RICHARD CURRAN
A decade on from the bank guarantee — what have we learnt?
THIS morning 10 years ago, we all woke up potentially on the hook for €440bn of bank liabilities. Not all of it was called upon, just €64bn, of which we will end up losing about €30bn. It was indeed a fateful night on September 29 2008 when the blanket bank guarantee was introduced. Ten years on, it is still debated as to whether it was one of the biggest financial blunders ever made by an Irish government.
Yet, with the benefit of hindsight and cooler analysis many would go along with the findings of Donal Donovan and Antoin Murphy in their seminal work The Fall of the
Celtic Tiger, that the bank guarantee, “despite all of its costly consequences, appears to have been the least-worse alternative facing the government”.
Much has been learned. We won’t be doing that again in a hurry, for a start. Central Bank regulation has improved. Politicians, civil servants and the media have a more probative approach to what is going on in the banking sector. But have bankers really changed? In his report into the banking crash Peter Nyberg concluded that among the litany of banker failures and mistakes were that banks set aggressive targets for profit growth; they had forgotten the very nature of credit; they had relaxed formal lending policies into only guidelines and that boards had little appreciation of how the banks were actually run at grass-root level.
He went on to say: “It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risks they were taking.” These failures happened, not because the bankers were under-qualified or not smart, but because the culture of the banks was wrong.
Fast forward nine years after the crash to the tracker mortgage scandal. Here the Finance Minister had to intervene to help the Central Bank to ensure proper redress for tens of thousands of bank customers ripped off by those very same banks.
In a report on the culture of banks compiled by the Central Bank and published in July 2017, the regulator said it was “clear that consumer-focused cultures in the banks remain under-developed and that banks need to overcome obstructive patterns of behaviour in order to transition to maturity”.
So 10 years and €64bn later, banks have yet to transition to maturity. As a consequence, the Central Bank has had to draw up a list of powers it would like to see enshrined into law. This requires legislative changes, which have not yet been introduced.
The regulatory authority believes bankers must be legally forced into compliance on things that any decent corporate entity or profession should be doing anyway. It wants to force them, through a new code of conduct, to act honestly, ethically and with integrity; act with due skill, care and diligence; be open and co-operative with the Central Bank; act in the best interests of customers and treat them fairly and professionally and observe proper standards of market conduct.
In the worst indictment of the industry, it also believes the precise duties, functions and roles of individual bank executives should be catalogued in detail, to avoid having one banker pass the buck of responsibility on to another.
Banks themselves have been shamed into developing their own industry quango aimed at improving the culture of their firms. But how do you force a corporate culture? Surely, it is something that evolves, takes its cue from the top and doesn’t happen quickly.
Improvements in the prudence of lending practices, mortgage-lending caps and greater solvency requirements are all there in the banking sector, but they have all had to be foisted on them by the regulators.
It is difficult to say how much the changes that have taken place in banking since the crash are actually due to the bankers themselves. The banking failures of the boom years were borne out of a culture of short-term gain. The tracker mortgage debacle which followed, wasn’t about managing risk but failing to act in the best long-term interests of both the customers and the banking institutions themselves. It suggests that very little has really been learned.
Fairfax is no hurry with FBD
INSURER FBD looks set to have a large new shareholder on the register in the months ahead. Prem Watsa’s Fairfax fund came to the rescue three years ago with a €70m convertible bond. The bond is paying out a 7pc coupon and isn’t repayable for another seven years. However, as of earlier this month, it can be converted into equity in FBD at a conversion price of €8.50 per share. This would give Fairfax 8.2 million shares in the company equal to more than 20pc of the equity.
So far, Fairfax has decided not to convert but it has plenty of time to decide. If the FBD share price stays above €8.50 for 180 consecutive days from here on (March 2019), it will convert to equity automatically anyway.
Fairfax is receiving €4.9m a year in coupon estimates which so far amount to €14.7m. Paid twice annually, the American investor should receive another €2.45m after Christmas.
Once it announces that it plans to convert to equity, the share price may soften as it will involve a dilution for existing shareholders. So why hurry? Surely it is better to wait until the share price has stayed above €8.50 for 180 days and let the conversion take place anyway.
At the current share price of €10.10, Fairfax’s share entitlement is worth €82.2m, plus the €14.7m in coupon payments already received, putting it ahead about €27m on its investment. Not as much as it made on Bank of Ireland, but not bad.
Collisons earn their Stripes
ONLINE payments group Stripe has been valued at $20bn after raising another $245m in fresh funding. The company is notoriously quiet about its financial position, not even publicly disclosing its revenues or sales.
However, analysts have estimated that its revenues were likely to be around $1.5bn in 2017, but no news on earnings or profits.
So is it really worth $20bn? Yes and no is the answer. Yes, in so far as group of investors stuck in $245m in return for a shareholding percentage, they must expect the value of those shares to rise in the future. And they would have had access to the financials.
No, in so far as the Collison brothers who founded the company couldn’t just sell their shares in the morning and get a pro-rata share of $20bn.
Dutch online payments company Adyen is worth a comparison. It is a competitor, albeit that it started before Stripe and has a different pricing model. It floated on the Amsterdam stock market during the summer on a valuation of €7.1bn. The offer price was €240 but just three months later its market capitalisation is €20bn, after the share shot up by 100pc at the time of the IPO.
Adyen’s revenues exceeded €1bn for the first time in 2017 and it has been growing rapidly. So is Stripe. Adyen has 750 staff, Stripe has 1,000. Adyen is big in Europe, where online payments are probably more advanced. Stripe is big in America and is making a big push into Asia.
Adyen handles about €108bn worth of transactions for thousands of businesses and is well established in integrating its online payment offering with payments made in real shops. Stripe recently launched its in-person offering. Adyen had raised around €250m in outside funding before its IPO. Stripe has now raised $680m.
Some brokers have put a ‘sell’ recommendation on Adyen as they think it is overvalued. Given’s Adyen’s stellar share price performance, it makes you wonder, has Stripe missed the boat by not doing an IPO by now?