A pandemic tale of woe at the banks
THE financial pain of Covid-19 is coming to a bank near you. AIB dropped a big bombshell on Thursday when it made a massive €1.2bn provision to cover expected loan losses due to the pandemic. This was just a day after Bank of Ireland lobbed in a €937m charge in its accounts.
Few will shed too many tears for the losses this brings about for big banks in the short term but it presages the real financial pain that is on the way for households and businesses.
A closer look at the figures for our main lenders shows that even the “big banks” are shrinking. Bank of Ireland is looking to shed 1,400 jobs. AIB has previously announced a move to cut headcount by 1,500, although that plan has since been paused.
Bank of Ireland is conducting a strategic review of its Northern Ireland business, and not ruling anything out, including offloading the operation — another contraction.
The real shrinkage in Irish banks is in their loan books. They are simply just struggling to grow.
Bank of Ireland had loans to customers totalling €79.5bn at the end of December. After writing €3.9bn of new lending the following six months, its loans at the end of June had grown by just €100m to €79.6bn.
Loan redemptions offset almost all of that new lending while a weaker sterling negated the €1.4bn it put out in revolving credit facilities.
At AIB, the picture is similar. Total loans and advances to customers at the end of 2019 amounted to €61.5bn. Six months later it was €60.4bn. Consumers are putting more money on deposit, while businesses are too nervous to borrow, or in some cases they are going to specialist finance houses.
Less than 20pc of Bank of Ireland’s loan book is unsecured lending and mortgages now account for 56pc of its group loan book.
Our big banks are getting smaller and becoming more dependent on mortgages.
Yet, take a mortgage lender like Permanent TSB. Its total loan book at the end of 2019 was €15.9bn. Six months later it was down to €15.6bn. At this rate there won’t be much left in five years time.
Central Bank is afraid to jump in
THE Central Bank has decided to dip its toe into the water on the issue of insurance claims for business interruption caused by Covid-19.
The insurance regulator hasn’t exactly jumped in by getting directly involved but has made a few noises about the need to treat business clients of insurers fairly.
Now it has ordered insurance companies to pay the “reasonable costs” of business customers in a number of ongoing test cases.
The Central Bank order won’t give carte blanche to anyone to sue their insurer without worrying about legal costs. It will only apply in a small number of test cases.
The idea is that where there is a reasonable argument to be made about whether a policy should pay out for business interruption due to the pandemic, small firms should not have to shoulder enormous legal costs, even if they lose the case.
Surely a better approach would be for the Central Bank to adopt a similar stance to the Financial Conduct Authority (FCA) in the
UK. It has taken eight insurers to court over business interruption policy wording, which insurers say do not cover the pandemic. Here, several publicans are taking FBD to court.
The FCA is seeking a court declaration to resolve contractual uncertainty in this issue. It is doing so by identifying a representative sample of cases with the most frequently used policy wordings.
It appears the Central Bank Acts do not specifically provide for what lawyers call a “clear and unequivocal basis” for the bank to do something similar here.
However, as pointed out by two solicitors at Ronan Daly Jermyn law firm in a recent blog, the Central Bank Act 1942 states that the bank is responsible for “monitoring the provision of financial services to consumers of those services to the extent that the bank considers appropriate, for the purposes of protecting the public interest and the interests of consumers”.
Elsewhere, the same act says the bank
“has power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions.”
Solicitors Brian Hunt and Michael Quinlan, suggested the combination of these two provisions give the Central Bank broad powers in relation to protecting the interests of consumers.
So why doesn’t the Central Bank, referring to those powers, take a similar course of action to the FCA?
Yes, its right to do so might be challenged by the insurers. But wouldn’t that make it a test case of sorts? If its right to do so was not challenged, it would provide clarity and a court ruling for consumers who feel badly let down by their insurance companies.
In other words, why doesn’t the Central Bank have the courage to take a test case of its own? Why should it be small businesses already ravaged by the fallout of a pandemic who commit their limited resources and time, to sue insurers for an uncertain outcome?
The Central Bank has the resources to take what would amount to a test case, instead of simply telling insurers to cover the legal fees of small firms who go before the courts.
Why not make it a Goliath vs Goliath battle instead of David vs Goliath?
If the Central Bank was successful in pursuing a similar approach to the FCA, it would set a very valuable precedent — beyond the issue of pandemic insurance — enabling it to intervene on behalf of the consumer in future in a much more proactive way.
Dalata waits for Dublin bounce
DUBLIN has been hit hard by the pandemic and nowhere is this more true than in the capital city’s hotels. As staycationers head off down the country, regional hotels are at least having a bit of a summer, even if it cannot last. Nobody is heading to Dublin.
So it isn’t that surprising to see Dalata Hotel Group’s share price languishing at around €2.61 giving it a market capitalisation of just €484m. This is a business that valued its assets a year ago at €1.33bn.
With 4,478 hotel rooms in Dublin, the company was perfectly placed to rake in profits before the pandemic, and it is now perfectly placed to suffer harder and longer in the short term.
But what about a couple of years down the road from now? Its enormous presence in Dublin should become a big advantage.
If anything there was a shortage of hotel beds in Dublin before the pandemic. Savills forecast that 6,300 new rooms would be coming along between 2019 and 2021, with 1,700 due this year and 900 next year in the three- to four-star category.
They may well get delayed now. But when Dublin eventually bounces back, Dalata should bounce right back with it.