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When two become one
29 November 2009
Financial institutions are eyeing each other up in preparation for a restructuring of the system, write Cliff Taylor and David Clerkin.
The list of potential suitors for Irish Nationwide Building Society was a long and colourful one as the financial meltdown developed over the past 18 months.
It was clear from day one of the crisis that a building society with 80 per cent of its loan book concentrated on commercial and development property did not have a future as an independent entity.
Potential suitors which were touted included some plausible names (Bank of Ireland, Irish Life & Permanent, US private equity giant JC Flowers and a number of Icelandic banks) and a fair number of implausible ones - including, at one point, investment firm Quinlan Private, and even Anglo Irish Bank. Anglo Irish put forward the idea of a merger between it and Irish Nationwide shortly before it was nationalised, but putting two basket cases together was never really going to work.
In the end, however, Irish Nationwide will spend its final weeks as a standalone entity preparing to limp into a forced merger with EBS, the stronger of the country’s two remaining building societies. The deal will continue the painful clean-up of the Irish banking sector by leaving just one mutual. It will be one which Minister for Finance Brian Lenihan will hope has a stable future after it has concluded its dealings with the National Asset Management Agency (Nama), which is buying the property loans of Irish financial institutions.
Pooling the assets and liabilities of both building societies was Lenihan’s preferred outcome, a factor that overrides the merits of any alternative strategy considered by either institution’s board. In the current tangled world of banking, where every Irish bank and building society depends on the government’s support for its survival, Lenihan’s wish is their command.
Once Lenihan had made his wishes clear to Irish Nationwide, as reported in The Sunday Business Post last week, its chairman Danny Kitchen and his opposite number at EBS, Philip Williamson, moved quickly to start formal talks.
Gerry McGinn, recently appointed as Irish Nationwide chief executive, met EBS boss Fergus Murphy on Wednesday.
Sources say that the talks will take some time to kick off in earnest, with Irish Nationwide’s advisers Goldman Sachs getting up to speed with their client’s position. EBS will be represented in the talks by NCB.
The deal, which is expected to be completed early next year, will provide a home for Irish Nationwide’s €2 billion residential mortgage book and a deposit base of approximately €5 billion. These will be the society’s only major assets and liabilities of note, following the anticipated transfer of €8 billion in commercial property loans to Nama.
The Nama transfer had been expected for some time to be the death knell for Irish Nationwide’s status as a stand-alone entity, as it will trigger multibillion euro losses on the society’s property development loans and wipe out all that remains of its capital base.
Faced with seeking a capital injection of as much as €2 billion to plug the hole in its balance sheet, Irish Nationwide lost control of its own destiny a long time ago. Instead, its board has resigned itself to seeking a clean way to depart the scene, while causing as few complications as possible for Lenihan in his efforts to maintain order.
Sources believe that the board examined a range of possibilities in recent months, but that Lenihan made clear to them in a meeting ten days ago that the merger route with EBS was the one they should explore. It is all a long way from the heady days when the board was promising a pay-out to its members from a demutualisation.
For EBS, meanwhile, Lenihan’s decision to marry the two businesses represents a benign outcome. Murphy had made a convincing case for lenient treatment in the required carve-up of the Irish financial services landscape - arguing that government support to preserve EBS would be desirable, as it would retain at least one mutually-owned building society to foster competition in the homeloans and savings markets.
His argument was helped by the fact that EBS’s foray into property development lending had been a relatively contained misadventure. The society will be the smallest participant in Nama, with loans of less than €1 billion (out of a total loan book of €18 billion) expected to be transferred to the new agency.
In addition, Murphy, as the only chief executive of the six guaranteed lenders to keep his job, enjoys an untainted reputation. He inherited EBS’s problems when he became chief executive in early 2008, but escaped blame for creating them.
However, EBS will still need at least €300 million from the government to replenish its capital base and continue in business. This number could increase substantially, depending on the precise shape of the final deal with Irish Nationwide and its likely impact on EBS’s capital structure.
But Murphy has the consolation of knowing that Lenihan is on his side. EBS said last week that it would pursue the merger ‘‘in the best interests of its members, stakeholders and the wider financial services sector’’, effectively code words for signalling to members that this will be the only option on the table.
While some EBS members may question why their institution should team up with a badly-weakened partner, Murphy will spend the coming weeks reminding them of the need for capital from the government.
That means that the society must deliver what Lenihan wants, and that it is in no position to dispute his terms.
If all goes according to plan, Murphy will be rewarded with being asked to take charge of a larger institution with less pressure on funding (thanks to access to Irish Nationwide’s deposits base), a stronger capital position (thanks to a government injection) and the absence of property lending headaches that will soon be taken on by Nama.
Meanwhile, Lenihan will take comfort that at least one of the many problems on his desk will soon be addressed in a relatively orderly fashion - and at a cost that is unwelcome, but still manageable.
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