The continued woes of NI’s economy: bank lending down “a third” since 2010

Lending down and need for banking diversification /

By Andrew Coffman-Smith

BANK lending in Northern Ireland, “the oil which lubricates the economy” has significantly fallen in the last three years, The Detail can reveal.

A drop of 33% has been recorded, a figure which shows the extent to which volumes of money in circulation here has shrunk – and which lays bare the scale of financial hardship being faced by the local private sector.

The data emerged in an interview with the Finance Minister Sammy Wilson, in which he spoke frankly about the “very poor” state of banking here, his efforts to lure new players into the local finance market and the politics surrounding the future of the Royal Bank of Scotland (RBS) and its local subsidiary, Ulster Bank.

In a statement to The Detail, Ulster Bank defended its record of helping customers who are in difficulties and said it had agreed almost £80m in new lending to hundreds of companies since September 2012.

The Finance Minister says the Executive is in the second round of talks with local banks to get to the bottom of the drop in loans at a time when capital is badly needed by businesses to expand.

The minister said he told the banks:

“You claim to be lending yet businesses are claiming that you not lending, where does the truth lie in that? Can you give us data about where your lending is going and what you are lending?”

He said quarterly data collected by the British Bankers Association (BBA) and shared with the Department of Finance and Personnel since 2010 have determined the availability of finance in Northern Ireland by looking at the banks’ net lending and gross lending figures or difference between amount lent and loans repaid.

The findings are startling for the first quarter of 2013 when compared to the third quarter of 2010.

“Since the information was first sought until now, bank lending has gone down by 33% which is not good,” Mr Wilson said.

“I can’t give you the exact figure of how much that means in money terms but it’s quite a significant drop over a fairly short period of time.”

The individual lending numbers for each of Northern Ireland’s four banks are not known because, as the Minister said in a report to the Northern Ireland Assembly in September 2012, banking matters have not been devolved and the Executive cannot require banks to supply information. Furthermore, the four banks all refused “on competitive grounds” when Mr Wilson did ask for their greater transparency.

It’s a guessing game what the current state of Northern Ireland’s banking sector is, Mr Wilson reported to the Assembly. What is known about Northern Ireland’s finance is that the availability of credit is constrained, expensive and comes with strict conditions, he said.

Mr Wilson told The Detail that banks would say the drastic 33% decrease in lending is “partly (due) to the fact that there is less demand” for borrowing in the middle of a recession but businesses are countering that it’s because the “conditions are too restrictive”.

This worrying drop in lending amplifies Mr Wilson’s repeated call on the urgent need to recapitalise local banking and specifically Ulster Bank which comprises up to 40% of the banking market in Northern Ireland.

“Ulster Bank and banking in general in Northern Ireland is in a very poor state,” Mr Wilson said and pointed to the property crash as the culprit behind the decrease in lending.

“Probably 90% of our banks all got badly bitten in the property boom and bust,” he said. “Therefore their main focus is what do they do to repair their balance sheets … rather than what do they do to oil the wheels of our economy.”

Mr Wilson says the means to both inject further capital into the local economy and to stabilise its banking sector is to diversify Northern Ireland’s finance beyond its current four, debt-ridden banks.

“I want a more competitive banking system here in Northern Ireland and the more banks that we can get that are probably not contaminated by the legacy of the property bust in Northern Ireland, the better,” Mr Wilson said in response to why Barclays – an English bank with only a single digit market share in Northern Ireland – was included in those talks.

The Executive is encouraging Barclays and other bigger names, outside banks who “actually got a lot of liquidity which they can lend to people,” to expand in Northern Ireland. Not only might they be in a “more viable position to do normal banking” but their international contacts could also bring in investment and jobs from the ‘BRIC’ markets of Brazil, Russia, India and China.

Banks split ulster's "crucified" businesses /

He spoke of how Ulster Bank is now sitting on massive debts after the property crash left Northern Ireland’s housing prices worth 50% less than what they were at the height of the boom. In its pursuit of recuperating loan losses, Ulster Bank is harming the economy by aggressively targeting healthy businesses that still have cash and assets despite negative equity, he says.

“They are crucifying business in Northern Ireland,” Mr Wilson said, an accusation rejected by the company.

The minister continued: "I get too many people coming to talk to me about the impact Ulster Bank has had on their business and the viability of their business. Ulster Bank will, of course, say that they are only doing what is prudent – that is, getting debts paid as quickly as they can”.

The minister gave examples of Ulster Bank pressing businesses – who are otherwise able to pay off loans – towards bankruptcy by severely shortening the payback period on their loans, seizing profit-making assets to pay off debts worth significantly far less and turning down business-expanding loans because they’re still paying a mortgage.

He claims that this further fuels the economy-draining ‘debt spiral’ that increases unemployment and Northern Ireland’s UK-record high rate of bankruptcies while decreasing property values, consumer spending and loan payments. One in five of Northern Ireland’s shops are now vacant.

If Ulster Bank wants to have a future, they got to have customers, he emphasised.

“You will only have customers if you treat people in a manner which makes them want to bring their business to you. And at present, I think many people would love to get out of Ulster Bank rather than stay with them because they feel that they are not getting that service.”

In a statement to The Detail a spokesperson for Ulster Bank responded to the Finance Minister’s comments: “We do not aggressively target healthy businesses for cash and assets. We are committed to working with customers who find themselves in difficulty and work with customers who engage with us to help them find a sustainable solution on a case-by-case basis.

“In the last four years we have helped a significant number of companies in financial difficulty and secured many local jobs. As a responsible lender we cannot continue to lend indefinitely to a business which is not viable and has no way of repaying its debts.”

Ulster Bank says it has already agreed almost £80m in new lending to more than 500 companies since September 2012 under the Bank of England’s Funding for Lending Scheme.

Many people are increasingly finding themselves over their heads with bills and mortgage payments. According to NI Insolvency Service, a staggering £1.2 billion in personal bankruptcies were “written off” in Northern Ireland in the last two years as compared to £8 million five years ago.

However, as revealed earlier this year in The Detail, a fortunate few in Northern Ireland are having their debts forgiven without having to suffer the associated stigma and restrictions attached to official insolvency as Northern Ireland’s banks are known to be secretly and selectively writing down and writing off some debt.

Mr Wilson welcomes UK Treasury’s review into splitting RBS and specifically supports breaking up Ulster Bank along a ‘good bank-bad bank’ split.

A separate legal entity (the ‘bad bank’) containing toxic assets and risky loans, could be run-down over a longer period of time along the lines of the Irish government’s NAMA – National Asset Management Agency.

If Ulster Bank continues to be weighed down by its debts, as the Minister said retiring Governor of the Bank of England Sir Mervyn King told him, Northern Ireland is “going to be in severe economic difficulties for the next ten years”.

To the benefit of Northern Ireland’s economy, a post-split, recapitalised and “healthier” Ulster Bank is supposed to then be free to see things more clearly with “a longer term view,” Mr Wilson said.

“If they were unencumbered by the debts of the past, then they wouldn’t need to be sweeping up and soaking in cash from existing businesses,” he said. “Those businesses would have more time to work through the bad loans which they had.”

“Secondly, the bank would have much more capital which it would then use to lend to customers – obviously with the appropriate business plans – not [like how it was] back in the recklessness of the past and I think that it would give customers a bit more clarity as to what was required of them.”

Northern Ireland and the bigger picture /

“I don’t think that Ulster Bank will be completely scrapped. It will be a case of how do you divide up that bad property loan end of Ulster Bank from the normal part,” Mr Wilson said in response to worst-case scenarios some analysts have speculated.

“It is more likely the British government is going to have to finance whatever arrangements there is."

The driving force currently determining RBS, Mr Wilson said, is the fact that the Chancellor of the Exchequer George Osborne is “dead-keen" to sell the public’s 81% share of RBS before the 2015 election. He added that this reprivatisation of RBS would demonstrate that the Tories have been successful in turning the economy around, in addition to boosting international confidence in UK finance and freeing up more money to be spent elsewhere by the Treasury.

He isn’t sure where Ulster Bank exactly fits in Osborne’s agenda but Ulster Bank’s fate is obviously “incidental” to its parent body’s as “it has a disproportionate amount of the bad property debt from the from the whole group although it’s only a very small fraction of RBS’ total business".

One possibility, he said, is that the British government will pitch Ulster Bank’s troubled assets to a big financial institution as long term investments and try to sell them at a “knocked down price” which he compared with how NAMA bought the loans from the Irish banks.

Mr Wilson is sceptical of the likelihood of Ulster Bank transferring into NAMA:

“If I was the Irish government, I would not be accepting any deal to accept Ulster Bank’s bad debts into NAMA in return for the better assets which NAMA holds in other parts of the United Kingdom. I don’t even think that the Irish are that foolish to take that one on!”

As for influencing RBS discussions, the Northern Ireland Executive has no control over Ulster Bank’s fate because such power still rests with Westminster. However, the Finance Minister has still been meeting with British ministers and said they have been receptive to Northern Ireland’s concerns.

“I would be very unhappy if Westminster were to ignore the views of the Northern Ireland Executive when it comes with dealing with RBS and Ulster Bank in particular because it does have such an important impact on the economy here,” Mr Wilson said.

Chancellor Obsorne will announce the Treasury’s decision on RBS in September.

© The Detail 2013