COMMITTEE FOR
FINANCE AND PERSONNEL
OFFICIAL REPORT
(Hansard)
Role of Local banks in the Current Economic Downturn
17 June 2009
Members present for all or part of the proceedings:
Mr Mitchel McLaughlin (Chairperson)
Mr Simon Hamilton (Deputy Chairperson)
Ms Jennifer McCann
Mr David McNarry
Mr Declan O’Loan
Mr Ian Paisley Jnr
Ms Dawn Purvis
Witnesses:
Mr Damien Earley ) First Trust
Mr Joseph McGowan )
Mr Alan Bridle ) Bank of Ireland
Michael Kidd )
Mr Mike Bamber ) Ulster Bank
Mr Henry Elvin )
The Chairperson (Mr McLaughlin):
The witnesses are very welcome I thank them for joining the Committee again. I apologise for the delay; the previous session overran slightly. I hope that that does not cause too much inconvenience. The witnesses comprise six representatives from three organisations, whose submissions the Committee has had the opportunity to read in advance. Rather than having the witnesses make introductory comments and assuming that everyone is content to do so, we will proceed to the discussion.
Mr Paisley Jnr:
I thank the witnesses for honouring their commitment to come to the Committee. It is certainly appreciated.
In the past few weeks, the Committee has heard from the Institute of Directors (IoD). I am sure that the witnesses have seen the institute’s report, which states:
“43% of businesses found that bank lending conditions had worsened. In our survey, 53% of respondents reported that bank lending conditions had worsened since the beginning of 2009.”
The institute’s report goes on to state that bank lending conditions had become tougher:
“with 64% of requests for new overdrafts and 55% of requests for an extension of an overdraft being declined.”
That is pretty stark reading. I am thinking principally of businesses in Northern Ireland and how they try to make a go of things. The IoD’s comments to the Committee, that survey and the overall report paint the fairly bleak picture that all the work that has been done has failed to improve life for the man on the ground. Life for a small business or an employer is not getting any easier in the current crisis.
I have spoken to a couple of businesses in my constituency. Company “A” employs 110 people, has been in business for 30 years and is in a strong trading position. During the company’s good years of banking business, company “A” took a 10-year loan at 1% over base. The company has now been told unilaterally that it must either adhere to a clause imposing immediate payment on demand or accept that the bank will increase its charges from 1% over base to the London interbank offered rate (LIBOR) plus 3·25%.
Another of my constituents who runs a business told me that previously its banking conditions were very good. The company employed 110 people in Ballymena for 25 years. Yet, after an annual meeting with their bank manager, that person was billed £850 for the pleasure of that meeting. That bank is not represented at the Committee today.
That hardly paints a picture of banks, further to our last meeting, saying: let us get out there and kick the ass out of this problem and let us try to help these businesses. It paints the picture that Northern Ireland’s small businesses are having their pips squeaked. I am not sure how the witnesses wish to respond to that. The loan in the first case that I cited was from the Bank of Ireland, the second was from the Northern Bank.
Mr Michael Kidd (Bank of Ireland):
I do not know the exact details of the loan to which Mr Paisley referred or the customer involved. Generally speaking, pricing is a factor that is relevant to all banks at present. We are trying to take a constructive approach with all our customers, but we are faced with the reality that a loan priced at base plus 1% today costs us a significant loss, given our funding costs and where general credit risks exist in the economy. This time last year the total interest cost of a loan was around 6·5%, but today a loan that had been plus 3·25% is probably now charged at 4·5%. I am not saying that that is a mitigating factor, but we have to look at our margins.
Mr Paisley Jnr:
Your figures are absolutely right. I do not want to go into the issue on a case-by-case basis; I simply want to look at the generalities that are exposed. It is an issue of trust. Someone who has had good, long-standing business relationships and good banking credit in the past will have signed a contract stating the rate at which money will be lent, yet that contract can be altered unilaterally by your side of the house, because there is a clause in the contract that gives you the option to demand repayment within 30 days. That puts the guy’s back against the wall so he has to renegotiate an interest rate that is no longer to his benefit. Trust has broken down, yet I had hoped that following our last meeting, trust would be the key focus for banks and they would work on that together. However, the constituent to whom I referred told me that banks do not give a stuff about him, rather they are squeezing him.
Mr Kidd:
I am more than happy to deal with the specifics of that case with you; I have no issue with that. Without knowing the details of that particular case, there are many clauses and conditions in contracts and although issues such as financial governance and trading profitability must be factored in, we have to look at pricing for all our customers. Providing funding at base rate plus 1% today is probably costing us in excess of 1·5% from a funding cost and credit risk perspective.
Mr Paisley Jnr:
If it were the other way around, you would not be putting money back.
Mr Kidd:
The other side of that is that over the past 8 years or so, we have negotiated loan facilities with many customers. The liquidity in the value market has been such that customers have come to us and said that they had negotiated a rate with us five years ago and they would like to renegotiate it because other banks had knocked at their door, and we reacted to that. Where the market is now is a natural consequence of that. We have to reflect the economic fundamentals of where our business is today and the types of return that we need to generate to ensure that we remain a strong bank that comes through the economic turmoil and that we also continue to support our customers.
Mr Paisley Jnr:
Do you think that the IoD customer survey got it right? I read out figures earlier indicating that people feel that it is tougher for them to trade now that banking conditions are tougher on them. Are those people being negative and pessimistic?
Mr Kidd:
I know that Alan has a view on that, but I think that there is a lot of anecdotal evidence around. I recall that the other element of that survey is that most people are finding that their loans continue to be extended. That survey highlighted a particular issue about overdrafts and we met the IoD to discuss that. People often ask for overdrafts to be extended by making a late call to the bank, so the proposal does not come to the bank in the manner in which we would like it to because the timing is very tight.
Mr Paisley Jnr:
The survey states that 55% of people who requested extensions to their overdrafts have been declined and 27% of people said that they were thinking of changing their banks. I do not think that people will change their banks. I think that banks in Northern Ireland have an incredibly loyal customer base. My colleague Simon has just said that those people have nowhere else to go, which might be another way of looking at it. However, if there is a view that people are requesting overdraft extensions at a late stage, can you tell them through this platform to come to you earlier and you will extend their overdrafts?
Mr Kidd:
Due to that overdraft situation, we have trained 17 relationship managers as working-capital specialists because we recognise that there is an issue around working capital and cash-flow pressures. They have been trained to go out and meet customers and businesses across the Province, not only our customers, but on a general basis. The aim is to help them better understand their working capital cycle and what will have a better impact on their cash flow and help them plan and look ahead.
It can be that the request for an overdraft extension comes in late because of trading pressures. Numerous factors cause those calls to be made, and we are telling our customers to speak to us early, keep in touch with us and help us understand the pressures that they are under. We want them to help us to understand the best solution for them. It is often but not always up to the bank. There are other things that customers can do to ensure that they keep their cash position as strong as possible.
Mr Paisley Jnr:
I want to raise a more strategic issue, and I swear that I am not picking on the Bank of Ireland. According to ‘The Irish Times’ yesterday, five institutions have submitted their developer loan details to the National Asset Management Agency (NAMA). Can you provide the Committee with an estimate of how much of the borrowings going to NAMA from your customers relate to assets in Northern Ireland, or can you come back to us with that information?
Mr Kidd:
I am not able to clarify that today. As you will be aware through the press and the public record, the details of NAMA are still being discussed by the Irish Government. We are very actively engaged with the Irish Government in trying to work through the best solution and proposals for NAMA. I am not in a position to tell you what Northern Ireland assets may or may not go into NAMA at this stage.
Mr Paisley Jnr:
There is an issue of principle in that assets that are held in another jurisdiction are coming into NAMA, and that has long-term implications for Northern Ireland’s economy. We have to get our heads around that quite quickly.
Mr Kidd:
The chief executive of the Bank of Ireland released a statement about NAMA a few weeks ago, around the time of our results announcement. We will not do anything through NAMA to destroy any asset value in Northern Ireland or to impact negatively on the economy in Northern Ireland.
Mr Paisley Jnr:
I do not imagine that that will be your agenda. However, if assets in Northern Ireland that were previously held by businesses are to be held by a bank, the State’s involvement in that bank is a huge issue that we have to get our heads around.
Mr Kidd:
NAMA is still in its formative stages, and we will have to go through the details of it when they become available to us.
Ms J McCann:
The report by the Institute of Directors states that there is a lack of take-up of the Government-funded schemes that are available to businesses. What are your views on that? There seems to be a view that the banks are almost hesitant to engage in those schemes.
Evidence has been given to us by the Ulster Community Investment Trust (UCIT) and other local community organisations indicating that the social economy enterprises are finding it extremely difficult to secure loans from banks. Around 82% of them indicated that they had experienced difficulties in accessing finance from banks. Are small or medium-sized businesses and social economy enterprises treated differently when they approach banks?
Organisations such as Advice NI and Citizens Advice have stated that the number of people seeking advice on debt problems in local communities has increased by around 300%. The Ulster Bank has been fairly proactive in putting some money towards creating initiatives and facilities for people. What are the other banks doing to help people who are finding themselves in difficulty because of debt? Are those banks going to introduce any initiatives to help those people?
Mr Henry Elvin (Ulster Bank):
I will answer your question about take-up of the enterprise finance guarantee scheme. It should be borne in mind that that scheme was announced by Lord Mandelson with very little thought for how it would be implemented. That put the banks in a difficult position because there had to be negotiations before we could even go to the marketplace. Reference has been made to the IoD survey. That survey was carried out within three weeks of Lord Mandelson’s announcement; therefore, I am not surprised that it found banks and customers to be all at sea in their understanding of the scheme.
All the banks have now moved on. The Ulster Bank spent a full day training all our client-facing relationship managers on the enterprise finance guarantee scheme. I would be disappointed if any customer or any of your constituents went into an Ulster Bank branch and was met by a commercial manager or business manager who did not know about the scheme. Take-up of the scheme is encouraging; to date, 35 have been approved through the system, and in excess of £7 million has been drawn down. We are happy with that, and the new scheme is a long way ahead of the previous small firms loan guarantee scheme. Given the current flow rate, we are confident of processing significant numbers this year. It may not sound much, but it is miles ahead of the old system, and the run rate is good.
Mr Mike Bamber (Ulster Bank):
I will handle the second question and leave the third question for someone from one of the other banks, because you excluded the Ulster Bank from it. Take-up of the small firms loan guarantee scheme was very poor in Northern Ireland. The enterprise finance guarantee scheme has had more success in a shorter space of time.
Four weeks after the scheme had been announced, we were still negotiating with Departments about stationery that was unavailable. Therefore, it took us some time to produce our brochures. Everyone was trying to build an understanding of the scheme; for example, Alastair Hamilton of Invest NI shared his thoughts with us, and we shared ours with him to make sure that we understood it. There was a time lag, and a survey done now would indicate much more awareness of the scheme.
Your second point concerns social enterprise. I sit on the Northern Ireland council of Charity Bank, which is a fully-licensed bank that is regulated purely to lend to charities. Charity Bank has more deposits than loans and there is a lack of demand for loans in Northern Ireland. I fully accept that Charity Bank needs to get its name out there more and increase people’s awareness of it, but it is not finding enough lending opportunities with which to deal. Not all of the social enterprise bodies here are registered charities, but those that are are eligible for loans from Charity Bank. I do not know of instances of Ulster Bank refusing to give a charity a loan, or why that would happen. Ulster Bank is sticking with its customers and charities, and social enterprises are a prime cause and are top of the list.
Mr Alan Bridle (Bank of Ireland):
You mentioned debt counselling, and we are conscious that many of our customers face financial difficulty in an economic climate of rising unemployment. Each of our branches has a trained counsellor who deals specifically with such issues. There is rising default among people who are borrowing money in the current environment. Cases are treated sympathetically, and our forbearance record would withstand scrutiny.
Ms J McCann:
You said that some of the staff who work in your branches are trained debt advisors. Are you prepared to take part in an initiative that bases such people in the community? I am conscious of the fact that people might not want to tell their bank that they are having financial difficulties in case that presents more problems for them. What I am suggesting is giving money to community organisations that can then give advice to people.
Mr Bridle:
We will certainly consider doing that. We are conscious of the fact that a number of the older banks perform certain roles in the community. We are all members of the community in some guise. Our branches work closely with communities in which the credit union movement is strong.
The Chairperson:
Did you say “in this guise”?
Mr Bridle:
I said “in some guise”.
Mr Joseph McGowan (First Trust):
Echoing what Alan said, First Trust Bank has trained the vast majority of its staff to be sensitive to and aware of debt issues and how to handle them. We are particularly focused on dealing with our customers’ debt problems. We have been actively engaging with customers to identify any signs of strain in their ability to repay or service their debts. We found that to be very effective in addressing personal credit arrears or mortgage arrears this year, in particular. We are adopting similar tactics in our business banking division. We will also consider appropriate ways in which we can help people in the community through outreach.
Mr Bamber:
Another element is the growing issue of unemployment. I am conscious of that fact that I am in the presence of competitors, so I will not say too much. Given the growing issue of unemployment, we plan to launch an initiative soon that will provide further assistance on forbearance. I will not say anything beyond that, so that no one steals our thunder; I realise that I will have to move quickly now.
Ms Purvis:
We have struggled to get data on the number of borrowers in Northern Ireland who are in arrears, as well as figures on new lending and loan-to-value mortgages. Representatives from the building societies, who were here just before you, have promised to provide us with disaggregated data for Northern Ireland. Are you willing to do the same?
Mr Bamber:
We have been very specific: of the 277 mortgages that are in arrears of one month or more, only 74 are 100% loan-to-value mortgages. I make that point because I have previously given evidence to Committees at Stormont, and if I were to believe everything that I have been accused of, I would believe that 100% mortgages are to blame for the downfall of the banks.
We are concerned about rising debt problems; however, we must keep that in perspective. Northern Ireland is still doing pretty well in comparison with other markets that I could mention. I think that we have been fairly specific in our response and equally specific about the volumes of new lending; we can be even more specific, if you wish.
Mr Bridle:
Mortgage data for Northern Ireland is publicly available from the Council of Mortgage Lenders (CML).
Ms Purvis:
We have that data; however, it did not include disaggregated figures for Northern Ireland.
Mr Bridle:
I am happy to share with you what I know. The Bank of Ireland reports its mortgage business on a UK basis. Obviously, that information is too commercially sensitive for a forum such as this. However, I can say that until the end of May, we had one property in possession, and that in the past 12 months, we have had three houses in possession.
Mr McGowan:
First Trust Bank is also organised on a UK basis; therefore, like the Bank of Ireland, we regard Northern Ireland’s arrears information as commercially sensitive.
During the current year we have observed two points that are worth noting. First, by addressing the issue of customers who are in arrears, which I mentioned earlier, we have reduced the number of our mortgage customers who are in arrears. However, the number of customers going into arrears remains a matter of some concern for us, particularly while interest rates are so low. We are working assiduously with our customers to address that.
That is not leading us to take the repossession route. We do not embrace that option and regard it as very much a last resort. All the figures paint a picture of the banks avoiding repossessions in general. The secondary lenders and other secured creditors, however, have been moving in that direction. The challenge in the future will be the way in which that part of the market will behave if interest rates begin to rise, and, as Mike said earlier, unemployment increases. Several variables will play out, and we will have to respond to the interests of our customers and in the interest of the business.
Mr O’Loan:
Thank you for attending today. It is important that we convey to the public the message that everyone is acting together to try to improve the economic situation.
I welcome what you said about the enterprise finance guarantee scheme and will not, therefore, question you further on that. I agree with you that the situation is rapidly changing and that it is important to work with up-to-date information. Ian and Jennifer quoted the information from the Institute of Directors, and I accept what you said about associated correctives. The Confederation of British Industry reported in May 2009 that fewer businesses are reporting problems with the availability of money. In connection with that, what is the current level of demand for credit for business start-ups? What is the general level of activity among start-ups and existing businesses? Do good propositions exist during a recession?
Mr Kidd:
On the demand for credit, Bank of Ireland has continued to experience loan-book growth throughout 2008 and the early part of 2009. Some demand for credit, therefore, still exists. Anecdotally, however, six to nine months ago, customers were not considering undertaking major capital expenditure plans or making significant investment in their businesses; they were focussed on the tight management of their business, and that is still the case.
Over the past four to six weeks, we have seen an increasing number of businesses coming to us with proposals for investment opportunities, either through business acquisition or investment in their existing plant. That is a sign that businesses are starting to gain confidence about the direction in which the economy is going, particularly for their sector. The confidence is not widespread throughout every sector, but it is evident in some.
As I mentioned the last time that I gave evidence to the Committee, the bank offers a package called Essentials for Business. Launched in April 2008, it is designed for start-ups and small businesses and has brought in more than 100 new customers every month since then, and it is fair to say that that demand has not slowed. That product continues to attract more than 100 new customers to the Bank of Ireland each month. Most customers are start-up businesses, but the product is also available to established businesses. We regard the demand by start-up businesses as being still relatively buoyant.
Mr Elvin:
I agree with that. As I said yesterday in the press, as part of the recapitalisation of the group, Ulster Bank gave a commitment to go out to the small and medium-sized enterprises with an additional £250 million. I can confirm that, at this stage, over £100 million of that sum has been committed. We are, therefore, enthusiastic about the level of demand. Good projects are coming forward and they are much better thought-out, a point on which I agree with Michael. People are standing back and assessing the risks before approaching the banks. Two or three months ago, people were, perhaps, slightly reticent about approaching the banks, but the run rate now is good. Given the current level of demand, we are fairly confident of delivering the £250 million of new lending by the end of the year to small and medium-sized businesses.
Mr Bamber:
On the personal banking side, Ulster Bank is experiencing a growing demand for mortgages. I suspect that that is because some players have left the market. It is hard for me to tell which players have gone, but we are getting more than our natural share of the market. In the past, our share was approximately 6% of mortgages, and it feels as though we are exceeding that by a considerable amount. The overall market has, however, shrunk.
Last week, we had our best week; we agreed to £13 million worth of mortgages and drew down £7 million. The majority of our mortgages are taken up by first-time buyers and movers, and we have priced our products to attract that sort of business because we feel that there is more to be gained from generating money for the construction industry and the housing market than from simply transferring debts from one guy’s balance sheet to our balance sheet. Rather than stimulating the economy, that just shifts assets from there to here. Therefore, we have deliberately priced our products accordingly. At the moment, Ulster Bank’s mortgage rates are lower than ever. Therefore, although we have not passed on all the base-rate reductions, our mortgages are cheaper than ever.
Mr O’Loan:
My next point may be difficult for some of you to listen to; however, according to my information, which, although anecdotal, is still serious, there is quite a variation in banks’ attempts to deal proactively with current issues. The Ulster Bank — with which I have no connection whatsoever — is one name that keeps coming up and is referred to favourably. Jennifer McCann rightly referred to the bank’s support and debt advice. It is all very well for other banks to say that they are training their staff to deal with customers, but that is only part of the solution, because people’s debt problems are not exclusive to any particular bank. Therefore, investing significant resources, as Ulster Bank has done, in the independent-advice sector is a genuine contribution in difficult times. Other banks and financial institutions have not replicated that effort. That point was made the last time that you were here, so I am disappointed.
In addition, broadly speaking, the banks and financial institutions have failed to respond proactively to the recession by supporting the business community. That is the sort of variation that I am picking up from what serious people are saying. Ulster Bank may choose to bask in that praise in the hope that it has achieved a coup, and the other banks may respond by saying that they are doing other things that are not being spotted. It is a difficult point to respond to, but, for what they are worth, I offer those comments.
Mr Kidd:
At this time, many comments about banking are anecdotal. As a result of a number of things with which we have been involved, and according to a number of the key accountancy firms with which we deal, Bank of Ireland is known to be actively seeking new business. Anecdotal evidence is, at best, patchy; however, I am comfortable with any such evidence that we have received directly.
Mr Bridle:
Perhaps, we should claim some credit for the Institute of Director’s survey, because, if Joanne Stuart were here, she would confirm that it was our suggestion to try to establish a more informed evidence base, rather than relying on anecdotal evidence. We would not have suggested the methodology that it chose to use, because it has limitations —
Mr O’Loan:
They are continuing to refine their work.
The Chairperson:
The process is ongoing.
Mr Bridle:
One important aspect to drill down into would be the initial purpose of credit applications if they are subsequently declined. The IoD has about a thousand members, and the response rate to its survey was 12%, of which roughly a half expressed concerns about credit applications. Such issues are inevitable. For example, the survey does not tell us whether someone who has been turned down for credit recently was turned down one or two years ago. It is important to investigate the reasons why applications were declined. For instance, was an application made in order to fund a loss-making business? In that case, is the real issue that that business needs more equity, rather than more debt? Those are the important nuggets of information that a piece of research should reveal.
The Chairperson:
Nevertheless, the IoD survey provided empirical evidence that validates the views of politicians. The evidence that your colleagues and Mr Leenders gave the last time that they met the Committee was less than satisfactory. Although you may not depend on anecdotal evidence, that was all that was available to us. In fact, the IoD survey subsequently validated the points that were being strongly made to us by your colleagues. If you did, indeed, suggest evidence gathering, and the survey was the IoD’s response, I am glad to discover its provenance. We welcome it, and we look forward to the continuing monitoring of the experience of the banks’ client base in doing business.
Mr O’Loan:
My final point is about your prognosis for the economy. I note that the Bank of Ireland’s report sees some positive signs and good confidence levels, but it talks about unemployment continuing to increase until 2011. What is your reading of the economy for the next two or three years?
Mr Bridle:
It is always easy for folk such as us to talk among ourselves about GDP and GVA. For most people, the recession means their job. Technically, the recession could end later this year as the economy stops going backwards and stabilises. However, we think that unemployment will continue to rise into 2010. Figures released this morning show a rise in the number of people unemployed of almost 2,000, and our prognosis is that unemployment will rise to 60,000. The number of people unemployed is a lagging indicator of the economy. My concern is that, even as the economy recovers, it will be a jobless recovery.
One must consider which sectors of the economy will drive employment growth. The strong employment growth that took place between 2003 and 2007 was heavily driven by construction and by retail. Northern Ireland experienced the combination of its own property cycle and a period of strong public expenditure largesse, which fed its way into the labour market and, consequently, into retail spend. I think that house building will pick up next year, and that will alleviate some of the issues in construction. It is very important that the investment strategy proceeds.
Because of rising unemployment, which will result in a higher level of unemployment than we have been used to, and higher taxation, there will have to be less dependence on consumer and Government spending to drive the economy. The other two levers are business investment, and net trade, or exports. I am more optimistic about that side of the economy. Within the strictures of European Union law and competition rules, we must protect our large exporting companies, most of which are manufacturers, because those companies will be in a position to capitalise from a more competitive exchange rate as world trade picks up.
The outlook for businesses that have been dependent on consumer and Government spending is a bit more sober than it has been for the past five to 10 years.
Mr Bamber:
I cannot compete with Alan on economics, but Ulster Bank’s economist, Richard Ramsey, has talked about 60,000 people being unemployed by the end of 2009, so I recognise the number that Alan mentioned. There is a lag factor; a downturn in the construction sector came first, and, as is demonstrated by today’s announcement of job losses at Victoria Square, retail is now struggling. Therefore, we believe that something should be done about the problem of unemployment.
People will not be out of jobs for years in a place such as Northern Ireland. A way must be found of bridging the short-term difficulties that will arise, and, because of the lag factor, unemployment is a big concern. The situation must be kept in perspective, and in the medium to long term, I am a huge fan of Northern Ireland and its prospects. I am also responsible for Ulster Bank’s markets in the South, and we have a trading partner on our doorstep that has more severe problems than we do. At least we are helped by the flexibility that the exchange rate offers.
Mr Hamilton:
Along with other members, I welcome you. As I said to the representatives of banks and building societies who were here earlier, it is good to continue the dialogue. In the past, perhaps dialogue did not take place between local politicians and financial institutions.
At the start, I want to recognise and welcome some of the initiatives that the banks have taken since we last met in Parliament Buildings. It sounds as though Declan is part of an Ulster Bank fan club. However, Ulster Bank has made some high-profile announcements, and I recognise that other banks have done things too. It is a positive development that banks have at least attempted to release good news and have taken steps to get the market going again.
Although one can argue that there are flaws in the construction of the IoD survey — many surveys have problems — it is still a useful tool. As the Chairman said, it is better than the information that the Committee had at its previous meeting with the banks, because it does, in some respect, validate some concerns that we heard, and continue to hear, from constituents.
Since we last met, I have had further contact with constituents. Although I recognise the global picture, the situation in Northern Ireland seems to be better than it was this time last year or six months ago. However, individual customers still have nagging concerns. For example, I recently talked to a construction firm that has been in business for 40 years and has banked with the same bank, in the same branch, for 30 years. It has been a good customer for 30 years; it has never defaulted on a single payment and has always repaid every loan. The firm told me that it now dreads going to the bank. In fact, it now receives limited or no local contact, because the contact is headquarters-based, and facelessness now taints their interaction with the bank.
There is a lack of understanding of that firm’s circumstances. As the banking representatives will accept, it is an important element of banking, and of all business, that one must understand or have some grasp of the local business. That construction company feels that it derives no benefit from the reduction of the base rate. Although I understand the reasons for that, the company feels that a massive amount of security has been taken out against its loans and that the arrangement fees are astronomical in comparison to those in the past. That paints a depressing picture for that customer, and it is repeated for hundreds or thousands of people across Northern Ireland.
Given the nature of your response to the climate in banking and financial institutes, are you concerned that a lack or loss of trust now exists between you and some of your lifelong customers? Although good initiatives have been introduced to put money into certain sectors and to help small and medium-sized enterprises and first-time buyers, what are you doing to improve communication with your customers and to explain your reasons for taking certain action? To a large degree, your actions are forced by market conditions.
I sense a lack of explanation to customers at times, which, consequently, creates a lack of trust between you and them. They need you as much as you need them. It is important that banks try to improve communication with people and do not simply, as I have heard is sometimes the case, haul people in at the first opportunity, read them the Riot Act and make their life difficult. You could explain in a more amicable way exactly what is going on and why you are forced to do what you have to do.
Mr Bamber:
The question is fair and contrasts with the questions during the first meeting, at which the British Bankers’ Association was present, where it felt like the banks had a bunker mentality.
Banks are in competition. I welcome the fact that we are not defending the banking industry at today’s meeting, because I compete with these guys and they compete with us. I have 30 years’ experience in banking, and I firmly believe that customers will remember us for how we behave during these times rather than for how we behaved during the good times. Therefore, it is my mission, and Henry’s mission in running the business banking, to ensure that we outperform these guys. It is undoubtedly their mission to outperform us. In my experience, customers have long memories and pass information through families to sons and daughters, and so on. Therefore, I do not welcome the time that we are in, but I welcome the opportunity to shine, to do things differently, and to be just as creative and as innovative.
I agree that we have not got our message over fully. We must do more about that. Part of the message that we must convey is not positive. It is obvious that we are not lending as much on property, and the reason is obvious: everybody knows that the banks over lent on property. The cost of borrowing has gone up, and I do not believe that we will ever see some of the present rates again.
To put that in perspective, RBS, 70% of which is owned by the Government, recently borrowed £1·5 billion on the money markets at a cost of 5·75%. I am lending on mortgages at less than 5·75%. Therefore, the unpalatable message that we must better communicate to customers is that there is no cheap money — the cost of borrowing is going up. Those are the conversations that the IoD fairly reports customers having with the banks. I am afraid that such discussions will continue to happen, because the world has changed for all of us. In my experience, a rate of 5·75% will not cripple a business. We are just returning to more normal levels of borrowing from the very cheap levels and those that we have had in the past year or so.
Mr Kidd:
I thoroughly agree with Mr Bamber’s comments on communicating with customers. Some of the anecdotal evidence might have arisen due to poor communication.
Bank of Ireland’s message to all its relationship managers and commercial managers is to be open and honest with their customers about how we see their business. We also offer them advice and support around how they see their business to ensure that businesses are aware of the changes that we are all seeing in the banking industry as well as the changes that they may be experiencing in their own business. Therefore, I thoroughly agree with Mr Bamber that communication is crucial. I hope that we have been doing it pretty well and that we will continue to improve upon that. Better communication will help to restore confidence in the economy in general and in businesses as we emerge from this period.
Mr Earley:
Not wishing to repeat what has been said by Mr Bamber and Mr Kidd, we all know that when one is dealt with toughly now, it is human nature to remember that treatment when times get better. Therefore, if First Trust is to protect its franchise, which is built on the back of relationship banking in all its forms but with the same aim, it must stick with existing customers through the bad times. Otherwise, we will not have those customers in the good times. That requires communication.
We were all thrown into the crisis very suddenly, which was difficult for customers, but many of our staff have never experienced such times. We have been trying to communicate to them why they must take certain actions that they have never had to before. I think and hope that we are slowly coming out at the other end.
Ms Purvis:
I appreciate the witnesses’ presence. The fact that they are here helps them to communicate with people who will be watching television, listening to the radio and reading newspaper reports of the Committee meeting. An analysis of the situation helps people to query more and to become more aware of what is out there and what is on offer, which is what I want to explore further.
The IoD survey said that 53% of respondents reported that bank charges had increased since the beginning of the year and that that compared with compared with 43% of IoD members surveyed across the UK as a whole. Are businesses paying higher fees in Northern Ireland than elsewhere in the UK?
Mr Elvin:
Far from higher fees, Northern Ireland businesses are still not paying as much in fees or margins on their loans. I contest that the data shows that in the past five years Northern Ireland has the most competitive banking industry. Without referring to specific Ulster Bank data, average margins have probably fallen by at least 50% over a three-year period. As the saying goes, the customer never had it as good as they had it going into this recession. However, that position was unsustainable. Therefore, to increase margins in order to reflect the cost of money, as explained by Mr Bamber, and to have margins rise to reflect risk, which Mr Kidd spoke about, is fair and reasonable.
You contend that it is unfair and that we are overcharging compared with what customers in the UK and the Republic of Ireland are being charged. That is certainly not the case. I can tell you that I am getting beaten up quite regularly by my boss — Mike Bamber’s equivalent on the corporate market side of the business — who tells me that my average margins in Northern Ireland are lower than those in the Republic of Ireland. What you are saying does not stack up. The data that I have does not back up your argument; I will leave that up to the others. I do not believe that we are imposing unreasonable margins and fees on customers.
Ms Purvis:
It would probably help us to have that data, so that we could make comparisons. It is obvious that we are relying on data from the IoD survey. That is a benchmark for us; it is the first evidential base from which we can work. I know that that survey will be repeated. Perhaps there is an opportunity for the banks to publish their own data that will inform policymakers and customers.
Generally speaking, term borrowing is considered to be more appropriate than overdraft borrowing. Is that pattern reflected in Northern Ireland? Have you seen a reduction in overdraft borrowing in contrast to term borrowing?
Mr Bamber:
There is more term borrowing on the personal-banking side because it aids budgeting. Customers tend to use overdrafts and overdraft limits for occasional purchases. Equally, in my experience, credit card usage is lower in Northern Ireland than it is in GB.
Ms Purvis:
What about small businesses or SMEs?
Mr Elvin:
Small businesses use a mix of term borrowing and overdraft facilities. Customers are always keen to go down the overdraft route. Most bankers who have been around for a while will always advise customers to structure their debt properly; in other words, to use term borrowing as much as possible. However, it must be recognised that the use of term-borrowing facilities involve covenants, and customers must accept that covenants are there to be adhered to. If a customer breaks a covenant, the bank has the right to renegotiate the loan. Term borrowing has an element of certainty, and banks are keen to structure loans using that option because it is not appropriate to run a business solely on overdrafts.
Mr Earley:
I will follow up on a point that was made earlier about increased margins being imposed on term facilities. If a customer remains within the conditions of their covenants and conditions, it is illegal for a bank to change the price. There is a perception that we are imposing conditions willy-nilly, and that we can say to a customer who has borrowed on the base rate plus 1·5% that his charges will rise to the base rate plus 3·5%. We cannot do that legally if a customer has honoured his terms and conditions, even if that lending is costing us money. All the banks have lending that is costing them money, given the cost of money now. If the customer stays within the terms of a 10-year facility, it will cost him the base rate plus 1% until the end of the 10-year period.
Mr Paisley Jnr:
Do you include a magic clause that says that borrowing is repayable on demand?
Mr Earley:
That is applicable to a demand loan, not a term loan.
Mr Paisley Jnr:
OK. That is an important distinction.
Mr Kidd:
That is a key element in helping to communicate to customers the nature of those facilities as well as the reasons for the renegotiation of a loan. I am happy to take that particular case up with you.
Mr Paisley Jnr:
I will speak to you afterwards.
Mr Kidd:
It is appropriate for small businesses to have a mix of the security of term-borrowing facilities and the flexibility of an overdraft. It is important that the structure of the loan matches the customer’s financial requirements. There has been no change in our approach in that regard; our small-business products are a mix of term loans and overdraft facilities.
Ms Purvis:
You talked about the enterprise finance guarantee scheme. I am not going to ask about that, but there are a number of Government schemes. The Department of Enterprise, Trade and Investment has produced a matrix of financial support for small businesses. To what extent are you familiar with the schemes that are on offer? How do you encourage SMEs to take those up?
Mr Elvin:
All the banks will have understood and have had an element of involvement with those schemes. The Ulster Bank distributed information to a large number of businesses across Northern Ireland, not only our customers but right across the gamut of businesses, informing them of what was available under the various schemes.
While we were waiting to come into the Committee, we were discussing how the Government can help by going to the business community to highlight the various available schemes, either directly or through organisations such as the IoD or the CBI. The banks can do their part, and I know that the Ulster Bank, the Bank of Ireland and First Trust have been doing that. If what we want is a true partnership to publicise and encourage, the Assembly has a role to play.
Ms Purvis:
I am aware that the Department, through Invest NI, the IoD and the CBI, has produced the MATRIX report and that is now available on the Internet.
Mr Elvin:
Other than it being available on the Internet, has there been a publicity campaign for the MATRIX report? I have not seen it.
Mr Kidd:
We have ensured that all our customer-facing managers are aware of the MATRIX report and the schemes that are available. We have communicated information on the new scheme that was announced two weeks ago to our managers to ensure that they are making the appropriate customers aware of it. There is a number of schemes available. They are certainly not a panacea, but they are a useful tool and support for businesses. As I said before, it is not always a solution from the bank that is needed. Some of the schemes provide the required solution; therefore, it is important for our staff to ensure that they communicate those schemes to their customers. The MATRIX report is a very good document; it summarises the situation clearly and lets people find more detail that may be relevant to them, which is to be welcomed.
Mr McGowan:
Our organisations face a communication challenge that involves contacting our customers to increase their awareness levels. Over the long term in Northern Ireland, I have observed that there is a cultural aversion on the part of business customers to look to those sorts of schemes as their first port of call. They are more inclined to look for debt funding directly from their bank. Earlier, we referred to the preponderance of overdraft debt and how that is favoured over term debt. We must educate the business community and bring it along, which will be a challenge.
Ms Purvis:
Some of that support is in the form of a grant, which does not require any payback. It is important that businesses know that.
I want to return to the issue of social economy enterprises, particularly the benefit of social economy enterprises in addressing unemployment and building sustainable and cohesive communities. I know that the Bank of Ireland has been involved in the Social Finance Foundation in the Republic and has contributed part of €25 million to the foundation, which acts as a supplier of investment finance to social economy enterprises. The Ulster Community Investment Trust has written to all the major banks in Northern Ireland seeking to discuss the possibility of establishing a similar fund in Northern Ireland, which would be administered through UCIT to help finance or provide on-lending to social economy enterprises.
As someone who comes from a community background and knows the benefits of those enterprises and what they bring to the community in addressing the issues that I outlined, what are your initial thoughts on contributing to such a fund, given that there is merit for your banks not only with regard to their social corporate responsibility, but with regard to the tax relief on that type of fund?
The Chairperson:
UCIT is waiting for a meeting with the banks to discuss that proposition.
Mr Kidd:
The Bank of Ireland has received communication from UCIT and we are trying to organise a meeting with its representatives next week to discuss those issues. Having being involved with the scheme in the Republic of Ireland, that group is relatively well-placed to understand the benefits of such a scheme.
Mr Earley:
First Trust has also received an invitation and we will be meeting Brian from UCIT. We have been involved in this type of scheme over the years. We want to get involved, because we are aware of the scheme’s benefits and because we have a social responsibility.
Mr Bamber:
Neither I nor Henry has seen the letter. Perhaps it has got lost in the post, or, perish the thought, they forgot to send it to us. Even without having seen the letter, I am pretty sure that we will want to play our part. We already support a couple of community funds, namely YouthBank and MoneySense. Indeed, MoneySense won a community impact award at last week’s Business in the Community awards. We will not surrender our competitive advantage in that area to other banks. If we can find the letter, we will give it a warm response.
Mr McLaughlin:
We could help to find the person responsible and ensure that letter is sent to you. [Laughter.] The Committee was impressed by UCIT’s presentation. It is a sound business proposition from the perspective of the banks and the social economy sector. It was useful that Dawn mentioned that to you.
Mr McGowan:
I was told this morning that UCIT has expressed a preference for meeting the banks collectively to explore possibilities. UCIT has engaged with the British Bankers’ Association in that regard to try to convene a meeting.
Ms Purvis:
Earlier, I asked the building society representatives about a changing culture in lenders’ behaviour. I mentioned the restriction on buy-to-let mortgages to 75%; the maximum loan-to-value amounts; the maximum loan-to-income amounts; and the probable ban on securitisation.
One of the building society representatives did not engender confidence when painting a picture of the need for international investment to increase lending ability in the UK market. That representative told us that he does not foresee a ban on securitisation, because that is what attracted international investment and international markets to the UK, but he said that it is a bit risky at the moment. The UK is seen as a bad debtor currently; it is not attracting foreign lenders. That representative suggested that unless securitisation in restricted in some way, the boom and bust could happen all over again. How is foreign lenders’ withdrawal from the market affecting lending in the UK? Can we continue without foreign lending? Would measures to attract foreign lending again merely save up trouble for the future, particularly with respect to debts being bundled and sold on?
Mr Bridle:
That is a very good question, and it strikes at the heart of the current situation. The mortgage market is in a period of transition. We have come through a period in which there was an excess supply of funds, which was not only driven by foreign banks. Northern Rock, for example, captured 20% of new mortgage business in the UK at one stage, but it stopped lending overnight. Moves are being made to reintroduce that lending.
I do not sense that there is a particular issue with the supply of mortgage finance in Northern Ireland, but there is an issue with demand and confidence. Some lenders would have previously lent at 120% loan-to-value rate, and the pendulum then swung in the other direction, to 70% or less. It is beginning to come back a bit; for example, in our submission we refer to the median loan-to-value over a long period for first time buyers requiring an average deposit of about 13%. We feel that something like a 90% loan-to-value rate is correct when buying a house and a 10% deposit being provided is appropriate and prudent for all parties.
The problem with the UK mortgage market was that it swung so far so quickly that young people in particular did not have the opportunity to save. However, we are now in an environment where the dynamic between borrowing and saving money has changed, and the virtue and value of saving and thrift is returning. Securitised markets may loosen up again in time. However, many people have learned some painful lessons in respect of over-borrowing and over-leverage, and it will be a long time before we return to the previous system of lending.
Mr Bamber:
There is a shortage of money supply as the securitisation markets have dried up and it is now impossible to obtain new securitisation of mortgages. That said, there are good and bad securitisations, and the Americans carried out plenty of bad ones. The bad securitisations were sub-prime from day one, yet the rating agencies still gave them a AAA rating. That is why the banks took them onto their balance sheets without asking as many questions as they should have.
In Northern Ireland, we continue to ready our books for the securitisation of mortgages. At the moment, we are able to pledge our mortgages with the Bank of England, and if we were in the South we would be able to pledge with the ECB. Those and other central banks are still providing funds. For how long that will continue is anyone’s guess, but I suspect that it will continue until another market is able to take their place.
However, there are definitely less funds available, and reduced supply and increased demand has led to the price of money rising. That is basic economics: with supply and demand, price is the final arbiter.
Ms Purvis:
Some argue that the credit rating agencies contributed to the credit crisis. That is because those agencies had a vested interest in rating the debt as they were not independent from those that were issuing the debts. Do you think that those agencies should be independent?
Mr Bamber:
Given that the same rating agencies are still in existence and still rate the banks, I will be quite circumspect in what I say. [Laughter.] My own personal view is that regulators, rating agencies, banks and their boards all had a role to play. I do not know enough to decide where more blame lay, but there was a collective responsibility. Certainly, none of the parties that I have named was blameless; that is for sure. I will keep my answer at that.
Ms Purvis:
That was very diplomatic.
Mr Bnmber:
Thank you. That is not a characteristic that is often attributed to me. [Laughter.]
Mr O’Loan:
On a different matter, an exercise involving the Consumer Council is underway to ensure that a free ATM is available in every disadvantaged community in Northern Ireland. What role will the banks play in that? More generally, are the banks taking a combined approach to ensure that an ATM is accessible to everyone in Northern Ireland?
Mr Bamber:
I stand to be corrected, but I believe that Ulster Bank has the most ATMs in Northern Ireland and all our ATMs are free. Currently, we do not have plans to begin charging for ATM usage, but the cost of dealing with ATMs, carrying cash and the security implications involved are only going in one direction, and that is upwards. Therefore, I foresee a threat to the provision of ATMs.
Mr O’Loan:
How is the territory mapped out if each bank operates independently?
Mr Bamber:
I know how it works with the Ulster Bank, and I suspect that the other banks operate in the same manner. We can all calculate the profitability or loss-making of our ATMs, and that often determines where an ATM is situated. As there is less cash circulating in the economy, usage of ATMs has reduced. We review our ATMs all the time. The reason that we install ATMs is to be profitable; we get income from the charges we levy on other banks and they levy charges on us. At present, Northern Ireland is fairly well provided with ATMs. There are some charging ATMs that are run by independent companies but, to my knowledge, there are not any run by banks.
Mr Kidd:
The Bank of Ireland offers a number of self-fill ATMs for retailers. You may have seen those ATMs in shops. Security costs for transporting cash are significant, so those are on offer and they are popular with a number of retailers. It is an alternative option. However, such ATMs are available only when the shop is open; they do not have the round-the-clock availability of other ATMs. However, we have taken that important initiative to try to make more ATMs available.
The Chairperson:
Are those ATMs free?
Mr Kidd:
Yes, they are.
Mr McGowan:
All First Trust ATMs are free. Mike has identified some of the economic issues in the provision of ATM services. Coverage in this market and in similar markets in these islands is a matter of competition between the various institutions. Mike mentioned that there are providers who charge for their services. We have no plans to charge for ATM services. Coverage and how we choose to position our network are determined by the competitive environment in which we operate.
Ms Purvis:
A point to be aware of is that when ATMs are situated in shops, the shops dissuade people from using debit cards. That has an impact on people on low incomes. If they have £15 in their account, they cannot get that from an ATM that dispenses only £20 notes. Some shops refuse to take debit cards and encourage people to use the ATM; that is something to be aware of.
The Chairperson:
I have no wish to bash anybody here, but I want to raise an issue involving the Ulster Bank. For a number of years, that bank had a facility known as north-west corporate services. I believe that it was popular and profitable all round. The bank decided to relocate that unit to Belfast. On Monday, I attended a meeting in this Building with a business that had a scheduled meeting to renew its loan facility in April, but it is now seven weeks later and no decision has been made. The business had a meeting in the north-west office with an officer who has since been transferred to other duties. It is now being referred to Belfast but it cannot get a face-to-face meeting. At one time, that company employed 80 workers, but it is now facing the wall. It is very dissatisfied.
Mr Bamber:
We have not closed or moved anything away from Derry. On Friday, I will be attending lunch there with customers in our substantially refurbished, rebuilt, extended business premises. We have very big premises in Derry. We have moved one individual, which seems to have raised some publicity. However, we are not moving business lock, stock, and barrel from Derry to Belfast.
The Chairperson:
I did not suggest that. The corporate support was a brilliant initiative by the bank. It has been relocated to Belfast. Do you dispute that?
Mr Elvin:
I do. I had been enjoying basking in the glory there, guys. [Laughter.] It is good to even things up.
This has either been badly handled by the bank, or it has been manipulated.
The Chairperson:
Or both.
Mr Elvin:
What we had is a business centre covering the whole north-west. There has not been one iota of change to that. We had a property division, operating out of the business centre and servicing a small number of customers in the north-west. It handled no corporate customers; I want that recorded. The individual in question never handled a corporate customer in all the years that that unit ran. All corporate customers were handled out of Belfast. A number of property customers were handled by the individual.
If I were to ask any one of the bankers sitting at this table whether they are lending to many people in the property sector, the answer would probably be a resounding no. Similarly, if I were to ask them whether they wanted to grow their property book, they would say that they do not want to do that at this juncture.
We can service small and medium-sized enterprises in the north-west better, and that can be done by using resources that are already available in the north-west to augment the business centre there. Indeed, two more people will now be working in that business centre. Our team in Belfast will now handle the small number of property cases in the north-west. That team handles our corporate customers in the north-west of the Province, and I do not see them as being any different from our property customers in the north-west. We will go to the north-west; as I said, I will be in the north-west on Friday, and I assure you that no customer there has been disadvantaged.
The Chairperson:
I met the two partners of that company. They had a meeting at the end of April. The individual with whom they had become accustomed to doing business and whom they trusted and relied on has since been removed from that position. They have only ever been in telephone contact with the two new representatives from the Belfast office. They have asked for face-to-face meetings but they have been told that that will not be possible. It is seven weeks since their meeting and they have yet to get a decision.
I accept that that case has been mismanaged. I also accept that because of individual interests, there has been a degree of manipulation in how it has been presented. I associate myself with the remarks of members who praised the wider efforts to stimulate the economy; however, this is a mess. A local paper is running with this story because many of your customers are dissatisfied. I met a significant business person who has decided not to do business with your bank any more because of what happened in the north-west.
Mr Elvin:
I am more than happy to take up the case with you. There are not many individual cases outside Belfast that have been handled in that manner; it is little more than that which I can count on my two hands. I will ensure that I will come back to you on any case that you raise with me.
The Chairperson:
I appreciate that. Compared with our last meeting, the quality of this engagement is absolutely different. We are in contact with the other bank that is not represented here today. As a number of members acknowledged, this engagement is qualitatively much better and will help us in our work. I hope that you see value in this engagement. As we work our way through this crisis, we should continue to work together. Declan O’Loan made that point. We are all in this together; this is a joint project in every way.
Mr Elvin:
It is important that you engage that other bank, because it has a reasonable market share in the SME sector. It is only right and proper that you do that.
The Chairperson:
I deliberately mentioned that bank so that you know that it has not, by any means, fallen off the edge of our table. On behalf of the Committee, I thank you for your contribution.