and these targets were associated with bonuses. Does this culture still exist or have we shifted from it? Has the link between targets and bonuses being broken? Mr. Boucher may have answered questions on how the bank deals with SMEs with property-related debts pulling them back. Their core businesses are successful but property has a stranglehold on them. Property developers and builders are also SMEs. We have a serious housing deficit in certain areas in the greater Dublin region. Last week it was reported that 8,000 properties were built last year but 25,000 are required. Does the bank see itself as having an input in stimulating the construction industry? It is time we matured and discussed this and were not fearful of what happened in the past because we have a need, particularly in the greater Dublin area.

Feargal Quinn (Independent)
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In recent years I have been involved with retailers on a television show and I found the majority of them state it is no good going to the bank. They have almost talked themselves out of going to the bank to get a loan. I was amazed to discover that when we held their hands they were able to get loans in practically all cases, but they need this help. What basic mistake is made by those SMEs who apply for loans and do not get them? Is there something the bank can tell them they should do to get it right? There are success stories and there can be more, but perhaps the SMEs just need hand-holding or advice. Is the bank capable of giving them this advice?

Peter Mathews (Dublin South, Independent)
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From late 2007 to 2011, the information and reports from the banks, including Bank of Ireland, were unreliable and misleading. This is a fact.

Damien English (Meath West, Fine Gael)
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With regard to SMEs?

Peter Mathews (Dublin South, Independent)
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No, the overall information from the banks.

Damien English (Meath West, Fine Gael)
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We have a short time and I would like to keep the discussion to SME lending. I ask the Deputy to confine his questions to this. Everybody else has managed it.

Peter Mathews (Dublin South, Independent)
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I will restart the question because Mr. Boucher and his team know what I am asking.

Damien English (Meath West, Fine Gael)
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I want to clarify. I asked all committee members at the beginning of the meeting to keep questions to the area of SME lending. We are very tight on time. I need to keep the questions to this area.

Peter Mathews (Dublin South, Independent)
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The bank has given us information on SME lending. The track record of the bank for four to five years was unreliable and misleading. Why should we believe it now?

The last time Mr. Boucher and his team appeared before the committee I gave them a note on the credit pyramid bubble of which Bank of Ireland was a part, creating the credit boom and bust. Did they read it? What have they to say to the evidenced fact that Bank of Ireland exceeded its prudential loan to deposit ratios by a factor of 68% over the 90% prudential guidance, which indicates the bank was a 75% manufacturer and creator of asset price bubble and bust? Did they read the paper? What is their answer to the fact the bank stands culpable to this extent?

Damien English (Meath West, Fine Gael)
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I wish to add a comment. The overall cost of credit to business has increased and it has become quite expensive to borrow money.

Mr. Richie Boucher:

I will deal with Deputy Mathews's questions first. I have not had an opportunity to read the Deputy's paper and I do not-----

Peter Mathews (Dublin South, Independent)
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That is a pity.

Mr. Richie Boucher:

I have many other things to do.

Peter Mathews (Dublin South, Independent)
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It would tell Mr. Boucher why he created the bust.

Damien English (Meath West, Fine Gael)
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It is not for today.

Mr. Richie Boucher:

I do not concur I created the bust.

Peter Mathews (Dublin South, Independent)
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All of the banks did.

Mr. Richie Boucher:

Our accounts are verified and audited. We present the accounts and investors make their decisions. The Deputy is entitled to his own opinion.

Peter Mathews (Dublin South, Independent)
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The facts show-----

Damien English (Meath West, Fine Gael)
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Deputy Mathews please. Many questions have been put and committee members want answers. We have a very strict line of inquiry.

Peter Mathews (Dublin South, Independent)
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My question was why should we believe the bank now.

Mr. Richie Boucher:

I will try to deal with the questions in the order they were asked. To answer Deputy Wallace, we are a business.

We have received private capital and support from the taxpayer. We should never have allowed the bank to get into the position of requiring taxpayer support but we did. While that support has been repaid, with profit, the bank has a greater responsibility to the economy. That is enlightened self interest. Ireland's success will be Bank of Ireland's success and vice versa. One of the key lessons learned is that chasing profits in the short term is detrimental to the sustainability and viability of the business in the longer term. A key issue now is how much capital we have and how it is deployed. It is often best to hang back from the market - in other words, when a competitor is going a particular route and one is not sure how its business model works, being prepared to concede market share, particularly if a credit bubble is developing. Some of the lessons we have learned include that is sometimes best to concede market share, that it is important to ensure that one can continue to provide products for customers and that one has a business model which ensures the bank can charge. To pretend that one can provide products free of charge and will somehow magically generate a profit is not sustainable. A sustainable business is one that generates profits over the medium term by providing products to its customers on the basis that customers will be with the bank not because they have to and do not have choice but because they want to be with us. No business should ever think that the customer has no choice because inevitably a new business will come along and offer it to them.
Bank of Ireland needs to be a sustainable business and to support the economy. We need to be profitable because if we are not we cannot support the economy and will require bailout by the taxpayer. It is a virtuous circle and a measured approach, in particular in terms of ensuring the sustainable viability of the bank. I agree that doing this can be difficult. Large corporations and companies have teams of accountants and treasurers, people who can provide financing packages, have track records and financial projections and will have undertaken industry research, which means it is often easier to look at the lending proposition from such customers. However, in the context of the bank's current customers, its largest corporations started out as small businesses in Ireland. Our job is to find the small businesses of today and to take a chance on some of them.
In response to a question from Deputy Lawlor and Senator Quinn, the bank has to work harder to identify what customers find intimidating about dealing with the bank and how we can help them prepare a loan application. The bank provides credit clinics across the country and there are credit links on the bank's website which provide customers with information on what they need to know in advance. There are also business development officers employed by the bank whose job it is to communicate with local accountants, business intermediaries and customers in regard to how we can help them to prepare their best application prior to it being put before us. Issues such as what they need to think about, how to prepare a cash flow forecast, how to structure a credit application and so on are addressed. We have had to use the web and other sources in this regard. In some cases, the anonymisation of information and assistance can help. In other words, a customer often feels less intimidated if he or she can access information in the comfort of their own home and so on. We want customers to put their best foot forward. Every loan application that we cannot process is wasted time for us. It also involves a cost for the bank. Every loan application that the bank can process quickly improves our business.
In response to Deputy Lawlor's other question, I do not know a business that does not set objectives for people. I cannot see how anyone could run a business without appointing X to do a particular job and showing what X doing a particular job well looks like and what X not doing the job well looks like. Staff involved in front-line business in our banks have objectives. For example, they must meet a particular number of customers and accountants every week and deal with a set number of applications. We do not pay bonuses. I cannot believe that there is any business that does not set objectives for individuals involved in it.

Anthony Lawlor (Kildare North, Fine Gael)
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My question was related to targets and bonuses being linked. However, I welcome Mr. Boucher's comments today.

Mr. Richie Boucher:

I must be clear. I set tough targets for Mr. McLoughlin and I am required to meet the tough targets set by the bank's investors. We have objectives, which we have to set out and achieve. A key objective for the bank is growing its balance sheet.

On Senator Quinn's question, confidence is the biggest concern. Bank of Ireland needs to lend money. It is not a question of the bank "wanting" to lend money, it "needs" to lend money. If people approach the bank it will work hard with them. While we will need the courage to say "Yes" we will also need to be able to say "No". We want to do business. What is important is that customers believe in their businesses and do not take "No" for an answer. They must prepare as well as they can and this means not focusing solely on numbers. I accept we will need to assist people in the forecasting of cash flows, but convincing the bank that a particular business will be successful is the job of the applicant. To do this the applicant needs to focus not only on how he or she proposes to ensure the business will be successful but on potential bumps in the road and how he or she proposes to mitigate that risk, all of which is important from the point of view of the bank. It is important an applicant can show that he or she has thought about what problems might arise for the business. It is important customers are able to look at the downside risk because that is what the bank has to do. The bank's margin is a fixed one and it does not participate in the upside. As such, if customers have considered any possible downside and how they propose to mitigate it the process will be much easier. The bank needs to continue to work hard to let people know all of this. I am delighted to hear that customers approaching Bank of Ireland, although worried, are happy with its approval rates. Our success comes from that.

With regard to Deputy Wallace's question in relation to the ECB and EIB, Bank of Ireland is required to repay the ECB as quickly as possible. Current borrowing by the bank from the ECB is invested in Irish Government bonds or in support of NAMA bonds. The money we borrowed from the wholesale markets was for funding loan assets. As customer deposits increase we are required to repay the ECB. I hope I have answered the Deputy's question. On the issue of big business versus small business, we try to address this issue using separate teams. We have teams of people who deal with the corporate bank and other teams who deal with what we call the mid-segment, which is customers who have a borrowing requirement of €300,000 to €10 million and a further team trained and experienced in dealing with smaller credits. For example, a person seeking a small loan for a plumbing shop would be dealt with by one team and the large corporation would be dealt with by another one. We segment applications in this way to ensure we can put in place objectives and goals for staff in terms of chasing business.

Mr. Liam McLoughlin:

We have a branch footprint of 250 across the country, which serves all of our customers including small business. As mentioned earlier, we receive more than 1,000 applications per week, 85% of which are approved. Of those 1,000 applications per week 75% are from what we would consider to be small business.

Mr. Richie Boucher:

On the national development plan question, in many economies the shortage is equity. It is not necessarily debt capacity but the equity contribution. The Government has put a lot of effort into equity contributions. Bank of Ireland is not a natural equity provider. Very often, if the bank ends up with equity in a business it is because it made a lending mistake. To generate profit and help to stimulate the economy the bank provides more than €250 million of equity to a range of funds which are dedicated to provide equity primarily for start-up businesses, early stage businesses or businesses in the hightech sector which would not naturally suit a debt funding model but where equity can be of assistance to it. I do not have a firm view as to whether the Government should be involved in the banking business but I do not think taxpayers should be. I believe that the primary issue is very often equity rather than debt. Specialist funds can help with that equity.

Mr. Liam McLoughlin:

Deputy Lawlor also asked about young entrepreneurs and the bank's 16,000 start-ups. I do not have details on how many of those start-ups involved people under 24 years of age. However, the bank is very focused and would be in agreement with the Deputy that young entrepreneurs are the future. That is very much where we hope to provide support. We work closely with a number of the universities through the provision of banking facilities, including in relation to incubation units to support young entrepreneurs. As I have mentioned previously, the bank sponsored a number of entrepreneurs through "Dragon's Den". In this regard, two of the ten programmes are focused on second level schools. The programme featuring the universities is scheduled for filming over the next couple of months.

The bank is also aligned to a number of accelerator programmes to support young entrepreneurs trying to accelerate their way through businesses. We have a programme which we fund in Dublin and we are due to launch one later in the spring in Cork. There are a number of schemes relating to the younger entrepreneurs, but I do not have statistics on that space below 24 years of age.

Mr. Richie Boucher:

Deputy Wallace asked about the construction sector. We have credit appetite for the construction sector. Obviously, we must be cognisant that property development was a significant problem for banks - less so for Bank of Ireland, but nevertheless a significant issue for us. Again, to refer back to another question, we must be careful not to become completely gun shy. The construction of property is a normal part of an economy. We see some opportunities there. We recognise that one of the issues might be the level of equity that a builder can put into a scheme, but perhaps it just means the scheme starts smaller. What happened in the past is that the value of land started to drive the asking price for the end product. Clearly, the asking price for the end product should be what drives the price of the land and of the construction backwards.

We are prepared to look at different models. We are also prepared to support people who are building under licence with a fixed profit margin, provided they are good builders. A contribution of equity coming in to support the construction industry is happening. I was in North America over the last couple of weeks and equity funds are starting to see this as an opportunity as well for putting equity to work. They have bought property, they see there are opportunities in construction and they would like to examine that. The bank is not a natural equity provider. We put it through funds, but we certainly have an appetite for financing construction activity on a measured basis.

Mick Wallace (Wexford, Independent)
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The witnesses present an image, and they present it well, of having a strong interest in helping SMEs. However, it would be wrong not to point out that the majority of people I meet are finding it difficult to get finance, and I know many people in small business and others have come to me about it.

Damien English (Meath West, Fine Gael)
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A number of other members have expressed that view. I must wrap up. There is no time for more questions because representatives of another bank are waiting to appear before the committee. Do the witnesses wish to make any concluding comments?

Mr. Richie Boucher:

The key to this is confidence and recognition that the banks do not get everything right. If there are instances where elected representatives feel there is a customer they believe should get a second chance, on the basis of their knowledge of that customer's business, my colleague, Mr. Farrell, would be the best person to deal directly with. He is in the right place in the bank. This is a free advertisement for the bank as well, from my point of view. We need business and we must get business. We have raised the capital and we have the funding. We have managed our costs and we must grow revenue, and the only way we can grow revenue is by getting more business.

Damien English (Meath West, Fine Gael)
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Thank you. The meeting today is for a report on this area which we are preparing over the next two months. We will share the results with you. We are talking not just to banks but also to stakeholders and business users on all sides to see if there is a problem and where it is and to highlight any solutions. If we identify areas of concern that we think you can have a role in addressing, we will refer back to you and work on it. The objective is to provide a report to the various Ministers to try to secure actions there as well. We are conscious in our research that it is not just bank lending that we must examine but all access to finance for business.
I thank Mr. Boucher, Mr. McLoughlin and Mr. Farrell for their attendance. The discussion was very useful. I apologise for the time changes and for running over time. I appreciate your patience and your direct answers. At some stage you might refer back to us with the cost of credit. I will not go into it now, but it is an issue as well.
I welcome Mr. Jim Brown, chief executive officer, Ms Ellvena Graham, managing director for SMEs, and Mr. Andrew Blair, wholesale chief officer, of Ulster Bank to discuss access to finance for SMEs. My sincere apologies for starting this session a little late. The first session went a little over schedule. We have delayed you, so if you need to leave just say it and we can get your replies again.
Before hearing your presentation, I am required to give the following privilege warning. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If they directed by it to cease giving evidence on a particular matter and 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 asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity either by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
Today's meeting clashes with parliamentary questions on enterprise which are taking place in the Dáil at present, so some of the committee members will be coming in and leaving to attend those. I apologise for that. The spokespersons from Fianna Fáil and Sinn Féin intend to return to the meeting as they wish to raise issues with you. I invite Mr. Brown to make his presentation to the committee on access to finance for SMEs.

Mr. Jim Brown:

I am joined by my colleagues, Ms Ellvena Graham, head of SME banking, and Mr. Andrew Blair, chief credit officer. I thank the committee for the opportunity to provide an update on Ulster Bank's progress in the areas outlined in the committee's invitation. I will go through our introduction quickly and then respond to any specific topics that the committee wishes to discuss.

Ulster Bank is the number three bank in the Republic of Ireland and the number one bank in Northern Ireland, building substantial market share in a number of key areas including the SME sector. We have a clearly defined strategy based on building a really good bank for our customers and at the same time addressing our legacy issues. We expect to return to profitability this year.

We fully recognise the importance of the SME sector to the economy. SMEs play a vital role in its recovery and supporting SMEs is a core part of our focus. Our Republic of Ireland lending book to businesses is approximately €6.7 billion and while we support the broad spectrum of businesses, we are specifically focused on the agrifood, exports and the professional and private sectors. There are two main aspects of our SME operations: new business lending and development, and supporting SMEs in financial difficulty. We have €1.2 billion set aside for new business lending in 2014. This is open to all businesses who are seeking finance to support their growth plans. Every proposal is different and individually assessed against sensible, straightforward, criteria. The first quarter of 2014 has seen a strong start to the year. We held a series of ten dedicated town hall sessions for SMEs across the country and we have been very visible in the market with a strong "open for business" message.

We are well positioned, we have a strong pipeline of business, we are growing market share and we look forward to expansion into the SME market as both demand and the economy improve.

We have also recently restructured our business to respond to customer behaviours. We are enhancing our online and telephony capabilities and are creating customer contact hubs in key locations while at the same time returning business relationship managers to the branch network to better support our customers. We also have a substantial number of relationship managers specifically seeking new business opportunities. We have also introduced new accreditation programmes for our people which ultimately ensures they better understand our customers' needs and, as a result, serve them well.

Separately, we have a number of initiatives in place to support enterprises through all stages of development. This includes financial packages such as our business start-up, early stage growth and agri packages, in addition to our business achievers sponsorship programme and many other networking events. We are also the lead banking support for Small Business Can, a dedicated website that allows business to network and share issues with their peers. These initiatives continue to prove both popular and effective within the sector.

As I have said, we are also working with SME businesses in financial difficulty. Legacy issues tend to be complex and can include elements of property speculation that remain a drag on many businesses. In the Republic of Ireland we have 300 people dedicated to working in this area. Our ultimate aim is to return viable businesses to profitability using a wide range of options and, in the process, save jobs. It is our experience that early intervention and engagement with our customers is essential to ensuring we can assist the business back to financial health. This strategy is working.

In conclusion, let me reiterate that Ulster Bank is fully committed to supporting businesses and growth in the economy. We have a clear strategy. We are making strong progress towards becoming a simple, more efficient and sustainable bank - a really good bank - for our customers. Supporting SMEs is a core part of our focus. I thank the committee and am happy to take questions.

Damien English (Meath West, Fine Gael)
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I thank Mr. Brown and call Deputy Dara Calleary.

Dara Calleary (Mayo, Fianna Fail)
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I thank the delegation from Ulster Bank. I shall ask a couple of general questions first and then I shall ask some specific questions, particularly on the work of the bank's global restructuring group. Mr. Brown gave figures on lending and stated that €1.2 billion had been set aside for 2014.

Mr. Jim Brown:

That is correct.

Dara Calleary (Mayo, Fianna Fail)
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How much was set aside for 2013? How much was approved? How much was drawn down? Is there a difference between the two figures?

Mr. Jim Brown:

The sum of €1.2 billion was set aside for new lending, so that is for drawdown. It is not approvals, limits or anything like that but actual cash that we are looking to get out the door. We are looking to lend €1.2 billion across the island. We expect two thirds of the figure to be spent in the Republic, which reflects our business here. That may amount to between €800 million and €850 million and can be compared with around €600,000 in 2013. The sum of €1.2 billion is actual cash to get out the door and be drawn down.

Dara Calleary (Mayo, Fianna Fail)
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In terms of the budget for 2013, I want a figure for what was allocated and what was drawn down. It is one thing to say that there is approved lending. We have got feedback from businesses that loans are often approved but the drawdown conditions are so unreasonable that businesses do not proceed to draw down. Also, the length of the approval process for drawing down is a major issue.

Ms Ellvena Graham:

Technically, only about 50% of our loans get drawn down once we approve them. The figures that Mr. Brown mentioned earlier are actual drawdowns. That means it is actual money that customers have drawn down to use for the expansion or development of their businesses. We have not even talked about approval numbers yet. Typically, there are a lot more approved than get drawn down, so the Deputy's question is fair.

Dara Calleary (Mayo, Fianna Fail)
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Has Ulster Bank had discussions with the Credit Review Office about making it one of the banks included in the credit review scheme?

Mr. Jim Brown:

We have regular dialogue with the Credit Review Office. The scheme, as I understand it, was originally set up to look at an appeals process for the pillar banks. We do not participate in it because Ulster Bank has a separate review process.

I shall give the Deputy some idea of the number of approvals. About 94% of our loans are approved so the number of cases appealed against is relatively small. Of the number that are appealed, about one third are ultimately re-approved.

Dara Calleary (Mayo, Fianna Fail)
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With regard to the work of the global restructuring group, Mr. Brown said he had 300 people in Ireland working on issues. Do they work for the group or are they part of a separate operation?

Mr. Jim Brown:

No; that is part of the group. On the island of Ireland we have about 500 people in total, which cover the real estate issues as well as the SME issues.

Dara Calleary (Mayo, Fianna Fail)
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Mr. Brown was pretty critical of Lawrence Tomlinson, entrepreneur in residence at the Department of Business, Innovation and Skills in the UK. He compiled a report on banking for SMEs in the UK and, in particular, he had a lot of harsh things to say about RBS. Mr. Brown has been very critical of his findings. Have there been any findings within Ulster Bank? It has been suggested that there are 40 potential cases within Ulster Bank and 50 in the northern part of the island that were identified in the Tomlinson allegations. Has Ulster Bank looked into the matter?

Mr. Jim Brown:

My response in the previous hearing was as follows. First, Mr. Tomlinson has not engaged with me at all. I have not seen any of the allegations or any of the cases that have been alleged either. We have had one contact from him, through his office, to a relatively junior member of staff to inquire about one line. That is the only contact that we have had.

In terms of the key findings, there is nothing in the report that specifically covers Ulster Bank. What I have said is that we take these allegations seriously and that RBS has instigated a separate review and commissioned Clifford Chance, one of the world's largest law firms, to carry out a review, which is under way as we speak. We expect the review to be concluded in the coming weeks. Separately, a review is being conducted by the UK regulator. The Clifford Chance review covers Northern Ireland and the Republic.

Dara Calleary (Mayo, Fianna Fail)
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What has the review found to date?

Mr. Jim Brown:

The report or review has not been concluded yet but we expect it to be finalised in the next few weeks.

Dara Calleary (Mayo, Fianna Fail)
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There is one very high-profile case. His testimony would identify exactly - and replicated exactly what Mr. Tomlinson reported - a matter which was in the public domain before Mr. Brown did his interview with the Belfast Telegraph. Is Mr. Brown saying he is very happy with the way customers are being treated by Ulster Bank? Is he saying he has no difficulties with the work of the global restructuring group?

Mr. Jim Brown:

When one deals with any customer in financial difficulty - whether it is a mortgage, a business or whatever - circumstances are very difficult to manage. No doubt many of those situations are emotive in terms of having to deal with those issues. There are no doubt customers occasionally who are not happy about the situation that they are in. On the alleged systemic issues with regard to how we handled cases, I have seen no evidence that that is the case.

Dara Calleary (Mayo, Fianna Fail)
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Is there a fee charged for the global restructuring group to work with a company? Is a fee charged for the work the group does with a company on behalf of Ulster Bank?

Mr. Jim Brown:

There are general fees attached, but Mr. Blair can comment on the matter.

Dara Calleary (Mayo, Fianna Fail)
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I have a general question that I ask every bank. How much has the bank increased its general normal business banking fees over the past number of years?

Mr. Jim Brown:

We have not.

Dara Calleary (Mayo, Fianna Fail)
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Good. Is a fee charged by the global restructuring group assigned to work with the bank's clients?

Mr. Jim Brown:

There are fees that are charged as part of the normal course of business. If we have to get professional services in for a valuation, for example, there may be specific fees charged.

Ms Ellvena Graham:

I wish to go back on that point. We have not increased regular banking fees since 2006 but if we wished to increase fees we would have to go through a process with the Central Bank. We have not increased them since 2006.

Dara Calleary (Mayo, Fianna Fail)
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Ulster Bank is significantly involved in the hotel sector, as are all the banks. Does the bank have a specific strategy for exiting the hotel sector that will not impinge on the overall industry and hotels that are currently run as good SMEs?

Mr. Jim Brown:

There are two parts to the Deputy's question. First, let us look at where we are at with Ulster Bank. We have some legal real estate issues which we are dealing with. We have set up an internal bad bank to deal with them, which is called RCR. We are looking to wind the portfolio down over the next three years but we will do so in an orderly way.

We will do that in an orderly way. It is not in our interests to do anything other than that. As part of that, there will be hotels that we will bring to the market and they are primarily those built as part of the boom that have real estate issues. Separate to that, we are supporting lending to the leisure sector, which includes hotels, and we are more than happy to provide credit and underwrite good businesses in that sector.

Feargal Quinn (Independent)
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I welcome the witnesses. I was fascinated by the figure that 50% of loans approved are drawn down. Can we get some idea of why that happens? We are here to talk about SMEs because we hear so much about SMEs having great difficulty getting loans. What advice would the witnesses give to an SME about what it must do to get the bank's willingness to approve loans? Why are only 50% drawn down after all the difficulties we hear about? What mistakes are those looking for loans and getting turned down making?

Ms Ellvena Graham:

I will take the first question. We find that more of our loans are now getting drawn down more quickly. Last year, we saw customers getting approval but not having the confidence to spend the money. In quarter 1, we find our lending is almost three times what it was in quarter 1 of 2013. There is a greater uptake in the drawdown of loans. We are encouraging that.

It is important we spend time with the customer. The relationship manager must explain the data and financial information we need. We look for quarterly financial statements but we find that if our relationship manager works closely with the customer, if all the information is in place it makes it more simple. That is why we can approve 94% of what comes in through formal application. Much improvement was needed with our relationship managers and we have put them through an accreditation programme of credit skills training and cash flow lending because many of them are not skilled in that area. Our programme is accredited by the Chartered Banker Institute in the UK. The more skilled the relationship managers, the better they are in dealing with customers, which means a better quality of application coming into us. It is a two-way street.

Peadar Tóibín (Meath West, Sinn Fein)
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I apologise for missing most of the presentation. I have just come from Oral Questions and, bizarrely, it is running concurrently with this meeting.

The witnesses mentioned that 94% of formal loan applications are successful. Is there any method of filtering potential clients before that formal application? How many are filtered out before making a formal application? What is the percentage of interested clients who make early requests for information and what percentage is filtered out?

With regard to the bank balance sheet, are SMEs in debt distress? What percentage are in debt distress? What restructuring does Ulster Bank offer businesses in debt distress? Has it written down any of the debt? Is it the understanding of Ulster Bank that businesses in debt distress have closed down? Are there figures available for its former clients? Do any of the figures refer to the rolling over of loans or is it new lending? What is the percentage drawdown of people who have been given approval for loans?

Mr. Jim Brown:

I will take the first and third question.

Ms Ellvena Graham:

I will take the last question. The loan figure we quoted is all new money, not rollovers. The €1.2 billion available is all new money and is not for the rollover or restructuring of existing debt. The first question was how much gets filtered out but I cannot give a percentage. We have made sure the relationship managers spend as much time as they can with customers to ensure we get the right level of information and to make sure the quality of application coming in is much better than it used to be. That is why we can say we have a 94% approval rate because the effort goes in to getting the detail, which makes the credit process much simpler.

Mr. Jim Brown:

The other key thing is the number of people looking for business. We have changed the business model to get more people out and about.

Ms Ellvena Graham:

We changed our business model last year to separate our business banking teams. We have people dedicated to managing existing portfolios, customers who have existing loans and other guys out on the road, North and South. They are business development managers out looking for new business. We are moving our business bankers back to the branches, where possible, so that they are closer to customers. We are doing many things to ensure we are close to where customers are, so that understand that there and so that we split new business and looking after existing customers.

Mr. Andrew Blair:

With regard to decision making and the options on forbearance solutions for customers, the first point concerns decision making. Customers repeatedly ask where the decision is made. For small businesses, we make it close to the customer. In terms of the range of options, we have all sorts of options that we developed on the mortgage side for the personal customer and this has been rolled out to SMEs. This includes reduced capital payments, term extensions, interest only arrangements and longer-term arrangements where we look at the capacity of the customer to repay and identify that there are certain assets they do not need for the purpose of their business and that they may want or need to sell at that point in time. This will create a lower debt burden and a higher level of viability. If needs be, we will also warehouse debt in the business for the SMEs.

Peadar Tóibín (Meath West, Sinn Fein)
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In the mortgage book, Ulster Bank often reduces the interest rate from 5% to 0.5%, which makes it more accessible. Has a similar thing been done in business lending? Has business debt been written down? Working closely with clients in advance of seeking loans makes them more prepared for the loan. This is positive but the negative aspect is that an undefined amount of people are filtered out. A good chunk of them could be real loan opportunities but because of the bank's pro cyclical policy and a retrenchment with regard to credit, it has decided not to afford them credit.

In the SME sector, it is coming out of that trough in the cycle and yet in year six we see a tightening of credit. This is worrisome in respect of small businesses and their ability to grow. How does the north and south compare in most of these key indicators?

Mr. Andrew Blair:

In the context of the question about write-downs, we treat these customers in the same way as people on the mortgage side. We manage the customer through the process and only in circumstances where we go through to the resolution of all assets, where there are no further assets available, that we consider a write-down. This is consistent with what we do on the mortgage side.

Peadar Tóibín (Meath West, Sinn Fein)
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What percentage of write-downs have been made?

Mr. Andrew Blair:

I do not have a percentage but we have written off debt after the resolution of all assets. It is an accounting write-off.

Mr. Jim Brown:

It is a write-off rather than a write-down of debt.

Mr. Andrew Blair:

There is nothing further to go for.

Damien English (Meath West, Fine Gael)
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Is the business closed?

Mr. Andrew Blair:

Yes.

Peadar Tóibín (Meath West, Sinn Fein)
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Only in a closure scenario?

Mr. Andrew Blair:

That is correct.

Mr. Jim Brown:

It is worth noting that the various options we have put in place for businesses in distress - that is, SME trading businesses - have worked very well. The number of SME businesses we have put into receivership in the five years since the crisis is only 31. It is clear from the magnitude of distress that this is a relatively small number. With the solutions we have, as long as customers can engage with us, and if there is a real viable business, we can ensure that business will continue to trade. With regard to demand, in the past few years there were a couple of issues. The banks, particularly Ulster Bank, were inwardly focused, having had to deal with many real estate issues as a result of the crisis, including mortgage arrears. We are very conscious of that. One of the things we did was to organise the business in early 2013 particularly to support SMEs, so that we could get the message out that we were open for business. We have people on the road looking for business and we have relationship managers back in the branch network. There are many other things we have done over and above that to support digital developments. It is fair to say that as a result of that, plus the upturn in the economy that has come through from the middle of last year, we have seen a significant uptake in demand, and the volume we have had in the first quarter of 2014 versus 2013 has doubled. I cannot give the specific numbers because we are in a closed period for financial reporting but there has definitely been an uptake in demand and an uptake in absolute lending by Ulster Bank.

Ms Ellvena Graham:

With regard to the Deputy's question about North and South, on both sides of the Border demand is increasing. While confidence is fragile, we see a good uptake in agriculture on both sides. In the North, thankfully, unemployment did not increase to a great extent, but there is still a very high reliance on the public sector. Agriculture is strong, as well as food and drink, and exports are not quite as strong in the North as in the South but there is a good uptake. The volume is about three times greater on both sides of the Border versus this time last year. There is a Government product for lending in the North, called funding for lending. That means we can give out loans where there is a 1% reduction in the margin and there are no arrangement fees. We find that product very successful in Northern Ireland. We have lent more than €150 million under that product since it was launched in September 2012. That has been a very good product for us, to which we signed up at the very start. More than 1,000 customers have availed of it in Northern Ireland. We are seeing a good uptake on both sides of the Border.

Peadar Tóibín (Meath West, Sinn Fein)
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I have just one question that was not answered.

Damien English (Meath West, Fine Gael)
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Was it not answered?

Peadar Tóibín (Meath West, Sinn Fein)
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What percentage of the businesses are in debt distress?

Mr. Andrew Blair:

Probably of the order of 35% of our SME book are in distress. I want to distinguish between those businesses which are SME businesses - trading businesses which may have other issues attached to them - and those businesses which are pure property businesses. Clearly, if property is taken into account, the number is greater than that.

Damien English (Meath West, Fine Gael)
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Thirty-five percent of pure SMEs.

Anthony Lawlor (Kildare North, Fine Gael)
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I thank the witnesses for appearing before the committee. In regard to funding for young entrepreneurs, the witnesses put particular emphasis on young trained farmers. Are they young trained farmers who are attached to the land, have a land asset or are seeking to lease land? We are trying to develop a scheme here under which young farmers can lease land. How difficult is it for young entrepreneurs to access funding? Of the 2,200 start-ups in 2013, what percentage of those were people under the age of 24?

Seán Kyne (Galway West, Fine Gael)
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I welcome the witnesses. They mentioned the whole area of new lending of €1.2 billion. What is the trend in terms of new versus restructuring funding? In regard to lending performance, what engagement does Ulster Bank have with the Department of Finance? I appreciate that Ulster Bank is not a pillar bank. The training of staff and external professional accreditation was mentioned. Who is used for that purpose? I have two final questions which I also put to Bank of Ireland. I note Ulster Bank has a high approval rate. Is there independent verification of these figures? For example, ISME would state that the level of funding for the banks in general - not specifically Ulster Bank - is 50% to 54%. Does the bank have verification of these figures and, if not, is it an issue it would consider? If all banks had independent verification we would not have anecdotal evidence or queries about the actual percentage figures. Does Ulster Bank have any concerns regarding competition from credit unions, which have a desire to get into the market for the purposes of greater lending to SMEs?

Peter Mathews (Dublin South, Independent)
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This week is in stark contrast to last week, yet it is the same bank or banks that are talking about the two sides of their balance sheets. Distressed mortgage lending is an asset that impacts immediately on capital requirements and provisioning, yet the banks must try to use their resources to lend new money to new businesses and new money for projects to old businesses that are weighed down by debt. As I said to the previous visitors, the information we got in broad report terms and the management information for a period of four to five years was totally unreliable and misleading, and it hid the lack of prudential policy on the part of the boards of banks. Has Mr. Jim Brown had an opportunity to read the paper I gave him the other day?

Mr. Jim Brown:

Not yet.

Peter Mathews (Dublin South, Independent)
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It should go to the top of the list, because it explains that the banks were the perpetrators of the credit bubble, the asset price bubble and the asset price collapse. This is very important, Chairman.

Damien English (Meath West, Fine Gael)
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It is not necessary. Please keep to SME lending, or we are moving on.

Peter Mathews (Dublin South, Independent)
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SME lending is a function of the resources of the bank. In order to be a healthy lender and supporter of businesses, the bank has to be healthy itself. We actually got estimates from the banks of their capital requirements in March 2010 and again in March 2011 which fell short. We find that the banks, their activities and operations at present are those of zombie or paralysed banks, because the money is not flowing into the economy. The balance sheet repair work is going on. This is not acceptable. Is the information we are getting fully transparent and truthful? Can we believe the witnesses? We are continually hearing reports and figures and the individual microcosmic stories are at variance with the overall figures. That is deeply disappointing.

As regards SME businesses being articulate in presenting the requirements, most of the clients who are good at their business know how to present the requirements and they are the people worth backing. I have come from 20 years of lending to SMEs through ICC Bank, where we got stuck into the businesses of the clients.

It is like being an athlete. If they do not understand what goes into training and preparation then they will not compete and they are probably not a good bet. There are exceptions. However, this idea of the bank being the magic wand or the aunt or uncle to businesses and helping them through does not really wash. My experience is that those in business who really understand their business know in their sleep who their debtors are, what the production costs are, who their creditors and sources of credit are and so on. They may need someone to sit down at a desk and do it but they know the details. There is some disingenuous conversation in this regard.

The deputation referred to the business model of banks. We know from the review of the balance sheets of the banks that prior to 2008 the policy of fractional reserve banking was totally abandoned and that this caused the credit boom and bust and the asset price collapse. I do not have the figures for Ulster Bank but I have them for the six Irish-owned banks. I can do an approximation for Ulster Bank because it was a subsidiary of RBS, whose loan-to-deposit ratio, if we ignore ABN Amro, was approximately 135% - that is, 45 percentage points above the recommended level of 90%. The RBS presence in Ireland is evidentially responsible for 50% of the asset price collapse. It is unfair on the customers who were caught in doing their ordinary business and providing homes for their families. It is unfair for them to be the subject of 100% recovery of loans that were used in the creation of a boom and bust. It is not right and it is not fair. That is the policy. Now the policy-----

Damien English (Meath West, Fine Gael)
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Deputy Mathews, I want to move on to the answers, please.

Peter Mathews (Dublin South, Independent)
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The last point relates to the business model and separating out existing and new business. I call on Ulster Bank to consider the point carefully. The experience of ICC Bank when it came to the maturity of a loan portfolio and the relationship with SME businesses over five, ten, 15 or 20 years was that there was an education for the customer and the lender or the lender executives in the relationship. Loans are not products. I keep hearing the expression from the banks that they have a product for this or that. They are five-, ten-, 15- or 25-year relationships of trust and involve supplying information both ways. That is what they are. They are priced according to the risks involved. If a bank decides that new business is to be separated from-----

Damien English (Meath West, Fine Gael)
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Deputy, a question, please.

Peter Mathews (Dublin South, Independent)
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If a bank separates new business from existing business it runs the danger that the appraisal by the new business executives will fall short of the learning experience of the people who have looked after existing business.

Damien English (Meath West, Fine Gael)
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We will move on to the answers now. You may wish to include the question of the cost of the credit, Mr. Brown. There are questions I could ask myself but we are short on time.

Mr. Jim Brown:

I am unsure of the Deputy's question, but let me try to answer the broad range of questions outlined. From an Ulster Bank perspective it is clear that we have more than enough capital. We have had the full support of RBS through the crisis. A total of £15 billion was injected into Ulster Bank through that period.

The other key point to note is that we have taken considerable provisions, including in December of the year just gone by. This was to enable us to deal with the legacy real estate issues and to get them behind us once and for all. They will be gone over the next three years.

We are involved in the asset quality review process and I am comfortable that we are in a good position for that.

There was a question on restructuring and the volume of restructuring that we do. Last year we did £350 million in addition to new lending. It was over and above that.

Reference was made to credit unions. I believe the credit unions have a role to play in the community. Obviously, they do small ticket and personal loan lending and so on. I do not really have a view on whether they should be involved in SMEs. The key area to highlight is that it is important that the right skills and expertise are involved in any organisation when it comes to that lending, and that should be examined.

We have a regular dialogue with the Department of Finance and the Central Bank on a wide range of issues and we update them on our various strategies and progress against those.

Ms Graham may wish to comment on the farming sector and entrepreneur training.

Ms Ellvena Graham:

I will comment on young farmers. We tailored an offering to new entrants to the farming sector last year. We ran several educational seminars with Macra na Feirme to try to work with younger farmers.
The question of what we do with young entrepreneurs was raised. We do a good deal of work through Small Business Can, an online offering. A total of 20,000 people or businesses are registered and use the website now. A raft of information is available on the website and many of the people who use smallbusinesscan.comare entrepreneurs. We run many workshops through an offshoot, the Businesswomen Can programme, which is tailored directly to women entrepreneurs. We have ambassadors for that in the bank and outside the bank. We have several online offerings and seminars and a good deal of material is available through the smallbusinesscan.comwebsite. It is all aimed at young entrepreneurs and entrepreneurs in general.
A question was asked about accreditation. The bank is accredited by the Chartered Banker Institute in the United Kingdom. That covers most of the questions.

Mr. Jim Brown:

I believe I have covered most of the questions.

Damien English (Meath West, Fine Gael)
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Our members are satisfied. Thank you for coming in today. As I noted at the end of the last presentation, we are engaged in a report on how the banks are performing in lending and the associated costs. We are also looking at other options of raising finance for businesses and the associated areas. We will feed back our recommendations and conclusions towards the end of the preparation of our report. I thank Mr. Blair, Mr. Brown and Ms Graham for coming in today. My apologies again for the time difficulty.

Damien English (Meath West, Fine Gael)
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I welcome the delegation from AIB for a discussion on access to finance for small and medium-sized enterprises. I welcome Mr. Bernard Byrne, director of personal business and corporate banking, Mr. Brendan O'Connor, head of financial solutions group, Mr. Denis O'Callaghan, head of branch banking, and Mr. Ken Burke, head of business banking.
I apologise to the witnesses for the delay in beginning proceedings and we will not delay anyone who must leave before the conclusion of the meeting.
I advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, 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. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons 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 they should not comment on, criticise or make charges against a person outside the Houses or any official by name or in such a way as to make him or her identifiable.
The timing of this meeting clashes with Question Time so some members will need to be absent for part of the meeting, for which I apologise to the witnesses. Deputy Dara Calleary of Fianna Fáil hopes to return to the meeting in order to put questions. I invite Mr. Byrne to make his presentation.

Mr. Bernard Byrne:

On behalf of AIB Group I thank the committee for inviting us to attend the meeting. We welcome the opportunity to present the bank's perspective and our plans on the vital issue of lending to the SME sector and fuelling the regrowth of the Irish economy. This forum provides a unique and very valuable means of communicating the bank's strategy to the political and wider environment and it allows the bank to absorb members' ideas and recommendations in terms of shaping bank policies.
I am very glad to be able to report that we are making progress on the difficult road back to normalised banking activity. The major restructuring that AIB has undertaken to become a fit-for-purpose bank, capable of normal lending, dealing with loan arrears and customers in difficulty, capital adequacy and returning to profitability, is yielding solid results. AIB expects to return to profitability during this year, 2014, and we believe we are adequately capitalised to meet the demands of an improving economy.
A number of perceptions persist around the bank's lending policy and I wish to briefly address these. To suggest that AIB is refusing credit to viable businesses is wrong and it fundamentally misunderstands the situation. With SMEs accounting for the vast majority of enterprises in Ireland, it makes absolutely no business sense not to facilitate their financing. The bank's ability to grow and make a return to the Irish taxpayer depends on its willingness and capacity to lend prudently. To do otherwise would be to remain static and is counter-productive on all fronts. The financial health of the SME sector and that of the indigenous banking sector are inextricably bound together.
Second, it is important to point out the mistake in making a distinction between new lending and refinancing as though the latter was somehow less critical to the economy. Protecting existing jobs is as important as laying the foundations for new employment and our figures demonstrate precisely the scale of refinancing required for SME customers in financial distress. The scale of SME lending in Ireland has to be viewed in context. From the highs of the boom years, demand and lending have fallen dramatically but all indicators are that 2014 will mark a turning point for SMEs as consumer sentiment improves to a point not seen since the economic crisis, coupled with a year-on-year fall in unemployment. AIB exceeded the Government's €4 billion lending target in 2013 with €4.3 billion sanctioned to 32,000 SME customers in new and refinanced facilities. The approval rate for lending applications was 92% for the year.
While factors such as consumer sentiment, employment levels and disposable income ultimately dictate the level of demand for credit, AIB is adopting a proactive sectoral approach through streamlined SME lending structures, targeted funds and detailed engagement with SME customers across all key sectors of the economy. The bank is building new sectoral teams with specific skills and expertise to complement our traditional core areas, such as agriculture. It is establishing dedicated personnel to originate and nurture new business opportunities in areas such as technology media and telecoms, energy, life sciences, exports, entrepreneurship, hospitality, tourism and property. We are also making funds available to stimulate and support many of these sectors, with a €1 billion in funds committed to the energy sector by 2017, a €350 million new residential homes fund and our more recent announcement of a €500 million agri-fund. AlB's volume of new money approvals rose by 22% last year and we are seeing this positive trend continuing into the first quarter of 2014. Increased levels of new money-sanctioned activity grew across a range of sectors, including wholesale-retail, agriculture and transport.
AIB has established itself as the leading Irish bank for SME start-ups, supporting approximately 50,000 job in the past three years. The bank has the No. 1 market share for new start-ups seeking banking facilities and has launched a number of initiatives including a business start-up academy in partnership with The Irish Times. The level of indebtedness in the Irish economy, relative to EU norms, is very high and this affects demand. Almost all SME borrowers are seeking to pay down existing debt rather taking on new loans. Repayment of loans continues to outstrip new lending activity.
We notice that the issue of SME arrears and distress appears to be the subject of less national debate than the question of mortgage arrears, even though its resolution is absolutely critical in terms of Ireland's economic activity. SME debt makes up the greater part of the bank's troubled loan book but we have made very significant progress with much higher rates of customer engagement among SMEs than among mortgage customers. We are on course to complete the substantial majority of SME restructures this year. As a pillar bank, AlB's strategy is to support viable businesses and protect jobs where possible and SMEs in difficulty are identified as the top priority. Criticised and impaired SME loans are typically managed with the banks financial solutions group and have a dedicated relationship manager to help resolve these issues.
Approximately 9,000 SME customers, employing a total of almost 40,000 people and €15 billion of loans, are managed within AIB financial solutions group, FSG. Proactive and targeted solutions are necessary to deal with these issues and AIB has set itself aggressive targets to agree long-term fundamental restructuring with its SME customers in order to restore them to unimpaired status and allow them and the bank to move onto a solid and certain arrangement.
A recovery in the SME sector is crucial to the Irish economy and to the banking sector. AlB's financial planning is concentrated on achieving total lending approvals - mortgages, personal and business - of between €7 billion and €10 billion each year up to 2017. On behalf of AIB, I want to use this opportunity to express again our thanks to the Irish taxpayers for their continued support. Our endeavours are focused on re-establishing AIB as a profitable, investable bank to deliver on the State's investment over time. We continue to invest and work towards the development of a customer-centric bank, meeting the challenges of the recovery and providing credit and all other banking services to Irish businesses that are the backbone of our economy. We welcome questions from members.

Peadar Tóibín (Meath West, Sinn Fein)
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We have been listening to many banks today. We have received conflicting information from the banks and from a number of SMEs. The SMEs tell us that it is very difficult to get a loan and the banks tell us that the vast majority - 90% - are getting loans. It would seem that a filtering process is being used by the banks before the formal loan application is made and that from the point of view of the banks this process is to ensure that people are fit and ready to make an application. However, from the point of view of the entrepreneurs, it is an informal method for saying "No". We are told that banks are aggressively pursuing the delivery of credit but we also know that they are aggressively deleveraging from the market. Some enterprise organisations have said that there is a reduction in credit supply for them this year.

Mr. Byrne is correct when he speaks about debt distress and he is one of the first people from the banks to say that debt distress is a major problem in the Irish economy. It is the equivalent of a foot on the neck of small businesses as they seek to grow and emerge from being knocked down. Until we get a proper solution to debt distress for small businesses we are in effect discounting these small businesses from future participation and from being an engine of growth in the economy. All I have heard so far today is that there is a level of forbearance on the part of the banks, which includes warehousing, for example.

From my perspective, there is no plan of action to identify the businesses with potential to grow into the future and ensure they have some level of write-down, some reduction in interest rate or some level of separation from their toxic debts. Will the delegates indicate the percentage of AIB's business customers who are in debt distress and what the bank has done to ensure there is a real alleviation of that weight on their shoulders rather than simply a deferral of the problem? Will they comment also on the flow of credit and how they are ensuring the filtering process is not a barrier to credit?

Mr. Bernard Byrne:

The issue of the availability of credit in the economy is one on which there are many views. There are numerous surveys out there, many of which, of late, are moving in a very similar direction. A very interesting survey in terms of its commentary is that of InterTradeIreland, which is largely independent. In regard to perceptions of the availability of bank lending, the report states, on page 58, "SMEs are not forming their opinion based on personal experience". In fact, InterTradeIreland found that only 20% of SMEs who answered a question in this regard did so based on their own experience. On the other hand, 43% formed their opinion based on media reports, and 40% on the basis of general commentary outside of the media. We need to arrive at a common view on this issue.

We have tried to be as clear as we can in terms of what happens in an approval process. If somebody does not apply for credit, it is difficult to arrive at accurate data by tracking applications. We tried to do something in this regard a year or 18 months ago, but people are still basing their views on the anecdotal conversation in the golf club and so on. We decided to focus specifically on the issue of SME credit to see what could be done there. Members might be surprised to hear that the majority of loan applications from small businesses are for less than €30,000. In fact, 60% of all applications are for less than €25,000, with €19,000 being the average. We put in place an initiative in our branches where a two-page application form was provided for SME loan applicants, with a commitment given that they would have an answer by close of business the following day. There is no external involvement in the credit application process; it is done in-branch and the answer is given the next day. We have a 97% approval rate in respect of those transactions and 95% of the amount is drawn down. That is the quickest way we could find to put in place a local discretionary and decision-making capacity, and it has worked very effectively in each local community.

Once one moves up the chain and into general surveys, we are confident that what is coming out of DKM and the Department of Finance accurately reflects what is happening on the ground. However, it is very difficult to beat the anecdote when it is not recorded. We are constantly advising people to put in a formal application. I would prefer if the approval rate had to decline in order to ensure we had the entire population included. If it really matters to people's business, we are urging them to put in their application. If we reject it, it can be submitted to our internal appeals process. If the applicant is rejected on appeal, he or she can go to the Credit Review Office, where there are very competent and capable people to assist them. These are the mechanisms we have in place and we try to encourage people in that direction. We discourage them from doing anything other than following the formal application process.

In terms of the availability of credit, our loan to deposit ratio, which was a crucial issue for us, is below 100% at this point.

Peter Mathews (Dublin South, Independent)
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Well done.

Mr. Bernard Byrne:

In addition, our capital is over 14%. We have plenty of capital and plenty of capacity to lend from a liquidity point of view. It is our objective to grow that balance sheet at the same time as we are trying to grow the profitability of the bank. We have no intrinsic motivation to do anything other than that. It comes down to the question of what is the demand for new credit. I referred already to the level of indebtedness that exists across SMEs, which is high. The other factor, which is always important, is the capacity in the marketplace to absorb that indebtedness. If we go back to 2008, when a lot of this credit was taken on, people were projecting that the economy would grow by a quarter in the coming years. In fact, it is actually 25% smaller now than it was six years ago.

There is significant extra capacity in the economy in terms of the investment in fixed infrastructure, which means demand has been low for a period. We always need to look at both sides of the issue. It is our job to try to improve the supply side. We feel we have done a lot in this regard, but we can always do more. The other important factor is how we can stimulate things on the demand side. The skills issue is another factor in that SMEs need more skills to submit their applications properly and understand the business planning process.

We are all agreed on the importance of resolving the debt distress issues. It is our job to seek to solve it by coming up with permanent solutions. I ask my colleague, Mr. O'Connor, to elaborate on that.

Mr. Brendan O'Connor:

At our last appearance before the committee we spoke about the critical importance of resolving the issue of SMEs in financial difficulty. We have approximately 9,000 SME customers, some of whom have multiple accounts, with €15 billion of debt attached. That debt was taken on at a different time and often in respect of non-core assets. Most typically, borrowers in Ireland are not legal entities but instead borrow in their own name. One frequently finds that assets are entangled - for example, buy-to-let properties mixed in with commercial real estate, apart from the SME itself. It is our strategy to disentangle what I would call the non-core debt over time.

We have a structure in place, which has been rolled out across the market and has quite a bit of traction, whereby we determine the level of sustainable debt a company can maintain. "Sustainable" does not refer to a maximum; we do not talk about maximising our return on debt but rather optimising the return. It is about finding the level of debt a company can sustain while continuing to run the business. An hotel, for example, needs working capital, a pub might want to install a new kitchen, and so on. We determine the level of debt-collect the SME can maintain while sustaining itself. The first step in this regard is determining whether the SME itself is viable. In some cases, for reasons unrelated to debt - changed market conditions, for instance - the business might simply no longer be viable. Once we have established viability, we put a structure in place for those customers who need it whereby the bank will compromise on the amount of debt outstanding. In other words, wet will right-size the balance sheet of the SME.

In the past 12 months alone, we have approved more than €2 billion worth of compromise. Such arrangements are subject to performance, so the SME needs to perform on the sustainable portion. To the extent that it does, it knows beforehand there will be a compromise on the unsustainable debt. Practically speaking, our approach is no different from what we are doing on mortgages. Where we have assessed that a debt cannot be repaid or never can be repaid, we are prepared to compromise on that debt.

Peadar Tóibín (Meath West, Sinn Fein)
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Is Mr. O'Connor talking about a write-down?

Mr. Brendan O'Connor:

Yes, it is write-down.

Peter Mathews (Dublin South, Independent)
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At last we are hearing that term. It is the right thing to do. Well done.

Damien English (Meath West, Fine Gael)
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In regard to restructuring, I accept that the compromise arrangement Mr. O'Connor outlined is a long-term fix. That is great. Is it the case, however, that for the majority of AIB's 9,000 SME customers, they will be seeing short-term rather than long-term solutions?

Mr. Brendan O'Connor:

There is something of a misperception that every SME will require compromise. The purpose of our group is to put specialists in place who can hand-hold customers through what might simply be a difficult time for them. We expect trading conditions to improve. Some of our customers have no debt other than working capital debt. We deploy short-term solutions most often in respect of those customers. I do not have the exact breakdown and it is reasonably fluid, but they probably account for 20% to 25% of the book.

Beyond that, we move to a situation where we put in forbearance in the form of, for example, a capital moratorium, no interest rate at all, an interest-only arrangement and so on. We modify the contract, but we put that in place while the company is proving viability, that is, proving that absent the overhang of debt, it would be a sustainable business. We have what I call medium-term forbearance for that proof period, for want of a better term, where both the customer and the bank are seeking satisfaction as to what is the future for the business and what is sustainable. In many cases - most of our customers understand this and we work with them on it - adjustments will have to be made to the core business itself. It is not just about debt; often it is about cost management, testing new markets and so on. In such cases, the types of instruments I talked about, including moratoriums, interest-only arrangements and so on, would come into play.

Where we determine that a company is viable, will require a right-sizing of its balance sheet and we will have to compromise on debt, we put in place a fundamental restructuring.

It is important to say that we contract that with the customer up-front to ensure they are not wondering what will happen in two, three, four or five years time. We put in place a five year or seven year solution. It could require disposal of non-core assets before we finally know what we are dealing with but we contract it up-front and we put in a longer-term restructure. Approximately 25% of the customers in that fundamental restructuring process are completed. Approximately 40% are currently in that process, and I hope that we would have the back broken on it by the end of 2014.

Damien English (Meath West, Fine Gael)
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Before calling Deputy Calleary I seek clarification on the debt compromise. Is that when a business is still in operation-----

Mr. Brendan O'Connor:

Yes.

Damien English (Meath West, Fine Gael)
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-----or is it similar to other banks in that it is only occurs at the end of the day?

Mr. Brendan O'Connor:

The purpose is to sustain the company.

Dara Calleary (Mayo, Fianna Fail)
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These are companies within the FSG group. Is it 25% of the 9,000 or are these separate companies? I refer to the companies with which Mr. O'Connor is working.

Mr. Brendan O'Connor:

The 9,000 customers, yes.

Dara Calleary (Mayo, Fianna Fail)
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Has Mr. O'Connor done a full rearrangement with 25% of those?

Mr. Brendan O'Connor:

They are on contracts. They are done in some cases. There is debt compromise on it in others. We have contracted the debt compromise. They are only servicing the sustainable level of debt.

Dara Calleary (Mayo, Fianna Fail)
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Is debt compromise write-down in layman's language?

Mr. Brendan O'Connor:

Yes.

Dara Calleary (Mayo, Fianna Fail)
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How many of the 9,000 have got debt compromise?

Mr. Brendan O'Connor:

We have approved it. Not everyone has it yet because we have to go through the approved period. We have probably approved it for close to 1,500 of those.

Dara Calleary (Mayo, Fianna Fail)
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I have a number of general questions. Mr. O'Connor said that AIB did €4.3 billion in lending in 2013, or approved €4.3 billion. How much of that was drawn down during the course of the year? What plans does AIB have to increase the draw-down rate? AIB's internal appeals mechanism has a 34% success rate compared to an average of 55% from the Credit Review Office. How many AIB cases were overturned by the Credit Review Office? One of the earlier speakers mentioned the number of cases overturned by the Credit Review Office. What percentage of those subsequently went into arrears?

I welcome AIB's comments on debt distress. It is the first bank to raise it as an issue. It is not the fault of this committee that small and medium enterprise lending does not get the kind of attention given to mortgage lending; that is the reason we have the witnesses before the committee. We may have to invite them back after today's meeting.

The Entrepreneurship Forum set up by Sean O'Sullivan published a report in January in which its members are particularly critical of the dependence of Irish banks on personal guarantees. They called it outrageous and said that Irish banks should begin to follow international standards on personal guarantees rather than continue what they have called "this current backwater behaviour". It is the contention of the entrepreneurship forum report that personal guarantees are in contradiction of the Central Bank code on SME lending. How much does AIB still rely on personal guarantees? For instance, how many of the 9,000 cases in its group would have personal guarantees in place?

I raise two other issues. Has AIB increased its standard bank charges to businesses be it for standard transactions or others in the past three years? Does it charge any special fees to businesses that might be in the FSG group? What level of fees are charged?

Mr. O'Connor mentioned the work under way in the buy-to-let market. How many outside agencies does AIB have assisting it with that? I am aware that PricewaterhouseCoopers is involved with it in that. What fees is AIB paying to outside agencies for the buy-to-let resolution process?

As one of the pillar banks AIB is crucial to the credit guarantee scheme, which has been a flop. The Minister will re-evaluate it. What suggestions will AIB give to try to make a success of the credit guarantee scheme?

Mr. Bernard Byrne:

We will change speakers to answer these questions. On the first point on drawn balances versus sanctions, we made a comment earlier which the Deputy might have missed but I will repeat. The way to look at this depends on the size of the facility being sought. In general, for those seeking small facilities, and as I said, the average facility being sold is less than €30,000, the drawn balance would be quite high. In terms of the example we gave, we have an under €25,000 initiative. In respect of that initiative the drawn balance was 95% of the sanctioned balance. For small businesses, therefore, it tends to match quite closely because people are reasonably specific in their requirement and then we can fund. As we move up the spectrum we tend to find that people put in more surplus capacity and therefore the level of drawn balance would be lower. For example, the average for overdrafts is approximately 60% in terms of the drawn balance piece. It is a big number, and it tends to weight the number. I would say the average is probably closer to 60% but the smaller the facility, the more likely it is to be between 90% and 100% drawn because it will probably match the exact requirement of the business. That is one of the ways we look at it. Larger organisations will tend to put in more capacity because there can be more variability depending on their business.

On the Credit Review Office, in total, since the Credit Review Office has been in place, and I said earlier we believe it is a very good initiative because it gives people the confidence that there is some other mechanism outside the banks to examine this credit, we have had 90 overturns. In that same period we have had 140,000 applications for SME credit, and our approval rate is 92%. It is less than 0.1% in terms of where that has gone. I do not know the statistic. I will have to find it in terms of how that has performed subsequently. I do not know the statistic and I will not make it up for the Deputy. We can come back and look at that. I do not know if Mr. Burke has any comment on that.

Mr. Ken Burke:

It is not something we would herald, to say that a significant number of the cases overturned have got into trouble. That is not something we are saying. I would reinforce the point that the customer speaks to our internal appeals process and to the external appeals process before a customer even gets to that point. There is a four eyes principle in all our branches, business centres and direct channels, therefore, before something is declined it goes to another lender who reviews. The basic premise is that we are trying to make the loan. We are trying to find a way to afford the credit. It may not necessarily be on the same terms or conditions the customer sought it or it may not be for the same amount but our starting point is whether we can afford this credit to the customer.

Dara Calleary (Mayo, Fianna Fail)
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Does AIB automatically give the Credit Review Office, CRO, contact details to everybody who is declined?

Mr. Ken Burke:

Absolutely, yes.

Mr. Bernard Byrne:

Yes, and we have done since it was established.

On the issue of personal guarantees, personal guarantees are still in existence in the Irish market. It is a feature of the current position of the Irish market. The logic is that many small and medium enterprises, SMEs, operate either in an incorporated structure or personally. Those who operate personally is a separate issue because they have taken on the borrowing personally. When they are operating with an incorporated structure, which may be for tax purposes or some other reasons, we have a choice, which is to try to get to the point where the person can put sufficient capital into the entity to support their commitment or, in many instances where they are unwilling to do that because it might cause a liquidation of assets to be necessary to put in the capital, a personal guarantee will be sought and put in place. People seek it in many instances. I am talking about the world now as opposed to the world pre-2008. It just happened pre-2008; personal guarantees existed for almost everything. The world we are in now is slightly different but personal guarantees are still a feature, and they allow people do things which they may not be able to do because they do not have access to equity or do not seek or wish to put in equity directly. We do not seek the family home in respect of those issues. That is an important distinction in respect to that. Currently, it is a feature. If we look at the general survey information available, the level of finance for SMEs in the Irish market that comes from banks is about 93% or 94%; it is significantly higher than the European norms. One of the reasons that is the case is because there is less equity being put in outside of banking. That is another feature that exists.

On our marketplace, we cannot take just one statistic for the market. In overall terms we must examine how SME lending works in the marketplace with other marketplaces. I do not believe a like-for-like comparison can be done. In overall terms we agree with the principle that there should not be blind personal guarantees in place. It should be focused on supporting the underlying banking transaction and banking proposition.

Dara Calleary (Mayo, Fianna Fail)
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AIB is on a group with the most successful entrepreneurs in the country who have been tasked by the Minister to tell him what they think about entrepreneurship in Ireland. They are not people who make flamboyant statements. They just get on with their job. Did it not wake up AIB when they used the term "backwater behaviour"? Should we be doing something different in that regard? I asked that question of the representatives of other banks also?

Mr. Bernard Byrne:

We need more equity in the market.

Damien English (Meath West, Fine Gael)
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What percentage of equity would the bank seek from a business owner if it were not looking for a personal guarantee?

Mr. Bernard Byrne:

It depends on the business proposition. Businesses that have significant collateral with real assets are one proposition. In the case of businesses with no collateral or equity coming in, there will be a need for more equity from them. We have the largest seed fund in the marketplace and we need to bridge part of that ourselves so we can provide some of the seed fund capital.

The issue is complex. There needs to be an evolution of this with which we would be happy to work and to continue to contribute to the debate. It should be very focused on meeting the needs of the lending proposition because one ends up supporting more lending propositions than one might otherwise because people do not have the equity in their business. I do not believe one can come up with a blanket answer. It needs to be thoughtfully considered to ensure we do not shoot ourselves in the foot due to the wrong answer.

We rate this as part of our participation in the credit supply clearing group. A sub-committee of the group is meeting to consider the options that might be available. When one looks at the various funds playing in the Irish market, there is quite a bit of investment in the €2 billion to €3 billion and above space. It is that €1 million to €2 billion space that we need to challenge ourselves about so as to find how we can provide alternative sources of equity funding.

We are confident we have the lowest level of fees and charges in the marketplace which we review constantly. We have a very attractive package for our start-ups. Any business start-up will have two years free banking fees, access to AIB’s iBusiness Banking, iBB, and access to merchant services of the debit and credit card service without an enrolment charge. This is the only opportunity for start-up businesses in the marketplace.

Dara Calleary (Mayo, Fianna Fail)
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How do fees now compare to three or four years ago?

Mr. Bernard Byrne:

I do not believe the fees are materially different than they were three or four years ago. From a European point of view, these fees are very competitive as confirmed by studies by the Department of Finance and are appreciably below the European average.

Damien English (Meath West, Fine Gael)
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How does AIB’s cost of credit compare to the European market?

Mr. Bernard Byrne:

The cost of credit is still quite low. Some of that is associated with the legacy of the back book, so there are very low levels of interest rates in respect of those. There is a blend of different types of overdraft available but the average rate comes in at 5.45%. If one eliminates and marks for the cost of funds difference in the Irish market versus, say, the German market, they actually normalise.

Mr. Ken Burke:

We have been working hard to bring the cheapest possible credit to our customers. We are the only bank with a third round of funding. We have another €200 million in AIB funding, bringing the total to €450 million. The last tranche of €200 million is ring-fenced in the sub €300,000 lending space. We are focusing on those small and micro SMEs. That funding comes at a discount of 1.25% to our standard variable business loan rate.

Mr. Bernard Byrne:

The credit guarantee scheme has not been particularly successful. The words “temporary” and “partial” were problems. A guarantee scheme that is not for the duration of the loan and does not cover it creates a challenge. The underlying credit in itself could not support the application. If someone does not give the comfort and respect of it, then one is not changing the credit decision.

Mr. Brendan O'Connor:

I do not have the actual figure for personal guarantees. I am not sure we have ever measured the figure of how many personal guarantees we have but there would be a substantial amount of them. Off the top of my head, I would say it is probably half of our customers.

To the extent there is a personal guarantee, we would consider the totality of the debt as I mentioned across all of the asset classes. It comes into play when we are compromising on debt. We will also seek the introduction of something by the sponsor into that. The only reason we are around is because we are in receipt of €20 billion from the taxpayer. The idea I could compromise on debt where people have borrowed in their own name for an SME and leave behind value that could have been introduced by the business owner is not tenable. We do not consider personal guarantees as something distinct or separate. We look at it in the totality of trying to come to an arrangement across all of the asset classes while protecting the SME and employment. Those are the two priorities we put into our business.

There are no fees to be in the financial services group. It would strike me as counterintuitive to increase fees on someone already in difficulty, given that in many cases we will not recover all of the debt in question. All I would actually be doing is making my loss greater. In fact, we often have to forbear on fees and charges for customers that fall under the remit of the financial services group because it does not make sense in the long run.

I cannot disclose the fees we pay to receivers of buy-to-let properties. I deal with four different buy-to-let platforms but the clue is in the name, the low-cost fixed-asset receiver platform. As an overall percentage of the asset, it is quite small and we would have tendered out on it.

Dara Calleary (Mayo, Fianna Fail)
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How many buy-to-let cases is the bank pursuing?

Mr. Brendan O'Connor:

I have about 1,000 buy-to-let cases where I have a fixed-asset receiver in place. We have a golden rule that if there is a rental income coming in but it is not being used to pay down the mortgage, we will appoint a receiver.

Dara Calleary (Mayo, Fianna Fail)
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What element of the bank’s business book has property-impaired but otherwise viable SMEs, either from buy-to-let or property investment?

Mr. Brendan O'Connor:

Again, this is a rough estimate but of the €15 billion, possibly €9 billion is what I would classify as non-core debt. It is not always property but it might be property related. When it comes to SMEs, a sponsor may have borrowed in their own name to start a business, as well as buying buy-to-lets or commercial real estate. When it comes to those customers, that is generally not where buy-to-let receivers are used because we are trying to come a solution around the totality of the debt. Generally if there is a buy-to-let receiver, the case is broken down and there will more than likely be a legal resolution to it in time. It can also be consensual in some cases where we agree a legal resolution which is in the best interest of the bank and borrower.

Dara Calleary (Mayo, Fianna Fail)
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If €9 billion out of €15 billion is non-core debt, was Morgan Kelly pointing in the right direction?

Mr. Brendan O'Connor:

I do not agree with the contention that the European Central Bank, ECB, has a plan to close down SMEs. In any of our dealings with the ECB, via the troika, it has all been about strategies to support SMEs and get a transmission of credit to them. Leaving aside that, we fully accept Morgan Kelly’s basic premise that one needs to separate the non-core debt from the core trading or viable debt. That is our strategy. It is not new news from our perspective. However, I did not get the point that the ECB wanted to take down SMEs.

Mr. Bernard Byrne:

It is not new news from any perspective on the estimate of the loss associated with that. So, there is not some timebomb of which we are unaware. We are very aware of the position of all of those loans. We agree about separating but everything else is what we are executing. There is not a surprise factor in respect of that.

Feargal Quinn (Independent)
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Mr. Bernard Byrne said there is a perception that refusal of credit for SMEs is much higher than is actually the case.

Mr. Byrne stated there is a 92% approval rate. Is that 92% of those who apply? If so, what percentage is drawn down, particularly by SMEs? As one of the owners of the bank, I want it to be profitable and to do well.

I was involved for four years helping a number of retailers around the country and the vast majority of them said there was no point in them going to the bank for credit because they would be turned down. However, when we helped them and they approached the banks, they got what they wanted on most occasions, although we do not hear that. What is the main error SMEs make when they apply for credit which leads to them being turned them? What advice can Mr. Byrne give them about what they should do the next time they apply for loan? Are they making basic errors?

Mr. Bernard Byrne:

I will open with a general comment and then hand over to Mr. Burke and Mr. O'Callaghan. The main advice is their track record matters and, therefore, the performance of their account is important, particularly for smaller applications, say, below €25,000. Most of them are based on their track record. If someone has a performing account, that will be a huge credit to him or her applying for a small credit. When applying for something beyond that or incremental to one's business, which is different, it comes down to a credible business plan that has been well prepared and makes the justifiable argument as to why somebody should be given cash now for cash he or she will generate from his or her business in the future. It is cash flow.

Feargal Quinn (Independent)
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Do quite a few apply without a well prepared business plan?

Mr. Bernard Byrne:

It is somewhat surprising sometimes because there has been so much comment that the quality of some of the documentation has been quite poor. Many surveys point to that. There is a gap in the financial capacity and capability of SMEs and the supporting environment to produce robust business plans.

Mr. Ken Burke:

The Senator spoke specifically to the retail sector. One of the things we have been working particularly on over the past two years is developing our own competence and capability in specific sectors. When we speak to some SMEs, they say, "One size does not fit all; my size needs to fit me." We have been investing heavily in all sectors in developing our own competence. We have always had strong competence in traditional sectors, particularly on the agricultural side. We doubled the number of agricultural advisors we have on the ground this week and launched a €500 million fund acknowledging the growth needs of the agriculture sector in the run up to the removal of milk quotas.

On the retail side, we took on the former managing director of ADM Londis to advise us internally as to how best we can react to the needs of retailers. We have done specific research. During 2013 and into 2014, we launched six specific sectoral outlook reports where we commissioned independent research on the dynamics and needs of the sector. We partner with the key players in the sectors. For instance, RGDATA was a key partner in the production of a report on the retail convenience sector. It is not just about building our internal capability, which is important, but about bringing that message to retailers. We have done a series of roadshows where we have worked with retailers to help them prepare as to how they might approach the bank with applications for credit, how they might digitise their business, how they might reduce their fees and charges and, practically, to help them and demonstrate that level of understanding. Right now in the retail sector we are seeing a level of investment and reinvestment and some pick up in retail spending which is allowing retailers to remodel some of their stores. We are also seeing a lot of activity in the necessary re-financing of customers of exiting banks. Customers of those banks that are leaving our shores who may be doing deals with them need a new banking partner that can understand their business and give them the necessary credit to allow them to part company with the exiting bank and reinvest in the business that might have in some way stagnated.

Mr. Denis O'Callaghan:

With regard to what we are seeing in local communities, the Senator's comment is right. It has been a feature. As a bank, we just had to get ourselves in to a position where we recognise we have a role to help rather than adjudicating on poorly prepared submissions or lack of support for customers. We have been reaching out more in terms of beginning to have dialogue with customers. During 2013, we had 103 seminars across our business where we invited customers to our premises in the evening at times that suited them and talked to them about how to prepare a business plan and what the bank looks for to address the mystique around this and to get the message out. There has been a strong perception that banks have not been as open as we believe we are. We have to get out there and prove that to customers. Sanctioning is one thing but reaching out and spending time with customers and helping them to put an application together that will meet the bank's requirements has been important. This is a journey but one we are very much about and we have recognised we are key stakeholders in building that education.

Damien English (Meath West, Fine Gael)
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Mr. Burke mentioned a fund for customers of banks that are leaving our shores. Is that available to those who have had debt difficulties with that bank and have come to an arrangement with it?

Mr. Ken Burke:

Absolutely. Typically, the process is a customer of another bank would come to us and say he or she may be able to do a deal and ask what he or she can raise. We run the numbers, go through the cash flows because it is important that we do not replace a customer that might be in difficulty with another bank with an unsustainable debt level and we also want to make sure that the customer has enough money to trade and to continue to invest in his or her business. Typically we issue a heads of terms to say all things being equal this is the type of funding we are likely do to. They would go back to the exiting bank and negotiate and then the deal would be cemented. That often comes back quickly. An exiting bank might have an end of year or end of quarter date by which it is prepared to do a deal with a particular customer.

Damien English (Meath West, Fine Gael)
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Does that apply to all viable business, be it in the agriculture or retail sector and so on?

Mr. Ken Burke:

We have done a lot on the hospitality side, particularly in the hotel and restaurant sectors. There is a particular imperative around the agriculture sector now with two banks leaving these shores. There are tight timelines in terms of the customers of those banks being refinanced. The €500 million fund we launched on the agricultural side includes a particular component to deal with refinancing customers of exiting banks.

Peter Mathews (Dublin South, Independent)
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Having listened to the presentations earlier and last week regarding mortgages and so on, there is a good chemistry now and a good relationship. Perhaps that is because we, representing the people, share the cockpit with AIB management and board in trying to get back to funding the important sectors of the economy. During the five years leading up to 2011, the information, management and board reports from all the banks were at best unreliable, if not misleading. I asked the bankers who appeared earlier why we should believe what we are hearing now. I will not ask the officials to answer this question immediately because on the basis of what they have outlined over the past while, they have pulled back the curtains a little to allow us to see the operational actions they have taken.

Having worked in banking for 20 years at SME level in ICC Bank, I recognise the authenticity of what they have said. I hope they keep it up and do more of this. I appreciate that Mr. O'Connor bears a great deal of responsibility, as his neck of the woods is about cleaning up the mess of the past and clearing the stage for businesses and households to move forward again.

I am glad there is no suite of options for people and businesses in distress. There is only one answer in each case because the facts of the circumstances for that person or business will reveal the answer regarding what is sustainable. When I hear loose talk about six or seven options, it does not wash.

When Nagasaki was bombed and people were suffering from radiation one could not spray an overall medicine for everybody. Each person who was hurt and suffering from radiation had to be treated separately. This is what the bank management is doing to deal with the issue and address it. I am glad to hear that where there is financial gangrene it must be cut off through debt write-down.

Damien English (Meath West, Fine Gael)
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Will the Deputy ask a question soon?

Peter Mathews (Dublin South, Independent)
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Last week we heard there are interbank protocols for addressing issues. Are there interbank protocols on fractional reserve banking? Mr. Byrne mentioned the bank is at a 100% loan-to-deposit ratio, which means either deposits have increased or loans have decreased. We know loans have decreased because in 2008 the figure on the loan book was €134 billion and it has decreased to approximately €90 billion, minus €18 billion provisions, which makes it approximately €78 billion. This is the contraction in the overall economy about which Mr. Byrne spoke. It is similar for the other bank. Keep up the clearing up of loans and the contract up-front for survival frameworks for borrowers.

Damien English (Meath West, Fine Gael)
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The Deputy must ask a question.

Peter Mathews (Dublin South, Independent)
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Through the interbank protocols, will AIB ask the other banks to step up to the plate and do the same? Did Mr. Byrne get a chance to read the document I gave him on the creation of the credit pyramid boom and bust bubble and the banks' participation measurable in its creation?

Mr. Bernard Byrne:

Yes.

Peter Mathews (Dublin South, Independent)
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Mr. Byrne is the first. Well done. The others did not do their homework. He can now see the validity of the oppression or depression in the case of borrowers because asset prices have fallen.

Damien English (Meath West, Fine Gael)
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Mr. Byrne has read it, so we will move on.

Anthony Lawlor (Kildare North, Fine Gael)
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I thank the witnesses for coming before the committee. How does the bank deal with young entrepreneurs and those aged under 24? They have difficulties in obtaining credit ratings. Does the bank guide them to other means of finance apart from banking finance? Construction is briefly mentioned in the documentation but it is a very important sector of the Irish economy. It became too important to fail a while back and we are now getting to the stage at which it needs to develop. How does the bank see itself as being proactive in this regard? We need to build a minimum of 25,000 houses a year but the ESRI stated that only 8,000 houses were built last year. There is a deficit in housing in the greater Dublin area at present.

Mr. Bernard Byrne:

With regard to property, we agree with the general point. There is a need for finance as part of an overall mix to try to move forward the construction of new homes. There is a clear demand; we can debate the number, but it is more than 20,000. We see ourselves as being very keen and anxious to support this development. As Mr. Burke mentioned earlier, we have a fund of €350 million. One of the main reasons for the fund was to state that we are keen to lend and support development. Another important element is the availability of mortgage finance at the far side, so developers know mortgage finance will be available after they construct housing. We are very keen to show the size of our commitment in this respect. We are very active in the market and we have campaigns to show we are lending, open and active. A total of 80% of all mortgage applications are approved. It is important for the developer to know there will be a financed end-user market.

We are working with many developers to establish the point at which they are comfortable. There is anecdotal and media evidence of equity being available domestically and internationally to support developers. There is also a Government initiative on NAMA and the overall freeing of property into the marketplace to support it. All of the bits are coming into place. There are planning issues and infrastructural issues associated with the development of sites which need to be progressed. We cannot help in this respect but we can state we are very much open for business, we are happy to support development finance in the short, medium and long term and we will be available to provide finance to many new buyers to complete the project. We see this as a very important activity and we are keen to support it. The fund is an element of this support.

Mr. Ken Burke:

In tandem with the launch of the €350 million property fund, we put three new business teams on the pitch throughout the country, namely, a Dublin and east team, a Cork and south team and a west of Ireland team. These are teams of relationship managers who have no other portfolio responsibilities but to respond quickly to new business requests. Much of the pipeline they built in the early days was with customers of other banks, including exiting banks. We have ring-fenced our property capability with specialist relationship managers and credit professionals who partner stakeholders such as Property Industry Ireland, PII, and the Construction Industry Federation, CIF, to ensure we can respond quickly. We are playing one part in unlocking the jigsaw, which is the financing and funding part, but other parts also need to fall into place.

Mr. Bernard Byrne:

Deputy Lawlor also asked about young entrepreneurs. To some extent this is sector-dependent, if we assume many of the younger entrepreneurs are more predominant in technology and media. We are close to all of the start-ups and all of the accelerator and incubator funds. We are committed in terms of our sectoral capacity, to which Mr. Burke referred. We have a sectoral team focused on innovation. None of these start-ups have assets which can be used as collateral. Some might just need a credit card and there may not be much capital required. We are trying to work as closely as we can with them. We are the only financial sponsor of the Dublin Web Summit, which was attended by 10,000 people. The sector needs to be understood. It will not be capable of supporting large amounts of debt at any point in time. Businesses must be enabled to process and become part of the payment system, and we believe we can help with this. We have available accelerator and equity funds. We partly fund the Dublin Business Innovation Centre, through which people can start businesses. We believe we are playing our part in this respect. It is not collateral-based so one must understand the business. Mostly it is about facilitating rather than providing capital.

Damien English (Meath West, Fine Gael)
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We have time now for Deputy Mathews to ask some questions if he so wishes.

Peter Mathews (Dublin South, Independent)
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I am struck by several issues which may arise when SMEs go to the bank with business plans and I wonder what the bank does to address them. SMEs sometimes ask for too little finance as they think the bank will be resistant to the request, and under-pitch their requirements. The bank is developing and educating specialist teams, which is good, because if they see that the business they are examining requires more finance they will be able to tell the business it should increase its application. If a business falls short it will go on a journey but not arrive at its destination. It will be goosed. Template assessment will not tell one this. It requires teams of specialists who understand the business. The bank's development in this regard is good.

With regard to personal guarantees, where there is no equity up-front the finance should be limited and released as the business takes root. One can be flexible about these issues. Some finance can be provided up-front to get the commitment, and as years two, three and four progress the rest of the finance can be released. This is the way out.

The business expansion scheme, BES, is a very good way to get equity because it combines tax shielding for investors who want to support businesses recommended by lenders. If a bank has had a five-year relationship with a business which needs a second-stage injection of equity, the bank knows the business has been good for the first five years and that it has a future. However, as the bank is not an equity investor it should lobby the Government and state it should give BES breaks to investors who trust those businesses in the borrowing stables of the banks.

The bank might also consider providing extended periods of grace in respect of capital gains tax liability for SME start-ups or second-phase business. During the start-up and early stages of business people make huge sacrifices. It is unwise to apply too a high a level of capital gains tax liability where a business is being sold or merged.

The property recovery issue is currently in the chatter of the newspapers and airwaves. Allied Irish Bank is currently working on restoring its credibility. It is important to put paid to the speculation that there is a property bubble emerging. There is a small volume of transactions taking place in the context of the demand in the rental sector, which is leading people to think the property bubble is starting up again. We know that if the bank, in the context of restructuring its balance sheets, sticks to fractional reserving, this will not happen. It would not have happened previously if fractional reserving had been done by the banks. That is the tragedy of all of this. It is important to put paid to that nonsense.

The silence of leadership on the part of Government in this regard is, in my view, irresponsible. It might give people the impression that it is happy to accept that property prices have increased generally by 15% when in fact that is not the case and cannot be shown to be the case by a capitalisation of rental yields. The Government has a vested interest in this because if there is to be a recalibration of local property tax in 2016 and it can be proven that property prices have risen by 15%, this will be low-hanging fruit. The banks not engaged in the roll-up-sleeves work in which Allied Irish Bank is engaged on a case-by-case basis, including debt write-down, are questioning whether they should do anything if the underlying security has recovered a little. That is disingenuous. Do the witnesses-----

Damien English (Meath West, Fine Gael)
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Deputy Mathews, we are dealing now with the rental sector.

Peter Mathews (Dublin South, Independent)
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The owner of a property in a Dublin suburb could get €2,000 per month or €24,000 per annum in rental income. Multiplied by 15, this equates to a 7% yield, or €360,000. That would be the open market value of the property. The cross check in this regard is that the family likely to be living in that property, if owner-occupied, will not, on average, have an income of more than €100,000. If one multiplies that by three, the investment yield valuation is lower. This needs to be dealt with by people who are in a position of authority. As I said, there is an awful lot of chatter around this issue at the moment. It may also be the case that currently there are people who, owing to an inheritance or a legacy, are participants in a small market, volume-wise, that has bid up prices beyond those investment values.

Damien English (Meath West, Fine Gael)
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I invite the witnesses to respond to the question in regard to funding into the construction sector. I do not want them to engage in a debate on mortgages and so on.

Peter Mathews (Dublin South, Independent)
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I am asking about property market investment values.

Damien English (Meath West, Fine Gael)
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I accept that.

Mr. Bernard Byrne:

On the property recovery issue, the most important point to make is that there is no credit-fuelled bubble at this point in time in that up to 60% of purchasers are cash buyers. As such, there is no credit exposure this time. The market remains down by 45% to 47%.

Peter Mathews (Dublin South, Independent)
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Does it remain so based on incomes and rents?

Mr. Bernard Byrne:

On the capital gains tax issue, I do not propose to advise the Minister on that matter. On the BES, Government-supported equity schemes to help SMEs is a positive idea. However, how they would be constructed is a separate issue. Anything that can increase equity is a good idea.

On the issue of too little finance versus too much finance, I agree with that comment. The debt must be right-sized and the capacity of the business to fund itself is important.

Peter Mathews (Dublin South, Independent)
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I sense that AIB is doing that well.

Mr. Bernard Byrne:

We do try to ensure that a business can survive its investment period. On the point regarding personal guarantees, PGs, this already takes place in respect of the run-down and release of PGs across the board.

Damien English (Meath West, Fine Gael)
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The witnesses have addressed the issue of the financial capability of businesses in great detail today. There is some doubt in my mind as to whether this is an issue. However, it is highlighted in many reports, including the InterTradeIreland report, as a major issue. One of the key recommendations is that the Government address it as soon as possible. I have always believed in the need for good business coaching and advice. Perhaps the witnesses would provide information at a later date to the committee secretariat on how the bank has strengthened its team, including the number of people employed therein, their qualifications, positions and so on. The issue of business coaching was raised with us by InterTradeIreland and I would like to back up the need for this with some evidence and so on.

Mr. Ken Burke:

One of our stated objectives is that our cadre of relationship managers will be professional not only in name but in qualifications. We have a programme of investment in people which included the provision of 4,000 individual training days last year for people on the front line. In quarter 4, some 1,100 people were given specific sectoral training. We also have a programme allied to professional qualifications which means that between 65% and 80% of our relationship managers in the larger business centres hold a professional qualification or are in the course of obtaining such a qualification. Many people have left the organisation through early retirement and as such we are rebuilding our teams, including by taking people from the market. We now have a number of qualified accountants on board. Equally, we have taken on board people who have been entrepreneurs. These people are advising on start-ups. We now have a blend of skills.

Peter Mathews (Dublin South, Independent)
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I am heartened that AIB has undertaken robust revisioning of €18.5 billion or thereabouts on a €95 billion book. That is good. It contrasts with the other pillar bank, which has done only a little more than €8.5 billion against the same-sized gross loan book.

Damien English (Meath West, Fine Gael)
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I thank the witnesses for attending today's meeting, which has been very informative. I thank them for the honest and frank interaction with members, which is of great assistance to us in terms of putting together a report for the Government on the issue not only of bank lending but of financing in general to business. Dealing with legacy debts is an issue for all of us. I thank the witnesses for the clarity they brought to that issue.

As we are preparing a report for the Government, we may need to engage further with the witnesses at a later stage.