Oireachtas Joint and Select Committees
Wednesday, 29 April 2015
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Overview of the Banking Sector in Ireland (Resumed): Bank of Ireland
2:00 pm
Liam Twomey (Wexford, Fine Gael)
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I welcome Mr. Richie Boucher, chief executive of Bank of Ireland, who is accompanied by Mr. Liam McLoughlin, chief executive, retail Ireland, Mr. Stephen Mason, director - MARS, and Mr. Pat Farrell, head of group communications. The format of the meeting is that Mr. Boucher will make his opening statement. In advance of the meeting, we collated questions from members and submitted these to Bank of Ireland. I thank Mr. Boucher and his staff for their responses in writing to these queries, which we received last Monday. The responses have been distributed to members. Together with the input of our witnesses today, I hope all the key topics will be covered. None the less, a question and answer session will follow to clarify any matter that might arise.
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 the committee. However, 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 a 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 they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, 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 House or an official either by name or in such a way as to make him or her identifiable.
I invite Mr. Boucher to make his opening statement.
Mr. Richie Boucher:
I thank the Chairman for introducing my colleagues. I will be brief but on occasion I might ask my colleagues to speak on a couple of the items. I propose to give an update on the group's strategy and financial performance, reflecting among other things that taxpayers have a 14% shareholding in this large pillar bank. I will make a Powerpoint presentation, one component of which will concentrate on matters that were particularly pertinent in the questions, that is mortgage interest rates and the group's management of challenged mortgages.
In slide 5, we give the key highlights of our financial performance for the year ended December 2014. We have achieved a significant turnaround in the group's trading performance, approximately a €1.5 billion turnaround. What is particularly gratifying for us and I hope our customers, is the significant increase in new lending. We did €10 billion of new lending in 2014, which was drawn down last year. We are the largest lender to the Irish economy. Our UK mortgage business also contributes to the growth in new lending. Primarily due to a reduction in the cost of money to the bank, reflecting a strategy the bank has pursued, our net interest margin improved during the course of 2014 to 2.11% for the year as a whole and the exit margin, that is the margin in the last quarter of 2014 was 2.22%. We made further progress on our strategy of reducing defaulted loans and they came down by €2.8 billion, that is 22% below their peak, but nevertheless it is still at a significant level of €14.3 billion.
During the past few years, but in particular with the coming of the Single Supervisory Mechanism, SSM, there has been a big focus on the bank's capital. The bank's core equity tier 1 capital ratio improved significantly during 2014 to 14.8%. We passed all the ECB stress tests with significant capital buffers and the intrinsic value of the group, that is the tangible net asset value per share increased by 13%.
On slide 6, we demonstrate that Bank of Ireland is a leading bank in the Irish economy. We hold the No. 1 or No. 2 positions in all of our principal product lines. In the 12 months to the end of December 2014, we provided one in three home mortgages in the Irish market.
We have 27% of the cash savings market. We are the only bancassurer in the market. We have 24% of the life assurance market. We are Ireland's number one business bank based on Central Bank of Ireland verified statistics, where we did greater than 50% of new business lending and agri-lending, and we are the number one corporate bank.
Slightly differentiated from some of our competitor banks, we have retained a significant presence outside of Ireland, which is focused on Great Britain. We have a partnership with the UK Post Office which has substantial market presence. In Northern Ireland, which we view as part of our Irish-type operations but it is obviously in sterling, we have a universal bank offering. We have an acquisition finance business, which operates internationally and primarily out of the United States.
I touch on the contribution to the economy on slide 7. We lent €5.7 billion into the economy in 2014. I advised the committee at our last meeting that our ambition was to lend and to have drawn down €33 billion in new lending into the Irish economy between 2013 and 2017. The 2014 figures show we are on track to meet this target. I will not continue with the advertorial in respect of the rest of the statistics.
Our view is that the economy is picking up. This is depicted on slides 9 to 10. We are trying to demonstrate in slide 9 that there is a classic investment-led recovery path coming from the export sector. We have seen a pick up in consumer confidence and consumer spending money in the economy in 2014, which is particularly relevant to our business. That has fed through into other confidence levels and an increase in the total number of people employed. Slide 11 explains the same thing in a slightly different way.
Slide 13 is a brief summary of the breakdown of the financial performance. Our income level and our net interest margin grew. Our costs were broadly flat. They were slightly up, which primarily reflects investments we are making in our businesses, in particular in our branch network in Ireland and our IT and digital banking infrastructure.
Reflecting the reduced level of defaulted loans, the restructures we put in place for customers, which are sticking, and a general improvement in collateral values, our provisions, that is, the loan loss charges we took, had a significant improvement in the year 2014. That flowed through on the profit and loss to our accounts.
It might be useful to pause on slide 14, which focuses on the bank's net interest margin. I draw the attention of the members of the committee to both graphs, but in particular the graph which is in the bottom left hand corner. This graph shows the progression in customer pay rates, that is, our customer charge rate and the pay rate. The lightish blue line is the pay rate we pay for funds and the dark blue line is the charge rate. The improvement in our net interest margin has come primarily from a reduction in the cost of money to us rather than a change in charge rates. We anticipate that, as we put on new lending at slightly higher margins and the tracker element of our book reduces as a proportion of the overall book, net interest margin growth will be primarily on the asset side.
Slide 15 gives a little more information on the mix of new business and the mix of new lending that we are doing, broken down between Republic of Ireland mortgages, Republic of Ireland business banking, Republic of Ireland corporate banking, our UK mortgage business and our acquisition finance business. That table shows that in each of our main business lines we have seen good growth in customer demand and our ability to satisfy it.
Given the time, I will skip slides 16 and 17. Slide 18 is a reminder that the taxpayers have been repaid and are in a substantial profitvis-à-vistheir investment in Bank of Ireland. Slide 19 gives a very quick pictorial overview of our market shares and our presences in the Irish economy. Slide 20 is a pictorial representation of our UK businesses.
In summary, the group has continued to deliver on the strategy we set when we recapitalised from the private market in 2011. Our strategy has been focused on an Irish business and our ability to lend money in that Irish business. We do not make money until we lend it and the growth in lending has been a particular stand out feature along with the reduction in the impairment charges, which came into the bank's capital. Our overseas businesses are self-funded. The group provides them with capital but they fund themselves. These businesses are performing in line with our expectations and that has been reflected in our share price and the share price available to taxpayers.
I will ask my colleagues to address the committee on the mortgage issue.
Mr. Liam McLoughlin:
I will cover briefly the situation in relation to mortgage pricing and will focus on presentation slides 51, 52 and 53. We keep pricing of all our products under ongoing and active review. Products, including our mortgages, are priced to reflect the cost of funds to the group, operating costs, including regulatory costs, and the estimated potential loan losses from the portfolio as well as capital and liquidity costs. These are all factors the bank as a responsible lender must consider. The structure and liquidity risk the bank takes against mortgages is a significant factor. We must remember that the bank is providing a 25 to 35 year commitment of money to the customer and we cannot fund for that duration. In accordance with commercial realities and Central Bank and Single Supervisory Mechanism, SSM, macroprudential policy decisions, pricing is risk based using the the loan to value, LTV, band as a proxy.
As recently as January of this year, we announced a suite of attractive fixed rates ranging, depending on risk or loan to value, from 3.7%. These fixed rates are available to both new customers and, importantly, existing variable rate and standard variable rate, SVR, customers. Our costs of funds, as Mr. Boucher noted when dealing with slide 14, reduced by 23 basis points during the course of 2014. This reduction is more than reflected in our revised fixed rate pricings announced in January. In addition, while not a feature across the Irish market, we also give customers, from February of this year, the option to move to a lower LTV band and thus a lower fixed rate pricing on the provision of an up-to-date home valuation. This feature is available to existing variable rate and SVR customers.
The decision to take a fixed rate mortgage, which is always the customer's decision, gives certainty to the customer and the bank for periods of up to ten years, which is the longest term for which we will provide a fixed rate, at a time when fixed rates are at the bottom of an interest rate cycle. At the end of 2014, fixed rate mortgages account for 9% of outstanding mortgage balances. During the first quarter of 2015, circa 50% of new mortgage customers chose a fixed rate draw down. In the month of March 2015 alone, more than 55% of new first time buyers chose a fixed rate. Mortgage markets differ very significantly in structure and features across all EU member states and this prevents an accurate and transparent comparison.
Slide 52 shows that the average SVR we charge in both Ireland and the UK are similar. Our analysis shows that both our fixed rates and variable rates would result in mortgage repayments being less than rental costs. Using publicly available data on www.daft.ie,we will look at a typical three bedroom semi-detached property in, say, Lucan in Dublin or Douglas in Cork. We calculate annual savings for customers of more than €2,000 per year against rental costs.
I will pass over to Mr. Stephen Mason who will cover briefly the mortgage challenge portfolio.
Mr. Stephen Mason:
A consistent application of our policies has meant we continue to make very significant progress in the management of mortgage arrears. Full details are in the presentation but I will make some brief comments. Starting with slide 25, we note that nine out of ten of our owner-occupier mortgage customers are fully up to date with their mortgage payments. Nine out of ten of our owner-occupier customers who were in financial difficulty were offered a sustainable solution and nine out of ten of those customers are meeting the terms of their new arrangement. All of our activities in our approach to mortgage arrears recognise the fundamental importance of the family home. By the end of February this year, the number of owner-occupier accounts in arrears had dropped by 33% from peak levels seen in May 2013. At the end of December 2014, 5.5% of our owner-occupier accounts were in arrears of greater than 90 days. That is materially better than the industry average, excluding Bank of Ireland, where the figure was 11.6%. Slide 25 of the presentation shows that we provided 32% of new owner-occupier mortgage lending in Ireland in 2014. We hold 19% of the national stock of owner-occupier mortgages.
We have some 10% of the national stock of owner-occupier mortgages in arrears, some 9% of the national stock of these mortgages greater than two years in arrears, and we have issued just 6% of the civil bills issued nationally in 2014.
We have included an analysis of the repayment patterns of owner-occupier customers greater than two years in arrears, which shows, regrettably, that half of these customers paid nothing towards their mortgage in 2014. This analysis also shows that the expected monthly payment for these customers averaged €890 a month, less than the average monthly rental cost in Ireland of €950. Further analysis in the presentation shows that uniquely in the market, our owner-occupier mortgage balances greater than two years in arrears fell in quarter four 2014, whereas they rose at industry level. The difference here is quite significant. Some 3.6% of our book is greater than two years in arrears, whereas at industry level, excluding Bank of Ireland, the figure is 8.8%.
On slide 49, we show we have concluded significantly more of our owner-occupier solutions under the mortgage arrears resolution targets, MART, process than the rest of the industry. We have reached a conclusion with 83% of cases, whereas the industry, excluding Bank of Ireland, achieved a conclusion with 61%. Again, the loss of ownership, as part of these concluded solutions, is significantly lower in Bank of Ireland. We also provide significant detail in our pack in regard to personal insolvency, where we show we have voted in favour of 84% of the arrangements that have been proposed to us, higher than the overall Insolvency Service of Ireland, ISI, approval rate of 76%. We fully engage with the ISI, as can be seen from the fact we have a participation rate of 36% or 363 protection certificates issued to the end of March 2015. We provide details of the 18 cases where we were a secured creditor and the client proposed arrangement on slides 37 and 38.
I will now hand back to Mr. Boucher.
Liam Twomey (Wexford, Fine Gael)
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We will move on to questions so.
Seán Fleming (Laois-Offaly, Fianna Fail)
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I welcome Mr. Boucher and his colleagues. We are in the process of meeting with the key banks to discuss the current situation, particularly in regard to mortgages. I noted two bits of good news in the presentation from Mr. Mason. First, I noted that 92% of Bank of Ireland owner-occupier mortgages are not in default and second, that of all the civil bills issued last year, Bank of Ireland was involved in only 6% of them. This is quite a low figure for a big bank.
However, I have a question in regard to unsustainable mortgages, namely where there is an unsustainable mortgage and the mortgage borrower continues to be liable for the recovery of any shortfall between the sale proceeds and the mortgage loan, the negative equity part. When people lose their house, they are homeless. Does Bank of Ireland chase up homeless people for money?
Mr. Stephen Mason:
We answered that question in response to the questions submitted to us. What we said is that mortgage lending is full recourse lending and that after a property has been disposed of, we will engage with the customers to come to an arrangement as to what they can pay in regard to the residual balances.
Seán Fleming (Laois-Offaly, Fianna Fail)
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I take it that is a "yes" therefore that the Bank does follow after homeless people for the balance. The answer is that it is full recourse lending on the property and the person is liable for the recovery of any shortfall between the sale proceeds and the mortgage loan. I am surprised, but Bank of Ireland seems to suggest it does follow up on homeless people for the negative equity.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Bank of Ireland got off to a great start here, with a positive presentation. However, it is now saying it will chase up homeless people. I am amazed it would not leave homeless people alone. Does it not think homeless people have enough trouble, without following them for negative equity? I take it as a "yes" that it will follow up on them, because it cannot say it does not.
On the bank finances, impairment is a significant issue. In the accounts for 2014, how much of a write-back was there in terms of previous impairments? Obviously, the bank has been taking a prudent view each year and as values have improved and the number in default has decreased, I presume it has been able to write back some of what had previously provided for? What is the figure for that?
Mr. Richie Boucher:
The provision to write back a recovery in the accounts was €280 million. That reflected the changes in our financial models and, in particular, reflected a change in house price assumptions. Up to June 2014, we had been making a conservative assumption that the peak to trough fall in house prices was 55%. Then as we considered our provision, we said there was probably another 10% on top of that for cost of disposal and cost of sale etc. As the market improved, from an accountant point of view an ability to continue to maintain a 55% assumption was no longer correct and that was reflected in €280 million of a provision recovery.
Seán Fleming (Laois-Offaly, Fianna Fail)
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What percentage is it now? It was 55%.
Seán Fleming (Laois-Offaly, Fianna Fail)
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What is the final percentage?
Mr. Richie Boucher:
It is roughly around 42% or 43%, but I would also say that it is slightly simplistic to give a bland answer like that because when we look at it, we look at the mix of our book and the locations. As we know, the market is made up of a number of micro markets. Dublin is different from Kerry, for example, and we try to look at the price in the various markets.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Looking at the figures, the impairment in 2014 was €542 million, down from €1.665 billion the previous year.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Therefore, that €542 million was well over €800 million, but Bank of Ireland had a write back of approximately €280 million, for a net rate.
Seán Fleming (Laois-Offaly, Fianna Fail)
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That is still quite a provision in 2014, given what has been said. Is Bank of Ireland over providing?
Mr. Richie Boucher:
We must provide prudently and must make reasonable assumptions. I would say we may be slightly more conservative than some of our competitors. If we look at the relative performance of our Irish mortgage book, as outlined by Mr. Mason, our provision in coverage would be higher than that of most of our Irish competitors. We believe it is appropriate to maintain conservative coverage ratios, because while we have a strong view the economy is recovering, we must learn the lessons of the past. Things go the wrong way.
Seán Fleming (Laois-Offaly, Fianna Fail)
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The slide indicated in the last quarter the cost of funds was 1.03%, yet the standard variable mortgage rate is 4.5%. I know it has been said people can switch to fixed mortgages, but very few have switched. Why have we such a variation between the cost of funds at 1.03% and the standard variable rate of 4.5%? I know Bank of Ireland took a strong view on this at its meeting this morning, but I would say it is making it easier for the Minister for Finance to come down stronger on the banks by its resolute action. Ministers are under significant pressure to exert what influence they can through the Central Bank and Bank of Ireland is making that job easier. AIB was before the committee last week and it suggested there was a possibility of a reduction, but Bank of Ireland has taken a harder line. I suggest that is not helping the bank's case when it comes to time for negotiation with the Minister, but perhaps Mr. Boucher thinks that does not matter anyway.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Coming back to the issue of impairment, Mr. Boucher says Bank of Ireland is at 42%.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Okay. The last topic I want to touch on is one Mr. Boucher may find easier to deal with. Question No. 34 in the document asked about the various issues that go into the costs in determining interest rates and the list included funding costs, operating costs of the bank and credit risk costs.
This is the bit I found interesting because we had Ulster Bank in earlier. Its representatives talked about the historical performance of the mortgage loan book in Ireland as having to be taken into account in determining the interest to be charged on new couples. I accept that Mr. Boucher may not have the answer for me today. If not, he might send us a note. What additional costs are there in Ireland which the bank must take into account in charging interest rates on mortgages that do not apply in other jurisdictions? In thinking about that matter, I note the historical cost of previous performance. We were told an hour ago by another bank that must be taken into account. There are also the capital and liquidity costs. I also see in the document mention of regulatory costs. Is it possible to give a note on the bank's cost structure in arriving at the standard variable mortgage rate? To what extent do the extra regulatory costs in Ireland add to the rate versus other countries? I ask Mr. Boucher to set out the additional costs. The bank still has eligible liability guarantees of approximately €1 billion, although I know it paid some off since year-end, as stated in the document. The preference dividend payments are factored into the cost as is the bank levy. Can Bank of Ireland give us a note of the costs it must take into account, including those imposed on it by the Central Bank and regulatory bodies in Ireland that may not be of a similar scale in other countries? Looking at the document, it appears the bank has to take all of these into account, which adds to the costs. It is very easy to blame the bank for the high variable rate but if that is due to the high costs being imposed as a result of bank levies, regulatory costs and the historical performance rules of the Central Bank, it would be nice to know. How much of the extra cost is being imposed by the State with the bank just happening to pass it on to the customer?
Mr. Richie Boucher:
I understand the Deputy's point but there are a couple of things to say. We will come back to him with more detail, particularly about the capital. As we identified in slide 2 - as a public company, any announcements I make must be made publicly and verified - we have a similar sized mortgage book in the UK to Ireland. They are roughly €26 billion to €27 billion. The exchange rate will have an effect but they are roughly of similar size. We have different product offers and fixed rates and a SVR or base rate concept in the UK as well as in Ireland. Trying to look at a comparable product, which is a variable rate product, where the rate can be adjusted at the bank's discretion, in the second half of last year, our charge rate to the customer in our UK business for our variable rate mortgages was, across all of the variable rate offers - because we have different variable rate offers in Ireland - 4.49% whereas for our Irish book it was 4.3%. As such, there is a slight misnomer that our charge rate is different in Ireland to the UK. We compete aggressively in Ireland and the UK.
To come to a couple of the other points, I could not put my hand on my heart and say we suffer higher direct regulatory costs on our UK or Irish business. Much of the servicing for our UK mortgages is done out of centres we have in Kilkenny and, as such, that provides employment in Ireland. Wage rates are not hugely different between our Irish and UK businesses, broadly speaking. The big difference between our Irish and UK business in mortgages is the historic loss experience, which has been considerable. We have had to have provision charges over the last six years of roughly €1.1 billion on our Irish mortgage book whereas it has been roughly €150 million in the UK. One has to build that into one's capital both for existing and new business. The big difference is the loss experience, which comes into one's capital charge, and also the anticipation of the time to recovery where a customer defaults. The time to recovery is dramatically different in our UK and Irish businesses. I will come back with a more detailed explanation to the Deputy.
Paul Coghlan (Fine Gael)
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I welcome the witnesses and congratulate them on the turnaround in the bank in recent years. It is fair to say the bank is doing better than its competitors overall. The bank is only responsible for 6% of the whole process of attempted repossessions. When does the bank anticipate a pay off to the taxpayer of the remaining 14% or thereabouts? There is public concern at the gap between ECB interest rates and standard variable rates. Where there is severe hardship in the case of some families, is the bank open to third party review of the applicable standard variable rate in circumstances where the customer can demonstrate that the rate is inflicting hardship? Would the bank accept an external agency to arbitrate on that matter in much the same way as the Credit Review Office assists SMEs with credit challenges?
I understand what Mr. Boucher said to Deputy Fleming about full recourse lending. Where a repossession is voluntary with assisted sale or surrender and the bank knows the borrower has nothing else, I presume the bank will not pursue the person with regard to the outstanding debt. There is nothing to pursue. Has the bank analysed those in persistent arrears and established why they are failing to engage with the bank? Engagement is the big thing. What is the total amount of the current level of loans in arrears? Has the bank sold any non-performing loans to debt investors, or vulture funds as they are more commonly known? What steps has the bank taken to ensure that customers are protected where such a transfer takes place? Perhaps it does not arise. I thank the witnesses. That is my lot.
Mr. Richie Boucher:
I will pick up on some of those questions and hopefully my colleague will have a note. I will work backwards. We were required under the restructuring plans with the EU to sell certain assets and loan books, but I cannot recall any Irish mortgage books being part of that sale. We have, in fact, bought performing books. We bought €250 million of performing mortgage books from the IBRC receiver. With regard to a customer with repayment challenges, for nine out of ten of our customers who come to us and fill in the standard form a solution can be provided with a restructuring option. That may take a number of different forms. It can be an extension, split mortgage, etc. In nine out of ten cases, we can do that. If some change in the interest rate is part of the solution, that is part of what we do. Following engagement with and feedback from the committee approximately 18 months ago, we reduced the rate we charge on a split mortgage.
The State's ownership of the Bank of Ireland is a discretionary ownership by the Minister for Finance. That is not something we have control over. Our share register has changed a great deal since 2011 and the type of investor in the bank has changed. At the end of 2013, our top ten investors accounted for 50% of the ownership of the bank, excluding the State, and that is now approximately 34%. Large investors have been able to exit the bank stock as things have evolved at a discount of approximately 4% or 5% for chunks of 5% or 6% of the bank to the prevailing market price. The Minister's decision is the Minister's decision, however. He made a decision in 2011 to follow the taxpayers' money, in effect, and invested in the bank at that time when the stock price was 10 cent. The stock price is now in excess of 35 cent, so the Minister looks to me like he knows what he is doing in terms of that investment.
Paul Coghlan (Fine Gael)
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I thought the price was 37 cent.
Mr. Stephen Mason:
For clarity, I note that we were required to sell a small portion of the performing part of our mortgage book under the EU restructuring plan. That was the ICS mortgage book which was sold to Dilosk, but I do not think that is what the Senator was referring to in terms of selling mortgages in difficulty. They were performing mortgages.
Paul Coghlan (Fine Gael)
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Are the witnesses saying the bank sold off some of the ICS book?
Mr. Stephen Mason:
In terms of the standard variable rate, SVR, the vast majority of customers that are in difficulty are on tracker rates. At the request of the committee approximately 12 months ago we looked at the issue of split mortgage arrangements for SVR customers in difficulty. We give them a reduced rate on the warehoused portion of their split mortgage.
Mr. Stephen Mason:
In terms of people who are not engaging, it is not a significant proportion of our book. We have a number of strategies in place. We try to engage with customers from the start of the process, including by telephone and in writing. If that does not work we then move to what is called the non-co-operating phase with customers, as provided for under the code of conduct on mortgage arrears, CCMA. Under provisions 28 and 29 of that code, a series of letters are issued in which we warn customers of the implication of non-co-operation with the bank, following which they move into the non-co-operating phase. If they continue not to engage, they then move into the legal process. What happens, typically, is that as this process evolves we get engagement at each stage from customers. Why some customers have not engaged with us, I cannot say. I cannot explain why the small percentage of customers who have not engaged with us have not done so. They will ultimately end up in the legal process. We are open to them engaging with us at any stage of the process.
Paul Coghlan (Fine Gael)
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What percentage of people are not engaging?
Paul Coghlan (Fine Gael)
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In regard to the Credit Review Office, is the bank open to arbitration with it in extremely difficult cases, of which, I presume, there are very few?
Peadar Tóibín (Meath West, Sinn Fein)
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I thank the witnesses for attending today's meeting. Congratulations on the results achieved so far with regard to the bank. Perhaps Mr. Boucher will clarify if Bank of Ireland intends to reduce the standard variable rate.
Peadar Tóibín (Meath West, Sinn Fein)
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Is there any plan to reduce the standard variable rate before 2016?
Peadar Tóibín (Meath West, Sinn Fein)
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I understand Bank of Ireland does not get involved in mortgage write-downs.
Peadar Tóibín (Meath West, Sinn Fein)
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The bank does get involved in corporate debt write-down.
Peadar Tóibín (Meath West, Sinn Fein)
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I understand the logic of the bank not wanting to give write-downs lest that becomes a practice within the market and it is not possible to provide write-downs for many people. We hear regularly from banks that they deal with people on a case-by-case basis. There are cases where an individual or family would be able to deal with, say, two thirds of the debt owed but cannot deal with 100% of the debt owed. In some of those cases, the persons involved may go bankrupt or pay no money back to the bank. There would be a net benefit to the bank in writing down the debt in those cases. Why, in those cases, does the bank not allow for write-down? In a similar corporate scenario the decision is made positively for a write-down. There has to be a net cost to the bank in living up to its no debt write-down rule in certain cases.
Peadar Tóibín (Meath West, Sinn Fein)
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Would it be possible for the bank to take equity in a house in a similar situation?
Peadar Tóibín (Meath West, Sinn Fein)
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There would be equity splits in certain types of mortgages with certain organisations.
Peadar Tóibín (Meath West, Sinn Fein)
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From the customer's perspective, this looks like one rule for corporate Ireland and a different rule for families in Ireland.
Mr. Richie Boucher:
We have made a lot of progress. We look at developments in the market that might work. We recognise that there are unique situations in Ireland. We have a large business in the UK, with a mortgage book which we manage. If there is some solution whereby we could take an equity in a property and we think that would enhance the value, we would look at that. However, I must reiterate that a mortgage is to an individual. Clearly, one cannot take equity in an individual. The property rather than the lending is the security.
Peadar Tóibín (Meath West, Sinn Fein)
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In comparison with other banks, Bank of Ireland has had good results in terms of its level of arrears. Is it the case that the bank entered this phase with that advantage or is it the case that the manner in which the bank has managed the process has given it that advantage?
Mr. Richie Boucher:
It is hard to answer that. As we entered the crisis Bank of Ireland had a lot of problems, although probably slightly fewer problems than some of its competitors. If we look at other metrics like, for example, the haircuts we took on loans transferred to NAMA, they were significantly below the industry average and provisions we have taken in business and other corporate books have been less than our competitors. Our books may have been better positioned coming in, including our Irish mortgage book. I think that was probably a factor. We probably focused on this earlier than our competitors did. However, in terms of the thrust of the Deputy's question, I think the consistency of our policies and procedures has been a feature of our relative performance. There is confusion as to what some of our competitors do and do not do.
Peadar Tóibín (Meath West, Sinn Fein)
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Mortgage to rent appears to be the big failure in the whole process. Allied Irish Bank appeared before the committee last week, at which time its representatives indicated that zero mortgage to rent cases have been concluded by that bank. I note from Bank of Ireland's results that it has completed five cases. Where does the problem lie and how can it be fixed?
Mr. Stephen Mason:
Perhaps I can take that question. The Deputy is correct that we have completed five cases. Nine are sale agreed and contracted. It is hoped that they will complete shortly as well. There are another seven in respect of which we have accepted the offer made by the approved housing body. It is now with the customer to accept what has been proposed. There are five completed and a number of others close to completion. There are 50 awaiting confirmation of demand from the local authorities and AHB. There are a number of others that for various reasons did not proceed, including a lack of demand for social housing and the customer opting not to participate in the scheme. I agree that the numbers completed at this point are disappointing. We are great supporters of mortgage to rent. It appears to us to be a very good solution to the problem for people whose properties are suitable for social housing, and for the people themselves.
We wrote to the committee 12 months ago, outlining details of how we thought the process could be improved. There have been some changes made recently. A new protocol, while it has not been signed off on, is in the process of being agreed. It deals with some of the issues around timelines and the amount of hand-offs that are in the process. There are a number of things that we believe need to be done to improve the process, including the establishment of a centralised dedicated agency to deal with mortgage to rent. The eligibility criteria undoubtedly needs to be revisited.
For example, if customers had any small equity in the property they would not be eligible and if there was no local demand for social housing, they would not be eligible. They would be ineligible if incomes were over a small threshold and the types of family unit in a property sometimes cause the property not to be eligible for social housing. They are among the bigger issues but there is nothing that could not be overcome with the right people in the room. The process could be made to work.
Peadar Tóibín (Meath West, Sinn Fein)
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Are some counties worse than others with regard to mortgage to rent schemes or is there an uneven experience?
Peadar Tóibín (Meath West, Sinn Fein)
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The witnesses mentioned that the bank was only involved on a small number of occasions in buying or selling loan books. ICS and the IBRC were mentioned.
Peadar Tóibín (Meath West, Sinn Fein)
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What about selling?
Peadar Tóibín (Meath West, Sinn Fein)
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The following issue may not directly affect the Bank of Ireland but the witnesses may be able to shed some light on the regulation from the Central Bank. Allegations have been made that banks have sold loans to third parties for far less than what the debtor was originally happy to agree in an arrangement with the bank. The logic is that the debtor - the householder or businessperson - would be in the property and the third party would receive a very cheap loan. There have been allegations that there are not enough checks and balances within the system to prevent insider dealing between a bank and third party in such a scenario. Are there enough checks and balances to ensure, from the Central Bank perspective, that if loans are sold for values lower than a potential arrangement with a debtor, it would be done in a manner that would safeguard shareholders' interests?
Mr. Richie Boucher:
We have not done it and as a public company, and particularly because we are quoted on the London Stock Exchange as well as the Dublin exchange, there are rules, which are roughly the same. Up to recently we were on the New York Stock Exchange. There are very strict requirements around connected parties. We must disclose any transaction of anybody who is a material shareholder. The materiality definition is someone who owns probably more than 5% of the company. If we do a transaction and there is any indication that it might not be a commercial transaction, it must be disclosed to all the shareholders.
I have an example, although it is not related to what the Deputy outlined. The Deputy might remember, for example, that our shareholders had to vote to allow us do the promissory note transaction with the State for the IBRC notes in 2013. That was because we must have transparency among all shareholders if we are doing what could potentially be perceived as a non-commercial transaction with a connected party, or somebody who has a shareholding in the banks. The rules are very strict and the board has a very high requirement in that regard.
Peadar Tóibín (Meath West, Sinn Fein)
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My final comments go back to the residual debt question that has been asked previously. It is quite shocking that Bank of Ireland is chasing residual debt, potentially, from a homeless person. Is there a cut-off period? For example, if I surrendered my home and there was residual debt of €100,000, would Bank of Ireland after seven years come to an understanding that there is no logic to pursue the residual debt? Will the individual have that hanging over him or her for a lifetime? Representatives from Ulster Bank were here earlier and they indicated that between seven and ten years is as long as they would chase residual debt.
Mr. Richie Boucher:
I will speak in generalities rather than about an individual case, as that is sometimes a rabbit hole in which people can disappear. In general, we recognise that there must be an incentive for the customer to support a proposal. We are pragmatic business people. We are commercial and recognise that in a commercial world if we would like somebody to do something, there is incentivisation. That incentivisation can be either that after a certain period of performance, there could be a period of further enhancement from the customer's perspective. It is a commercial arrangement with a customer but we recognise that there must be an incentivisation for somebody to co-operate. It could be a disincentivisation of going legal or a positive disincentivisation, putting something in it for the customer in order to co-operate. That is the way we try to operate.
Liam Twomey (Wexford, Fine Gael)
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Is Deputy Spring sharing his time?
Arthur Spring (Kerry North-West Limerick, Labour)
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We will see. I thank the witnesses for attending. Will they give an estimate of the market capitalisation or value of Bank of Ireland at the moment?
Arthur Spring (Kerry North-West Limerick, Labour)
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Approximately.
Arthur Spring (Kerry North-West Limerick, Labour)
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The value five years ago would have been roughly zero or heading towards negative territory.
Arthur Spring (Kerry North-West Limerick, Labour)
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What was the lowest point of the share price?
Mr. Richie Boucher:
More shares have come into issue etc. We can consider the recent past. The share price was 10 cent at the recap. It came to just above or below 8 cent because we did a debt for equity swap with bondholders and they sold into the market in late 2011. The share price was at its lowest in late 2011, and it was around 8 cent.
Arthur Spring (Kerry North-West Limerick, Labour)
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My rough calculation is there was approximately 400% increase from the very lowest point to where it is today. That is largely due to the balance sheet repairing itself. Is that fair enough?
Arthur Spring (Kerry North-West Limerick, Labour)
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Obviously the staff had an input. The balance sheet of the bank repaired itself and the value comes from that.
Arthur Spring (Kerry North-West Limerick, Labour)
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What percentage of the loan book would be property-related, particularly with respect to mortgages?
Arthur Spring (Kerry North-West Limerick, Labour)
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That is approximately 200,000 mortgages, or a quarter of the Irish market.
Arthur Spring (Kerry North-West Limerick, Labour)
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With the increase in the price of property in Ireland, the balance sheet has repaired itself and, ultimately, the share price has repaired itself. Would that be a logical progression as to how it has worked?
Arthur Spring (Kerry North-West Limerick, Labour)
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For a bank, the asset is the loan, and that is secured by the property. The properties have increased in value, so therefore they are more viable and attractive for securitisation. That is where value comes from.
Arthur Spring (Kerry North-West Limerick, Labour)
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The witness would acknowledge that the value of property increasing is increasing the value of the bank ultimately.
Arthur Spring (Kerry North-West Limerick, Labour)
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We had Ulster Bank here earlier saying the money it is currently providing for site finance and working capital for new home development is about 10% of what it was providing at the height of the boom. If every bank applied that, we would have about 8,000 houses built a year, less than half of where the market is at. I want to know what Bank of Ireland is currently providing for site finance and working capital for builders as a percentage of what it provided at the height of the boom.
People are now struggling to get affordable homes. Might there be a rationale in place whereby the banks are seeing their own balance sheets improving due to the fact that the price of property is improving, without providing working capital and site finance? Why would they provide this when the law of supply and demand would mean they would only bring down the value of the property that is ultimately backing their loans? Relative to what it provided at the height of the boom, what site finance and working capital facility is Bank of Ireland now providing for start-up homes?
Arthur Spring (Kerry North-West Limerick, Labour)
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I have gone through this, and in respect of SMEs Bank of Ireland has €9.6 billion out. The €250 million to €500 million-----
Arthur Spring (Kerry North-West Limerick, Labour)
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I understand. How many houses would Mr. Boucher foresee being built with the backing of Bank of Ireland? Can we do the quick math on that?
Arthur Spring (Kerry North-West Limerick, Labour)
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Is site finance built into that or is it just working capital?
Arthur Spring (Kerry North-West Limerick, Labour)
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What is the bank's prerogative on supply and demand in mortgages?
Mr. Richie Boucher:
We see a market demand for it. We do not associate the two. Strange though it may seem, it can be self-fulfilling for property values. If the market is completely frozen, there is uncertainty in property values. The more liquidity is in the market, the more we have certainty about our provisioning and our comfort levels. I do not think there is an association.
We do see that there is a business opportunity for us in providing money to housing finance. Our biggest single issue is the customer's ability to provide equity. For example, we will provide about 60% of site finance and about 70% to 75% of the working capital for the development. Then, by definition, the customer has to produce equity.
Arthur Spring (Kerry North-West Limerick, Labour)
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If an individual had 50% pre-sales, would the bank change its rules on working capital?
Arthur Spring (Kerry North-West Limerick, Labour)
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If I may say so, it is making it very difficult for the market to catch up with demand. The banks do not seem to be engaging on this at all. We are hearing that between 15,000 and 20,000 houses need to be built per annum and what I can glean from the banks thus far is that this is not the role they want the property market to play in their business.
Arthur Spring (Kerry North-West Limerick, Labour)
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I am aware of that. What I am concerned about is people who are trying to get on the ladder. The 80% loan-to-value, LTV, ratio and the decrease on the affordability cash flow means that the price of housing is beyond the reach of many people. Supply is probably the biggest way of correcting that as it would create competition within the market, as Mr. Boucher acknowledged earlier when discussing his own variable methodology. What is Bank of Ireland going to do?
Looking at the reports the bank has provided to the Central Bank historically, one would have to find exactly how much money it used for site finance, agriculture and so on. The fact that this sum has significantly decreased is, in my opinion, improving and helping the share price of the bank. I want to see more houses being built and I need the banks to provide more site finance and working capital. I am here to explain that we need more engagement from the banks.
Mr. Richie Boucher:
We see a business opportunity in lending money for developments. Currently, we see a mix and a lot of what we are doing is what we would call infill. That might be someone who is building 20, 25 or 30 houses. In the natural cycle, that builder makes a profit and has equity for the next transaction.
Arthur Spring (Kerry North-West Limerick, Labour)
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If the bankruptcy period is reduced from three years to one year, how is that going to affect the bank? What kind of losses does it expect to incur?
Arthur Spring (Kerry North-West Limerick, Labour)
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I have gone through this with Bank of Ireland in this committee on a number of occasions. It does not write off debt but rather keeps everybody and anybody on the line. Why would an individual not head towards bankruptcy and crystallise the loss for the bank? Surely that will have a negative impact on the bank's balance sheet.
Arthur Spring (Kerry North-West Limerick, Labour)
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The bank has provided for it but is not allowing it to happen.
Arthur Spring (Kerry North-West Limerick, Labour)
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The bank is not providing any write-off. Is Mr. Boucher acknowledging that it needs to be done or could be done?
Arthur Spring (Kerry North-West Limerick, Labour)
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Bank of Ireland is covering the risk but not actually doing anything in day-to-day practice. That is all right. I know it is the bank's modus operandi.
Stephen Donnelly (Wicklow, Independent)
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Mr. Boucher and his team are very welcome today. I would like to start with Mr. Boucher's thoughts on an issue that is not related to Bank of Ireland but rather concerns IBRC. Imagine if there was a company that owed Bank of Ireland €150 million and the market value of the company, which was insolvent and could not pay its debts was approximately €50 million. If the bank decided to sell the company and the €50 million was realised, that would leave the bank with a write-off of €100 million. Is there any situation in which the bank would condone a payment to the shareholders of several million euro which the bank would forgo as part of the total sale price?
Stephen Donnelly (Wicklow, Independent)
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Please.
Mr. Richie Boucher:
In general terms, we do have situations in which we need the co-operation of management or shareholders to keep a company going as a going concern. In particular, this would apply to construction or continuous process-type companies. For companies with dead assets where we do not need the co-operation of the management, we have a different view. In situations where the company must be kept alive to enhance or maintain its value, one might need co-operation. These are different situations which primarily reflect the nature of the company's business. I get criticised for that but our job is maximise recovery and in some situations we would have to do things we would prefer not to do in order to maximise value.
In answer to Deputy Tóibín's question earlier, in certain situations one does recognise that incentivisation or disincentivisation is an appropriate part of commercial negotiation.
Stephen Donnelly (Wicklow, Independent)
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I thank Mr. Boucher and appreciate that we both have to be careful. In his time as chief executive of Bank of Ireland since 2009, has the bank ever allowed a deal where a substantial amount was written off by the bank - up to €100 million or more - and where part of that deal was a multi-million euro payout to the shareholders of the insolvent company?
Mr. Richie Boucher:
I would guess that in some situations, for example in our leverage finance business, which is an international business, we have had to do that, usually as part of a club with other banks or in deals ourselves. I would guess in some work-out situations we have had to incentivise either management or existing shareholders.
Sometimes existing shareholders control certain patents. That might be an example, they have certain controls over the company that they are not going to surrender. The alternative is to put a receiver and liquidator in or the equivalent, Chapter 11 in the US, for example.
Stephen Donnelly (Wicklow, Independent)
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Sorry for cutting across, but I am conscious of time. Is Mr. Boucher aware of any situation where a cash payment of several million euro has been made to shareholders when the bank had significant losses?
Stephen Donnelly (Wicklow, Independent)
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Thank you. I would like to move on to mortgage arrears. As Mr. Boucher knows, I have been consistently very critical of Bank of Ireland’s approach to mortgage arrears. We will go into the numbers in a minute but I want to talk about the tone. When I talk to people involved in helping borrowers, be they commercial, not-for-profit or statutory operators, or at least funded by the public purse, and Bank of Ireland comes up, the words used for the bank’s approach to borrowers are “aggressive”, “unreasonable” and a word used to me this morning was “deplorable”. I know there are several personal insolvency practitioners, PIPs, who refuse referrals on Bank of Ireland cases because they say Bank of Ireland is impossible to deal with and they will not spend any time on it. As chief executive and senior manager of a bank with a very long tradition in this country, which has always had very positive relationships with the private sector and the community sector, and which was rescued at a particular point, how do Mr. Boucher and Mr. Mason respond when the bank they run is consistently, and pretty much unanimously, singled out for this sort of criticism, with words such as “aggressive”, “unreasonable” and “deplorable”?
Mr. Richie Boucher:
I would first of all point out that in practice people do not tend to go to their Deputy when something has worked. The statistics show when talking about mortgages that in nine out of ten cases and this is verifiable information, we can provide a solution to the customer that is a higher proportion than our competitors, despite the fact that our book is demonstrably better performing. In nine out ten cases where we have offered a restructure, it has been accepted and they are performing.
Stephen Donnelly (Wicklow, Independent)
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That may be true but-----
Stephen Donnelly (Wicklow, Independent)
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That is fine, but the statistics say nothing for the tone and the cause. They show the outcome. A perfectly reasonable response is that borrowers are signing on the dotted line because they are scared of Bank of Ireland in a way they are not scared of the other banks because they consistently see it operating in a much more aggressive manner. We do not know. That is the realm of speculation. What is not speculation is that any Deputy, or anybody working to help borrowers, will consistently single out Bank of Ireland, which has a proud tradition in this country, from the main banks – I am not talking about the sub-prime lenders who do not always act responsibly - and use words such as “aggressive”, “unreasonable” and “deplorable”. What does Mr. Boucher say to that?
Stephen Donnelly (Wicklow, Independent)
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Does it bother Mr. Boucher that his bank is regarded in this way?
Mr. Richie Boucher:
I am concerned on an ongoing basis about the image of our bank and that is why I keep reiterating the facts: when we engage with the customer, and we have better engagement with customers, we do not have to employ third parties, we get more restructures offered and more of our restructures stick. The fact that other banks have confused messages and approaches and some kind of a lottery system for what happens, the consistent application of our policies, processes and procedures, has us where we are and the inconsistent lack of policies, processes and procedures has our competitors where they are.
Stephen Donnelly (Wicklow, Independent)
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Let us talk about that. The expert review on repossessions states the following as Government policy:
The Government’s paramount objective in the context of resolving the mortgage arrears problem is to keep borrowers in their homes wherever feasible; repossession of private residences is a last resort when all other options have failed. The statutory and regulatory frameworks have already been strengthened in order to achieve this objective.
Two weeks ago I spent the morning in Bray Circuit Court. One of the repossessions granted was sought by Bank of Ireland. The lawyer representing the bank admitted in court that repayment had been made the previous month. My understanding is that the amount was above the level of interest. The payments of the mortgage were occurring and mortgage arrears had built up in 2014. I know Mr. Boucher does not have the specifics of that case in front of him and he cannot comment on it yet it appears blindingly obvious that Bank of Ireland is moving to repossess houses when all other options have not been exhausted and when borrowers are making payments. What does Mr. Boucher say to that?
Mr. Richie Boucher:
I cannot comment on an individual case. I note the example the Deputy gives. We have to go through a very significant route to get a repossession. Repossession is a last resort. In our presentation we show that of the civil bills sought by banks 6% are from Bank of Ireland, the other paragons of virtue are at 94%. As a proportion of our book and as to where we are, we do not use the threat of court proceedings as a negotiating tactic. The other banks the Deputy describes clearly do. They bring people to court as a negotiating tactic.
I cannot talk about the anecdotes the Deputy hears. All I can talk about is the verifiable available information, which is that Bank of Ireland accounts for 6% of the civil bills despite having 21% of the mortgage market. I can only deal with the facts as I see them. It disappoints me. I do not like the image of our bank being given in the terms the Deputy describes. It is not an appropriate image. I have 500 colleagues who are trained to do their job for the bank but to do it in as empathetic way as possible. We do not use pejorative words around our customers as other people do. They are our customers and they have challenges. We do have practices, policies and procedures. Some people do not like them but they are consistent.
Stephen Donnelly (Wicklow, Independent)
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If I and others were to provide Mr. Boucher with a portfolio of testimony, maybe from individual borrowers but also from people working in this field with all lenders that identify Bank of Ireland as being on its own in the level of unhelpfulness and aggression used in these cases does he believe who might be factored into changes in the bank’s policy? I understand that Mr. Boucher’s job under law is to return value to his shareholders but the bank’s SVR mortgage is higher than that of several of its competitors. The verifiable word in the market is that if a borrower gets into trouble he or she will be treated in a much less reasonable and humane way by Bank of Ireland than by its competitors. If it turns out that the word is the bank is more aggressive, and if it is more expensive, that begs the question why would anybody take out a mortgage with the bank. With that in mind, would Mr. Boucher be open to reviewing testimony with a view to changing the tone and approach Bank of Ireland has taken consistently over the past few years when working out mortgage arrears problems, as I am told every day by people working in the field?
Mr. Richie Boucher:
Any information that allows me to do my job better and gives me an understanding of the bank and an understanding of the perception of the bank is always welcome. I cannot promise that when I get a certain piece of information, it will lead to a certain action. What I do promise is that any information that is provided to me which helps me do my job better, I take seriously. I would be very willing to accept a presentation from the Deputy.
Stephen Donnelly (Wicklow, Independent)
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I thank Mr. Boucher.
Michael Creed (Cork North West, Fine Gael)
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I welcome Mr. Boucher and his team. He has given a very robust defence of the bank and the statistics make for interesting reading. I have to say I concur with the latter point made by Deputy Donnelly.
Mr. Boucher is ahead of the posse. He has made reference to the other banks, in somewhat pejorative terms, and how they might manage their business. Undoubtedly, we have learned the following from our engagement with people like MABS, personal insolvency practitioners, New Beginnings or whatever. The overwhelming body of evidence, and this is from people whom I would deem to be reasonable and impartial observers, is that Bank of Ireland is back to business as usual. Given what we have been through, and given the fact that the taxpayer bailed the bank out, although I appreciate that the money has been paid back, there was a naive expectation that it would never be back to business as usual - that which preceded the crash that we have been through - and that there would be some moderation on the worst excesses of the profit motive in the bank. I am a capitalist and support the bondholder. In that milieu it must be possible to have a more humane approach to clients, particularly mortgage holders, who are in difficulty.
I suspect the following will inevitably be the case and is where the bank should be concerned. People will not forget how they were treated. There is a lot of people who feel they are not being treated very fairly. In response, the CEO will resort to statistics and dismiss anecdotes. From the wide range of people who have expressed such a view, and I would suggest if one canvassed the views of all of the Oireachtas Members, one would get significantly the same point of view that has been made by Deputy Donnelly and I, the view is that Bank of Ireland would be perceived as the most difficult bank to engage with now. I understand the points that have been made by the CEO and he may wish to repeat them. It might be best if he took on board what has been said. The bank is ahead of the posse and has repaid its dues to the State but its obligations to change practice does not end there. I know the bank has a responsibility to its shareholders to maximise returns for them. Somewhere in between the bank's customers must receive due consideration. That is the end of my opening remark.
I will now ask a few questions. Credit rating agencies have given the bank a particular status or standing and it operates in the Republic and in the UK. Can the delegation give us information on its credit rating by the rating agencies? They take into account all of the risk factors that impact on the bank's cost of funds, etc. Do they say the Republic of Ireland is a more difficult place to do business, relative to Northern Ireland? Do they say it is the same risk rating? Do they say it is a different rating for the UK? What is Bank of Ireland's credit rating where it operates?
Mr. Richie Boucher:
We deal with four different credit rating agencies. Before I get to our own, I will talk in a general attitude because that is much of the thrust of the Deputy's question.
Different agencies look at things differently. Standard & Poor's, in its rating, places a huge emphasis on what it calls the systemic-related issues. That means a bank is very tied with the sovereign ceiling and then the systemic issue. The organisation is very open and provides a very clear methodology. There is a high emphasis on the system so one cannot consistently outperform the system. I can see the sense in that because no matter how good one is, if the system is problematic and the country has issues, then one's own creditworthiness is impacted by that.
Moody's operates a slightly different position. It places less emphasis on the system but a big emphasis on the macro or the performance of the economy when it looks at banks of our size. Fitch is much more focused on the individual bank. For each of the credit rating agencies, our own rating has improved. We are still below investment grade for long-term debt but for short-term debt we are above investment grade. It does vary depending on short-term or long-term deposits. In general terms, the bank's improvement has contributed to that situation. Probably the biggest factor that influences our credit rating today is the perception of the sovereign.
Michael Creed (Cork North West, Fine Gael)
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The bank trades in the UK. Does it have a different rating for its UK operation?
Michael Creed (Cork North West, Fine Gael)
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Is the rating on a par?
Michael Creed (Cork North West, Fine Gael)
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That implies that the agencies see the risks as being the same.
Mr. Richie Boucher:
As we have seen, the improvements in our credit ratings have been partially influenced by the bank. The primary driver in the improvement of the credit ratings has been the improvement in the system and in the sovereign. I know from my engagement with the credit rating agencies that they are a lot more positive about Ireland and the system than they would have been two years ago.
Michael Creed (Cork North West, Fine Gael)
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The bank's UK operation is in the mortgage business as well. If the agencies give it a similar rating to its operation in Ireland, that suggests they consider the risks to be comparable. It would equally suggest that the rates a customer pays for a standard variable rate should be comparable but they are not.
Michael Creed (Cork North West, Fine Gael)
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For fixed rates.
Stephen Donnelly (Wicklow, Independent)
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In March.
Michael Creed (Cork North West, Fine Gael)
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What is bank's net interest margin in both cases?
Michael Creed (Cork North West, Fine Gael)
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Is it comparable?
Michael Creed (Cork North West, Fine Gael)
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What about fixed rates which are substantially lower?
Michael Creed (Cork North West, Fine Gael)
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Will Mr. Boucher come back to us about the fixed rate issue and the difference?
Michael Creed (Cork North West, Fine Gael)
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I wish to ask a question about competition in both jurisdictions. It is true to say, to an extent, that competition in the Republic stems from banks that are exiting, at one stage or another, very difficult circumstances. All of them are trying to correct their balance sheets and nobody is going to rock the boat too much. I suggest that competition is much more aggressive in the UK market.
Michael Creed (Cork North West, Fine Gael)
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It is still more aggressive in the UK than it is here because the bank is not in the financial position to-----
Mr. Richie Boucher:
There are a lot of regulatory restrictions in the UK as well on the level of aggression one can have in one's office and that. They have macro prudential requirements in the UK as well.
We now have competitors in the mortgage market and each of them is a meaningful competitor. Between KBC, Permanent TSB, AIB, Ulster Bank and ourselves, each of those competitors are meaningful. In other words, they have more than 10% market share. We have about 1% of the UK market. Our business in the UK is probably a little bit less.
Michael Creed (Cork North West, Fine Gael)
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I have a few questions on personal insolvency arrangements where the bank has used a veto on proposals. I accept what has been said in terms of statistics and influence and that across the industry they are the lowest. In what circumstances does the bank veto a proposed deal?
Mr. Stephen Mason:
As can be seen from the figures, we veto a very small number. We have voted against 18 cases. There have been 243 cases voted on and we have voted against 18 cases, which involve secure credit, for a variety of reasons. We have given the full detail on the 18 cases.
To summarise, which is what the Deputy asked for, it would largely be because the arrangement would not have returned the customer to solvency. In many cases it was that the proposal was not for what was allowed for under the Act, which was a six-year arrangement, but was for a shorter arrangement for something like a year, when the customer had clear repayment capacity to pay some of his or her debts over a six-year period.
In a couple of cases, there were assets outside of the jurisdiction, holiday homes and so on, which it was decided not to include in the personal insolvency arrangement. On that basis, we did not vote for it.
Michael Creed (Cork North West, Fine Gael)
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There is an ongoing public debate on whether the bankruptcy legislation should be amended again to reduce the discharge period from three years to one. Does Bank of Ireland have a view on that and, if so, has it expressed that view to Government?
Michael Creed (Cork North West, Fine Gael)
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I am thinking about the bank's experiences in the UK market.
Mr. Richie Boucher:
The big difference in the UK regime is that the mortgage always gets absolute primacy. The regime here is quite different, with unsecured debtors given a higher proportion of consideration than they are in the UK. In the case of a lot of PIAs in this jurisdiction, the mortgage is left aside. Moreover, the repossession process is different in the two countries. We have a better-performing book in the UK than in Ireland. While we will repossess approximately 600 properties in the UK next year for a similar-sized book, I expect our figure for Ireland will be approximately 300. It is a different process, approach and attitude in the UK. Different markets will always have different cultural issues, different prices and different capital. I said earlier in response to a question from Deputy Fleming that we have to put more capital against an Irish mortgage than we do against a UK mortgage because of our loss experience here and because the process of recovery is different.
Michael McNamara (Clare, Labour)
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Mr. Boucher said that part of the reason that Bank of Ireland's performance was better than its competitors was that its books were better positioned going into the crisis. Was that partly because of the personal relationship between bank personnel, particularly bank managers, in branches across the country and their customers? Is there a risk now, as the bank seeks to drive down costs and increase profitability at branches, that those personal relationships will be lost? Is there a danger, in short, of throwing the baby out with the bath water?
Mr. Richie Boucher:
There was a combination of factors which meant Bank of Ireland was different from its competitors. However, let us not take away from the fact that we did not come into the downturn well positioned. The fact that our competitors were in a far worse position is not anything for us to be particularly boasting about. We were relatively better but in a field where others were very badly positioned.
Michael McNamara (Clare, Labour)
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I presume Bank of Ireland was relatively better positioned because it engaged in more prudent lending than its competitors. Was that in some part because of the personal relationships that were built between personnel and customers? The bank maintained those personal relationships for longer than other lenders before decisions were effectively made to conduct business remotely.
Mr. Richie Boucher:
I have worked at Bank of Ireland for nearly 12 years. In all that time, no member of staff, from the chief executive down, has had an individual discretion. There always has been the requirement for a second sign-off. I ask my colleague, Mr. McLoughlin, who runs our Irish business, to explain the structure and strategy for our branches.
Mr. Liam McLoughlin:
In 2007, Bank of Ireland had a network of more than 250 branches across the country. That number remains the same today. We see the engagement and outreach between branch and local community as being fundamentally important to our business. We are the only institution that has not reduced its branch footprint. In fact, we continue to invest in it quite significantly in terms of both resources and branch layout. We have arrangements in place across the country to facilitate very significant investment in local enterprise. We have conducted enterprise week events, for instance, where the local branch and staff work very closely with the local community. In the past 18 months we have invested in an initiative called Enterprise Town, which is another way of supporting local businesses. So far this year we have held Enterprise Town events in Ballincollig, Oughterard and Callan, and we intend to invest in 40 other towns across the country in 2015. That engagement, involving branch managers and staff working with the local community, is of vital importance to us.
Michael McNamara (Clare, Labour)
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I was aware that Bank of Ireland had not reduced the number of branches in County Clare, but I did not know this was the case nationally. I also am aware, however, that the bank has hugely reduced the services available at all local branches in Clare. There was a time when people going into their bank could expect to talk to a human being rather than having to interact with a machine. Automated services reduce costs, of course, but there are major problems when the machines break down.
Mr. McLoughlin spoke about Bank of Ireland's commitment to local communities. In a context where the Central Bank is trying to move us all towards a cashless society, ATMs have become more and more important. When they break down there is a serious problem, particularly for businesses which are reliant on cash. In my home town of Scariff, the machine breaks down every Christmas and is not fixed until the new year. It is an issue I have raised with the bank's staff. The problem is especially serious because Scariff is served only by Bank of Ireland, a scenario that applies also to three other Clare towns, namely, Tulla, Milltown Malbay and Kilkee. When the machine breaks down and there is no possibility of fixing it over a holiday period, this impacts negatively on the bank's customers, including business customers who rely on people having cash to spend it in their pubs, shops, restaurants and so on. When no money is available from the ATM, people simply move on to the next large town where the ATM facility of AIB or another of Bank of Ireland's competitors is actually working. That leaves a very poor impression.
I was contacted by a solicitor in Scariff recently who, although he is not reliant on ATM services as he is not a retailer, recognises how damaging this is for the businesses on which he relies. Furthermore, he pointed out, one cannot drop a letter into the bank's letter-box, because it is screwed shut. If one tries to contact the branch by telephone, one is put through to a central telephone service somewhere in the country. In other words, the branches are no longer bank branches as people would always have understood that concept. We are heading into a bank holiday weekend and there undoubtedly will be issues. Will Mr. McLoughlin come back to me next week with information on how many of the bank's ATMs did not work for the duration of the weekend, including the status of the facilities in Scariff, Tulla, Milltown Malbay and Kilkee? In the case of those four towns, as I said, the Bank of Ireland ATM facility is the only one.
Michael McNamara (Clare, Labour)
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It is not just Scariff. That is where I live, so I hear the most about it, but I have heard the same thing about Tulla, Kilkee and Milltown Malbay. As I said, this is a particular issue in those four towns because there is no other ATM there.
Mr. Liam McLoughlin:
To come back to strategy, the branches are very important to us, and it is vital to ensure they remain commercially viable. If the machines are not working, the branches will not be commercially viable. I will follow up on the cases to which the Deputy referred.
Our focus is very much about enhancing our customers' experience and there is a significant investment going into ensuring that is the case. While the branch footprint has been maintained, there has been a significant shift in the types of services offered. Customers do a lot of their transactions now using the self-service machines. When people go into the branch, there is always a welcome adviser to meet them. Customers across all demographics tell us they like using the self-service machines.
Michael McNamara (Clare, Labour)
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Not when they are broken.
Mr. Liam McLoughlin:
Clearly not. It is disappointing when that happens and I will follow up on it for the Deputy. In a range of our branches, certainly in the more rural locations, we have put in place lodgement ATM machines, which means the opening hours are effectively now 24-7. Our focus is on increasing customer service and enhancing customer experience. I am disappointed to hear about the issues the Deputy raised, and will follow up on them.
Michael McNamara (Clare, Labour)
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Unfortunately, these incidents are more the rule than the exception over bank holiday weekends in the towns I mentioned.
Michael McNamara (Clare, Labour)
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I accept that, but it is particularly frustrating for retailers when it runs out on the Friday night at the beginning of a bank holiday weekend because they know they will have no cash for the remainder of the weekend.
Michael McNamara (Clare, Labour)
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No, Bank of Ireland does not. Retailers also sometimes end up cashing cheques that they may not wish to cash.
Mr. Richie Boucher:
A failure of service has a negative impact on our reputation and it impacts on us commercially. Our investment is to stay there. An ATM should not run out on a Friday night. Sometimes it will run out on a Sunday night because it is the only ATM in a location and all the cash has been taken out.
Michael McNamara (Clare, Labour)
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Sometimes it is not just a question of cash, it is a technical problem, and I am told there is no possibility of getting someone out on a bank holiday weekend to fix that. Given that Mr. Boucher has described the bank as pragmatic, businesslike and commercial, I would have thought that where it is a technical problem rather than a cash problem, contracts would be in place to remedy the issue.
Michael McNamara (Clare, Labour)
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Will he come to me next week on the performance of the ATMs over the bank holiday weekend?
Liam Twomey (Wexford, Fine Gael)
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Try the ATM over the weekend and let us know how it goes.
Michael McNamara (Clare, Labour)
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I am not in a position to try all five of them.
Liam Twomey (Wexford, Fine Gael)
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It is an appropriate time of year to be taking a trip around County Clare.
Arthur Spring (Kerry North-West Limerick, Labour)
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I will go back to the issue of reputation. I have been like a broken record on the issue of reputation for several years and I heard Deputies Creed and Donnelly speaking about it. There is one thing I am trying to get my head around, which I would like to tease out with Mr. Boucher. He talks about having 500 people working in the area of dealing with distressed mortgages. Bonuses are part of the culture in banks again. How are people dealing with distressed mortgages incentivised? Are they incentivised on the number-----
Arthur Spring (Kerry North-West Limerick, Labour)
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How are people incentivised? Are they paid any further amount for performing their duties?
Arthur Spring (Kerry North-West Limerick, Labour)
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Then nobody in Bank of Ireland, in treasury or anywhere else, is getting a bonus and incentives are all wage-related. I am just trying-----
Arthur Spring (Kerry North-West Limerick, Labour)
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That is life insurance and so on. I am looking at the figures again and seeing that there is between €200 million and €500 million for new business in building homes and so on.
Mr. Richie Boucher:
Yes. That is the new lending. Our total new lending to property in 2014 was €1 billion. About €250 million to €500 million was for residential housing. I am not sure whether that was all drawn down. As the Deputy knows from the construction industry, one draws down funds, then recycles them.
Liam Twomey (Wexford, Fine Gael)
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The Deputy may only ask a quick supplementary question because I want to conclude.
Arthur Spring (Kerry North-West Limerick, Labour)
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I am flabbergasted by the small amount of money going out there. I am sure that in years gone by, Bank of Ireland would have given out multiples of that. That does not bode-----
Arthur Spring (Kerry North-West Limerick, Labour)
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There is capacity for more. The demand for houses exceeds supply and the price of property is going up.
Arthur Spring (Kerry North-West Limerick, Labour)
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This does not bode well for the person who is trying to get on the property ladder. The price of property is only going to go one way.
Arthur Spring (Kerry North-West Limerick, Labour)
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I understand that but Bank of Ireland's loan-to-value ratio is fairly strict and its working capital is probably even stricter. What does it need to do to get more equity into the system?
Arthur Spring (Kerry North-West Limerick, Labour)
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In the meantime, we are going to have a supply and demand issue.
Michael Creed (Cork North West, Fine Gael)
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I expect Mr. Boucher will not have the figures to hand, but could he give us an overview of the bank's lending to the agrifood sector? In particular, does he have a breakdown of inside-the-farm-gate lending in the various sectors? Particular areas of interest at the moment are the dairy sector and the dairy processing sector. Can he give us some information on that, and on lending being made to the agricultural sector for land purchase and overdrafts?
Mr. Richie Boucher:
I do not know the quantum, but we financed 10,000 acres of land transfers to the farming sector last year. We did 50% of the new lending to the agricultural sector last year. That excludes the very large co-ops and so on, so it would primarily be farming, but could also be small food manufacturers - craft food and so on. I do not have the figures off the top of my head, but we will come back to the Deputy on that.
Arthur Spring (Kerry North-West Limerick, Labour)
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We would also like information on overdraft facilities and working capital.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I apologise for missing the earlier session but I had to be at another committee meeting. I am sure many of the issues regarding variable rates and so on have been discussed. Mr. Boucher will be aware that the events around Siteserv have dominated media debate over the last week or two. That has opened up a debate around big write-downs on commercial loans. The figure the Minister is looking at now is loans over €10 million where there were significant write-downs and so on. What has Bank of Ireland's attitude, policy and practice been with regard to big loans and write-downs of the magnitude that we are seeing in the Siteserv case, where somebody owes €150 million and €110 million is written down?
Mr. Richie Boucher:
We get criticised for our policy but it is consistent. We seek to maximise recoveries. There are certain situations where there is limited liability. In a personal situation if someone goes bankrupt, whether court-enforced or through a liquidation process, there is no money and nothing to collect, so the entity itself is gone. In other instances, we will convert a portion of our debt to equity. Indeed, when we were recapitalising the bank, some of the bondholders converted some of their bonds to equity in the bank.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Is Mr. Boucher saying that - I am not unsympathetic to him in this regard if that is what he is saying- under no circumstances could he envisage a situation where somebody owed Bank of Ireland €150 million and €110 million would be written down to keep them in business?
Mr. Richie Boucher:
There would be situations where one would have to restructure the debt. Deputy Donnelly asked me a slightly different question. I speak in general terms because I cannot talk about an individual situation with which Bank of Ireland had nothing to do. I have seen instances where management or shareholders have to be incentivised in very tricky situations. This is particularly the case in continuous process companies, where ultimately one needs co-operation to keep a company alive because if the management walked out or the shareholders stopped being involved for some reason, the company would collapse and one would be in the middle of a continuous process. That can happen in construction companies, in companies with continuous processes or where companies have certain types of contracts. That is a general comment, but I have to be careful, as do committee members, of identifying a particular company of which I have no knowledge. If the Deputy is asking about my corporate experience, I have seen situations where management teams or other persons have to be incentivised because that is the way to maximise one's recovery.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Mr. Boucher may not answer this, but did he have some involvement, along with other banks, in the write-down given to Independent News and Media?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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So Mr. Boucher took equity in the bank as-----
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Was that of about €100 million?
Mr. Richie Boucher:
I am sorry, Deputy. I do not have the figures but it will be available on the Independent News and Media website as to the debt for equity conversion, which I think was done in 2012. It is publicly disclosed information because it was a public company, in terms of the quantum of bank debt that was converted for equity. I do not think it was broken down on an individual bank basis, and we do not disclose those figures, but as a matter of public record and as disclosed by the company, it has been converted.
Liam Twomey (Wexford, Fine Gael)
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I thank Mr. Boucher for participating in the meeting and for the material supplied by the Bank of Ireland to the committee. Do members agree that we will make all this material available on the website? Agreed. I ask members to remain so that we can conclude discussion on our correspondence in private.