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Conference call speech
National Irish Bank
17 December 2010
Andrew Healy & Martin Gottlob
CORPORATE PARTICIPANTS
SPEECH
Andrew Healy
Martin Gottlob - Danske Bank - Head of IR
National Irish Bank – CEO
Martin Gottlob
Good morning and welcome. Thank you for taking the time to
Danske Bank – Head of Investor Relations
attend this presentation on Ireland and National Irish Bank.
I will conduct the conference call here from Copenhagen, but
most of the talking will be made by my colleagues in Dublin
and therefore I will hand over the microphone to Andrew
Healy, CEO of National Irish Bank.
Please go ahead, Andrew.
Andrew Healy – National Irish Bank - CEO
Thank you, Martin. Welcome, and thank you all for attending
this update on developments in the Irish economy and the
implications of these developments for Danske Bank’s
activities in Ireland via National Irish Bank.
With me today are Chief Financial Officer, Grellan Dunne and
Chief Economist, Ronnie O’Toole.
Please go to slide 2
Agenda
In today’s presentation we will provide an update on the
economic situation in Ireland and the prospects for National
Irish Bank, with particular focus on asset quality and the
bank’s strategy in the changing banking marketplace here in
Ireland.
After the presentation we will open up for a Questions &
Answers session.
Please go to slide 3
4 Year Plan to tackle Government Finances
From last August onwards, there was a surge in the cost of
Irish sovereign borrowing, which was largely driven by fears
over the scale of losses in the banking sector.
While the state had funding until well into 2011, its hand was
forced by a run on the Irish banks by wholesale and private
investors.
In addition, there was considerable pressure placed on
Ireland by the European Commission to accept financial
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support in order to reduce the contagion risk for other
eurozone countries, particularly Portugal.
Please go to slide 5
Ultimately a package of €85bn was agreed. The Irish
Economy has some good underlying fundamentals
government has committed to implement a four year plan
Given all the bad news flow from Ireland, it is understandable
involving €15bn of austerity measures – tax increases and
that the external perception of the long run potential of the
spending cuts - from 2011 to 2014. This will be front-loaded
Irish economy is poor. There is undoubtedly a painful period of
to the tune of €6bn in 2011.
adjustment ahead but the underlying economy retains some
The plan involves funds being made available to the Irish
good strengths. I have already mentioned the export sector
State as well as to the Irish banks. In terms of the banks,
which is growing at a rate of over 10% and which is expected
there are stringent conditions associated with this support,
to remain strong. Ireland is a very open economy and will
including increased capital requirements. I’ll talk a little more
benefit from an upturn in global demand.
about that later.
Ireland retains a strong Multinational sector with a good
pipeline of new investment from abroad. Many of the world’s
Please go to slide 4
leading pharmaceutical, technology and financial services
Medium Term Economic Prospects
companies use Ireland as their export base into the European
We expect domestic demand will contract by almost 3% next
single market.
year, impacted by further reductions in construction activity
as public infrastructure spending is scaled back, as well as a
While unpopular among other European countries, Ireland
reduction in current public spending.
has successfully defended its low 12.5% corporation tax
rate, which is one of the key attractions for multinationals to
Consumer spending will also weaken due to higher tax bills
invest in Ireland. These companies also like Ireland because
and lower welfare payments.
of its English-speaking workforce and its pro-business
regulatory environment.
Unemployment has broadly stabilised at 13.5% over the last
6 months, though there will be no meaningful improvement
There has already been a significant improvement in Ireland’s
any time soon given the weakness of domestic demand.
international cost competitiveness, with labour costs down
Having said all this, we do not expect Ireland to fall back into
5% since the end of 2008, though costs will have to come
recession.
down more.
We anticipate overall GDP growth of 0.9% in 2011 driven by
In the domestic economy, a lack of confidence has resulted in
continued export growth. The performance of exports has
the household savings rate tripling from 4% to 12% from
been particularly strong, and has been boosted by a
2008 to 2009. Households therefore have capacity to
significant improvement in competitiveness as costs of
stimulate the domestic economy by using disposable income
production have rapidly reduced in the Irish economy. As long
– but confidence is key.
as global demand recovers, Irish exports should continue to
outperform and to be the main engine for economic growth in
Ireland has one of the youngest populations in Europe and is
the future.
well recognised for its high education standards and welleducated workforce.
Our forecast is that the level of gross Government debt could
Please go to slide 6
peak around 120% in 2014. However the Government have
indicated that they are going to run down some of their cash
reserves, notably the National Pension Reserve Fund, so the
Property Market
net debt figure could turn out lower than this.
The property market remains in very poor shape, and the
additional austerity measures will not help.
Much of course will depend on the trajectory of economic
Residential property prices across the country are down
growth.
from peak by at least 36% and, in many areas, up to 60%.
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While there are recent signs of increased activity in the
Detailed asset disposal and deleveraging plans must be put in
second hand housing market in greater Dublin, over-supply
place by the Banks by April 2011.
outside Dublin is likely to depress house prices for a number
Many of the foreign owned banks have downsized and we
of years.
have seen the exit of a number of others.
The overhang is estimated to be around 90,000 units, or 6%
Now I would like to move on to National Irish Bank.
of the residential stock, though this is disproportionately
higher outside of the main urban areas.
Please go to slide 8
There was a surprise announcement in last week’s Budget
that Ireland’s very high rate of tax on house-purchases was to
NIB Loan Portfolio
be greatly reduced to a flat 1% for transactions less than
The table shows the breakdown of the loan book as at the end
€1m and 2% for values greater than that level. Previously the
of quarter 3, and the Bank’s impairments by category.
rate had been as high as 9%.
Cumulative impairments to 30th September amounted to
This will help the property market, but its influence is likely to
€1.4bn, of which €1.1bn, almost 80%, relates to commercial
be limited in the short term given the many other challenges
property. 59% of commercial property loans have an
facing the market.
impairment charge with an average impairment of 50%.
From peak, values for commercial property have fallen by
Looking at the commercial property book in more detail,
around 60%, with development land values down by as much
investment property makes up 2/3rds of the total
as 80-90%. Vacancy rates average at about 20%, however
commercial property exposure and this sector has the lowest
this number varies across regions. Over the course of 2010,
impairment rate of 18%. This is due to the fact that while the
the rate of reduction in commercial property prices has
values of properties have fallen, these tend to be let out to
eased, with only a 1% fall in the most recent quarter.
good tenants and are generating sufficient cashflow to
service the loans.
Please go to slide 7
The Development and Landbank books are impaired by 54%
Banking in Ireland
and 46% respectively. However, within these there are some
The main reason why the Irish Government was ultimately
performing assets in good locations which have little or no
forced to go to the EU/IMF was the market uncertainty which
impairment, while the non-performing assets in poor
surrounded the Irish banks.
locations have up to 90% impairment.
The EU/IMF programme includes a range of measures
Please go to slide 9
designed to restore market confidence in the Irish banks.
Under the programme, the target capital ratio has been
Mortgages
raised from 8% Core Tier 1 to 12%. It seems clear the
Impairments on the mortgage book remain relatively low at
Government will increase its stake in the Irish banks and that
1.3% with arrears well below market levels.
it will play a prominent role in the banking market over the
1.6% of loans (247 loans) are in arrears over 90 days
coming years.
compared to a market average of more than 3 times that
level.
Under the programme, there is also a requirement for the
Irish banks to be significantly downsized. The Credit
Institutions Stabilisation Bill, which is currently going through
The quality of our book reflects the strategy we pursued
the houses of parliament, provides the Irish Government with
during the boom years. We did not use brokers to originate
unprecedented and extraordinary powers to implement a
new business and we did not market 100% mortgages. Our
fundamental restructuring of the Irish banking market.
average LTV is currently 83% despite the fall in property
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prices which reflects the low LTV of these loans at
Further, it is reported that NAMA has written down the value
origination.
of assets where it has concerns that there are flaws in the
underlying documentation, which is not an issue for us.
Please go to slide 10
There is also a very wide difference between the haircuts
applied to the loans of the 5 banks participating in NAMA.
Business Lending
The business lending book – SME and Corporate lending -
We do of course monitor developments relating to NAMA,
accounts for 25% of all lending.
and the market more generally, very closely. But reliable
Impairments are 11% across this book, representing
direct comparisons with NAMA are virtually impossible and
individual businesses that have encountered difficulties.
NAMA discounts do not influence our impairments.
While all sectors are facing cash-flow pressures, there are no
major concentrations within the SME and Corporate books.
Please go to slide 13
Please go to slide 11
National Irish Bank: Financials
For the 9 months ended 30th September, income declined by
Impairments
11% to €124m due to reduced customer demand, the
We expect impairments in Ireland to remain high in 2011
impact of impaired loans and lower deposit margins.
also, but we expect that Q2 2010 was a spike and we do not
Costs reduced by 3% to €88m, but the full benefits of our
expect it to be repeated.
restructuring programme will not flow through until next year.
I will cover our actions around costs on a later slide.
We hope that the gradual trend of declining impairments will
After loan impairment charges of €504m, we reported a net
continue, but of course there can be no guarantees.
loss of €486m for the period.
While the austerity measures do not help, they have not
Please go to slide 14
materially changed our expectations. As mentioned earlier,
impairments are concentrated in commercial property,
Balance Sheet and Margins
accounting for almost 80% of the total and we expect
National Irish Bank’s loan portfolio is reducing slowly through
commercial property to continue to account for the majority
amortization and weak demand, and is down €1bn or 10%
of impairments in 2011.
from the peak in Q1 2009.
Impairments will remain high due to the continuing fall in
The trends in deposit growth are strong, with growth in
property values/collateral, and mainly relate to increased
average balances of 14% year on year up to Q3 2010. We
impairments on customers already impaired rather than new
have seen further growth in Q4 as customers are attracted
impairments.
by our capital strength as a branch of Danske Bank. Our loan
to deposit ratio has improved from 40% to 51% during
Please go to slide 12
2010.
NAMA
We have made substantial improvements in our lending
It is not possible to directly compare the impairments on
margin over the past two years where we have been working
NIB’s property book with the NAMA discounts.
to reprice our loan book to more accurately reflect risks and
funding costs.
NAMA loans are coming from 5 different banks, consist of a
Please go to slide 15
different mix of properties and are in different locations. We
do not know the original LTV of the loans or whether they are
currently performing or not.
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Costs
channel approach involving a range of direct banking and
We embarked on a major restructuring of our operations this
advisory channels.
time last year.
Please go to slide 17
The strategic objective was to put the business on a lower
cost platform suited to a low growth environment and, at the
Outlook for NIB
same time, reposition our customer proposition so that we
In concluding, I would say that the short-term economic
could maximise our competitive strengths.
outlook for the Irish economy has deteriorated because of the
necessary additional austerity measures being taken by the
Government.
The programme has now been completed, well ahead of
schedule.
We will continue our focus on actively managing our loan
It involved closing more than half our branches with our
book, though impairments are likely to remain high in 2011
remaining branches now converted to a cashfree model. We
as the Irish economy struggles.
entered into a partnership deal with the Irish Post Office to
provide cash services for our customers across their
Through our restructuring programme, a lot of ‘heavy lifting’
network of 1,200 post offices around the country.
has been completed in 2010 and we have successfully
Staff headcount has reduced by 20%.
moved our organisation to a position which provides us with a
good platform for the future.
The full benefit of these cost savings will be evident in our
We believe we have made more changes than most to handle
2011 results.
the dramatically changing banking landscape in Ireland. And
having
Please go to slide 16
moved
more
quickly,
there
should
be
good
opportunities for us in our target segments.
Strategic Repositioning
The restructuring programme was more than just a cost
It’s going to continue to be tough next year but we have made
reduction programme. It was also an important strategic
the changes necessary to put us on a good footing for the
repositioning of our business model, to give us more focus on
future.
the
customer
competitive
segments
strengths,
where
particularly
we
in
have
important
Corporate
Please go to slide 18
and
Institutional banking and in the upper end of the business and
personal banking sectors.
Q&A Session
That concludes our presentation, and we are now ready to
We are the best online bank for businesses in Ireland and our
answer your questions. If you are listening to the conference
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This
by e-mail.
product is particularly suited to the export sector which is
one of our most important customer segments, and as
Operator, we are ready for the Q&A session please.
outlined earlier, exporters are naturally less exposed to the
domestic Irish economy.
Claus Højmark – ABG - Analyst
We have reorganised and expanded our Corporate Banking
unit to ensure greater scale and capability to develop our
Yes, just two questions. Could you please elaborate a bit on
business with institutional, corporate and multinational
the split of your impairments this year? How much of it has
companies. We are encouraged by the quality of new
actually been due to new problem loans coming into your
business customers that have moved to us this year.
portfolio and how much has been due to collateral falling in
values? That's the first question. The second question is:
We have implemented a disciplined approach to customer
You've now guided for high impairments in 2011. You've also
segmentation and channel management, adopting a multi-
done that in previous quarterly statements, but I struggle a
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bit to interpret what you mean by high. High – is that high
increased the haircut – why is it then not possible this time?
relative to your earnings in Ireland? High – is that relative to
That's the first question. The second one is about the past
what your losses are going to be in 2010, or can you give
due loans and residential mortgages. I talked to AIB earlier
some more flavour into what you mean when you say “high”?
this week, and I believe they're at around 2.6% being past due
Thank you.
90 days. So my first question: Who is it that is at around
6.0% or what is the market level, and do you know if those
have already been written down and what will happen in these
Grellan Dunne – National Irish Bank - CFO
cases? Thank you.
In response to the first question, the impairments in 2010
have primarily been related to existing impaired customers,
Grellan Dunne – National Irish Bank - CFO
so it's primarily related to reductions in collateral values. If
you look at slide 21, it shows the breakdown of rating
If we take the first question, we've said in the presentation
category 10 and 11; and you'll see category 11 has been
here that NAMA doesn't impact or influence our impairment
pretty flat throughout 2010. So it's primarily further falls in
levels, but we also do look at what NAMA's doing and the level
collateral values.
of discounts. In Q2, it did provide us with some more evidence
of what the market prices are. With the level of activity being
When we say high impairments going forward, we mean high
very low, it's very hard to have a definitive guidance to where
relative to our earnings. We would expect that impairments
values are at. But in Q2, it did give us some further evidence
will continue the downward trend, but you can't rule out
of where prices or collateral values were at.
fluctuations from quarter to quarter. But overall, we would
expect the trend to continue downwards. But high relative to
In relation to the second question, the past due 2.6%, we
our earnings is all we mean.
don't know whether they had been written down. In our own
book, we have impaired 1.3% of our mortgage book. They
haven't been written off at this point, so I'm not sure if that's
Claus Højmark – ABG - Analyst
the answer to your question.
So just to mention some number, if losses were five times
your pre-provisioned earnings, that would still be high, even
Jakob Brink – Handelsbanken - Analyst
though it's significantly down from '10?
Yeah, just one. Who is it in the market that is sitting with
those very bad mortgages?
Grellan Dunne – National Irish Bank - CFO
Yes, that's still very high compared to our earnings.
Grellan Dunne – National Irish Bank - CFO
We don't have that information. There've been a number of
Claus Højmark – ABG - Analyst
specialist mortgage lenders in the market who probably have
Thank you.
been more aggressive at the outset, but we really don't have a
breakdown of the market figures.
Operator: Jakob Brink from Handelsbanken is online with a
question.
Andrew Healy – National Irish Bank - CEO
If our figure is at 1.6% over 90 days and the market is at
Jakob Brink – Handelsbanken - Analyst
three times that level, it's obviously a combination of the rest
Yeah hi, it's Jakob from Handelsbanken. Two questions,
of the market. You mentioned one institution. But there are a
please. The first one is regarding the NAMA and the haircuts
number of specialist providers, and there are a range of
there. If I'm not mistaken, I believe after the Q2 where you had
financial institutions that are have varying levels of arrears.
the DKK 1.6 billion charge, you'd mentioned that that was
The market figure, though, is a lot higher than ours and the
because of new information from the transfer to NAMA. So
institution you mentioned there.
why is it now – that where AIB and others have actually
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been because of falls in asset values, falls in collaterals. And
Jakob Brink – Handelsbanken - Analyst
while the housing markets and the rate of fall of house prices
Great.
and property prices in Ireland have eased a bit this year,
prices are still falling, and it is of course difficult to call exactly
Operator: Nick Davey from UBS is online with a question.
where the market is because of the limited level of activity
that's going on.
Nick Davey – UBS - Analyst
I mean there are signs of increased activity in certain parts of
Yes, good morning, everyone. Nick Davey from UBS. First of
the market, but there's oversupply outside Dublin and so on.
all, thanks very much for taking the time to arrange this
Prices are down on the residential side by 36%, on the
conference call, very helpful. Just two questions from my side.
commercial side by 59%, and it's possible we'll see further
The first, I think coming back to a theme that has been picked
falls. It's unlikely that the austerity measures and the
up by a few previous questions, just on the provisioning
country's fiscal position generally will help a lot in terms of the
outlook for next year:
outlook.
I'm just interested to hear your reference to it being in your
When we talk about continued high impairments.
view increased provisions against already impaired loans. I
We're
taking account of the fact that we're likely to see continued
just would like if you would be happy just to flesh that out a bit.
falls in property prices, but it's difficult to be precise around
I mean is the fact that you have a particularly bearish outlook
where that will head. Also in terms of private customers, in
on asset prices into next year? And if so, would you maybe
terms of small businesses, the climate, the outlook is not
give us some sense of what your baking in when you are
particularly wonderful, but we do expect that the bulk of our
cautious into next year as far as a kind of secondary dip in the
impairments going forward, as we said, will continue to come
regional asset prices?
from existing impaired loans being impaired further.
And also just to flesh out, I guess your provisioning policy
In terms of the outlook for return on equity and performance,
more broadly: I mean if you have that outlook into next year.
it's difficult again to be precise. In terms of helping a bit with
Could you give us a sense as to why your book isn't marked to
that, obviously we have made some fairly significant changes
your central outlook already? And the second question just
to our cost base through removing half our branches, through
coming onto slide 13: your ROE before loan impairment
moving to a cash-free model, through reducing headcount by
charges is ticking down at about 12.5%. I realise you're
20%. That will help a bit on the cost side. In terms of revenue,
constructive on the cost outlook. I realise you're constructive
the demand will continue to be low. We expect impaired loans
on the margin outlook in the new banking sphere, but could
will hit our return on equity.
you just give us a little bit of a flavour as to where you see that
are we moving, just in broad terms?
Deposit margins are under pressure. What will happen in the
banking market going forward? There certainly will be some
I mean, my sense is, I mean, it's likely to be at least in the
transformation. How quickly that will take hold is hard to say,
medium-term a period of deleveraging ... fiscal austerity
but the market will change. There is potentially some upside
unlikely to provide a constructive backdrop for margins in the
on lending margins out of all of that and some opportunities
short- to medium-term. So could you just flesh out for as long
for National Irish Bank if other banks are under a bit of
as we have impairments in that division, what your sense is
pressure. So if we put all that into the mix, what return on
on ROEs, what your aiming for, what you're happy with, a bit
equity figure do we get? I'm not sure. I'd be quite cautious.
more colour there? Thank you.
Nick Davey – UBS - Analyst
Andrew Healy – National Irish Bank - CEO
Okay, thank you.
Yeah. I mean firstly in terms of provisioning, we have said that
the trend in terms of our provisions has been that existing
Operator: Aaron Ibbotson from Goldman Sachs is online with
customers have been impaired further, and that's largely
a question.
8
book is fixed margins, so you can't re-price it. And your
Aaron Ibbotson – Goldman Sachs - Analyst
margins have been stable since the interest rates fell in '08,
Yes, hi there. Good morning. I just got two questions if I may.
so I'm just trying to understand how you see that develop
The first one is just trying to square some numbers on the
going forward.
lending side. Is there any chance you can share with us what
you have actually written off? So if I look at this decline of
about a billon euros, is that actual amortisation or is some of
Grellan Dunne – National Irish Bank - CFO
it related to write-offs? I'm just trying to understand exactly
There's a couple of things you've mentioned there. Firstly on
how much you have written off of your assumed property
the branch closures: we haven't seen a significant loss of
book relative to where you are now. Is there any chance you
income as a result of that, and we have a low level of
can share that?
customer losses as a result. So the income impact of that is
negligible.
Grellan Dunne – National Irish Bank - CFO
On the impaired loans: you obviously see a hit on income
The write-off levels are very low. In 2009, the amounts
there as impairments continue to be raised. Those loans, we
written off are around 20 million, and it's a similar figure for
stopped accruing the interest on those, so that will impact.
2010 up to Q3. But I think you can see going forward the next
There is some potential upside on deposit margins if interest
few quarters. You can see an increase in write-offs as the
rates increase from the low levels they're at the moment. The
impairments that have been raised will be actually ... the loans
mortgage book – 70% of that tracks the ECB refinancing rate
will be written off in some cases.
– so that moves in line with the ECB rate.
Aaron Ibbotson – Goldman Sachs - Analyst
Aaron Ibbotson – Goldman Sachs - Analyst
So you have actually seen 1 billion of amortisation then.
Okay. So could I just ask one final question just following up on
Nick's question previously? On these prices, when you sort of
make your forward-looking impairments, you're saying that
Grellan Dunne – National Irish Bank - CFO
you're not using NAMA discounts as a guide price for asset
Sorry, could you repeat the question?
values.
Can I just ask what exactly are you using because my
Aaron Ibbotson – Goldman Sachs - Analyst
understanding is that it's extremely low turnover, particularly
Yeah. So you've actually seen 1 billion Euros? I'm just a little
on the secondary commercial property market. So I would've
bit confused if I compare to the sort of movement in the
assumed that NAMA would be the most sort of transparent
balance sheet of other Irish banks because it looks... I sort of
guide for asset prices, so that they would have a direct
assumed that there was some write-offs included in that, but
implication on your impairment?
we were looking at net loans. But your ... you've actually seen
1 billion of amortisation.
Grellan Dunne – National Irish Bank - CFO
What we use for valuations is professional independent
Grellan Dunne – National Irish Bank - CFO
valuers, which is pretty much the same as what NAMA used.
Correct, that's natural amortisation and repayments across
In some cases, we may use the same external companies; in
the various parts of the book.
some cases we may not. NAMA, I understand, have a range of
valuers working for them and we would have also depending
Aaron Ibbotson – Goldman Sachs - Analyst
on the different parts of the country and the different type of
Okay, but ... Okay, fine, perfect. Secondly, can I just ask on sort
assets.
of outlook for income considering that you're downsizing quite
dramatically and quite recently on the branch side. And also
my understanding is that quite a significant proportion of your
9
In terms of the NAMA question, the comparison: are we at a
Andrew Healy – National Irish Bank - CEO
disadvantage because 40% of NAMA book is in UK? You
And the key point to add to that is just to repeat that we can't
could argue yes, we are at a disadvantage because the
benchmark against NAMA. Their loans come from different
market there is performing better. On the other side, you
banks. They consist of a different mix of property types, and
could argue that: Well, less of our book is in land and
they're in different locations. We raise our impairments on a
development, so we have an advantage there.
quarterly basis based on the cash flows on individual loans
and the value of our collateral. So that's the approach we
Equally there have been loans transferred to NAMA where
take.
NAMA has given no value at all because there been issues
with documentation. So there's so many variables within
NAMA. And we don't have precise, detailed information on
Aaron Ibbotson – Goldman Sachs - Analyst
the loan, so it's impossible to make that direct comparison.
Okay, perfect. Thank you very much.
In terms of the expert group on mortgage arrears, there have
Operator: Simon Christensen from Nordea Markets is online
been a number of recommendations that have come out. We
with a question.
have adopted some of them and because their good practice.
In relation to the deferred interest scheme, we have opted not
Simon Christensen – Nordea Markets - Analyst
to participate in that. We don't believe there's one blanket
Yes, good afternoon, gentlemen, and once again thank you for
solution to mortgage arrears. So our policy has been and will
taking this call. I have four questions, if I may. On the NAMA
continue to be to work with customers on an individual basis
again (inaudible...) that NAMA is roughly 40% UK, where NIB
to find solutions, and I think our policy that we've adopted is
is around 4%, shouldn't that... I mean that would be your
proven when you look at our mortgage arrears compared to
disadvantage if we should compare the two books. I totally
the market. So at this point, we won't participate in the
agree that you cannot.
deferred interest scheme.
Secondly, there has been this expert group on mortgage
arrears, which has proposed a few things to be implemented
Ronnie O’toole – National Irish Bank - Chief Economist
in law. It looks likes to me that the banks will be punished
We did downgrade our GDP expectation for a few reasons.
somewhat – different interest schemes, et cetera. How will
Most obvious is the austerity measures that the government
that affect you?
have announced and increased. Secondly, I suppose because
the momentum of the economy has slowed down a lot, even
Thirdly, I can see now that you say that your loan losses will
within 2010. So the consensus forecast a few months back
be high in 2011. What kind of run rate do you think we should
was for GDP growth of around 1% this year, but it's now going
use? EUR 130 million has been roughly the run rate for 2010
to be around minus 0.4%. So the momentum going into 2011
if we exclude the second quarter. And lastly, you downgraded
is a lot worse, particularly on the domestic side. As I said,
2011 GDP for Ireland from 3% at the third quarter 2010 to
consumer spending, which had been picking up in the early
now roughly 1%. Should we expect to be a link to your
months of the year, has started to trend down.
collective impairments going forward? Thank you.
So given the extra tax increases, the cuts in social welfare
that we're going to see next year, there is going to be - or we
Grellan Dunne – National Irish Bank - CFO
expect a further deterioration on that front as well. In terms
Maybe take the run rate question first. I mean it's difficult to
of the public investment program, the Irish government had
say, as we said. We would expect to see the overall trend
been doing a very ambitious large infrastructure program
continue to decline, so I mean we can't really call more than
over the last half a decade or so. They had been planning to
that. A lot depends on the level of activity in the market and
reduce it gradually over the next number of years, but
where valuations go, so we can't be more precise than that.
because of the fiscal situation, they're reducing that much
more sharply next year. And it'll be (inaudible) a public
10
investment problem which will lead the decline in investment
you will have high impairments in the coming quarters. I
next year when up to now it's been the decline in residential
mean, are there any kind of change in your wording here?
construction.
Now you're saying that it would be for the entire 2011.
I suppose the reason why we're still forecasting a positive
Grellan Dunne – National Irish Bank - CFO
growth rate of 0.9%, which is significantly above the growth
rate you see for the likes of Greece and Portugal, is because
No, I think the comment is the same in 2011's four quarters,
of the continued performance of the export sector. Irish
so the comments are the same. Nothing has changed from
exports only declined 4% last year against around 13% in the
what Peter would've said. We may see fluctuations between
eurozone. We're going to outperform the eurozone again,
quarters. But overall, again, the overall trend should continue
probably this year, but by much smaller margin. But over two
the downward trajectory.
years, it still represents a significant outperformance.
Simon Christensen – Nordea Markets - Analyst
Simon Christensen – Nordea Markets - Analyst
Okay. Thank you. Much appreciated.
Okay, thank you. And maybe just a follow-up. You shown a
slide – I think it's 21 – that the upgrade in your books in the
Grellan Dunne – National Irish Bank - CFO
third quarters are down and the... I mean how... Is this... First
Thank you.
of all, is this in a net or gross basis, and how has this turned
into the fourth quarter?
Operator: Jan Wolter from Deutsche Bank is online with a
question.
Grellan Dunne – National Irish Bank - CFO
This is on a gross basis. Sorry, I didn't catch the second part
Jan Wolter – Deutsche Bank - Analyst
of your question.
Yes hi. Jan Wolter here at Deutsche Bank. A couple of
questions here if I can. First, if we look at the commercial
Simon Christensen – Nordea Markets - Analyst
property book there, you have what you call investment,
I mean, how do you see this trend going forward? I mean, has
which is EUR 2.4 billion, and that's been written by 18% or so.
there been any major developments? The number of
Just could elaborate a little bit more on this portion of the
downgrades is increasing, and the number of upgrades is
book because the write-off is fairly much lower than the rest
decreasing into the third quarter.
of the book? And second question is: How much on average
have you marked down your commercial real estate collateral
would you say? And the third question is: How much
Grellan Dunne – National Irish Bank - CFO
sovereign bonds and bonds in Irish banks are on the balance
sheet? If you could tell us what that looks like. Thanks.
Yeah, I think you got to look at the overall trend rather than
individual quarters. Ratings are down on different parts of the
book at different times during the year. So I think when you
Grellan Dunne – National Irish Bank - CFO
look at the economic environment, it's probably reflected in
the trends here, so we wouldn't see any change in the overall
Just to cover the last one. We don't have any sovereign bonds
trend here. I still expect an overall downgrade in the book for
on the balance sheet in National Irish Bank.
the next couple of quarters at least.
Going back to your first question – elaborate a bit on the
commercial property investment – the book there, 2.4 billion,
Simon Christensen – Nordea Markets - Analyst
is a mix of retail, office, industrial. The reason the
Okay. And just finally to underline this, I think... I remember. I
impairments are at 18% is the majority of that is let out to
haven't checked the conference call printout, but I think
reasonably good tenants, so the impairment levels more
Straarup said that at the third quarter conference call that
reflect the cash flows rather than the valuations.
11
Six per cent of that book is vacant, so 94% of it is let; 60% of
Jan Wolter – Deutsche Bank - Analyst
it is fully let, and the remaining part is partially let. So there is
Okay, thank you.
cash flow. These assets are producing cash; that's why
they're not as heavily impaired as the land or development
loans.
Grellan Dunne – National Irish Bank - CFO
Thanks.
In terms of how much we've written down our collateral, it
very much depends on the location and the type of the asset. I
suppose our write-downs would be in extreme cases 80-90%
Martin Gottlob – Danske Bank - Head of IR
on land, where it's in rural areas and there's no future value in
I have a question coming here from the website. It's coming
it. In commercial property, it's down to 60% in some cases,
from Per Grønborg. He asks the following questions: What
but it is very much location-dependent and whether the asset
percentage
is producing an income stream or not.
of
the
commercial
property
book
is
nonperforming? And secondly, regarding business clients.
Over exposure to export-oriented clients is still only 40%
Jan Wolter – Deutsche Bank - Analyst
lending to the manufacturing sector; were export-oriented
Okay. And just a follow-up there on the investment book:
clients hidden in the pie on slide 10?
What tenants did you primarily have there? Was it retailoriented, retail shopping mall shopping centres, or was it
Andrew Healy – National Irish Bank - CEO
something else?
In response to the first question, the level of nonperforming
loans in the commercial property book, again: if you look at
Grellan Dunne – National Irish Bank - CFO
slide 21, it shows the nonperforming loans across the entire
There's probably no major concentration. As I said, it's a mix
book. There's a pie chart on the right that gives a breakdown;
of retail, and they're generally high-quality tenants there. The
and the figure there ... it actually says "Credit 82%" – that's
other parts of it are office, industrial, so there isn't one ... it
commercial property. So just over 80% of the total
isn't concentrated in retail.
nonperforming loans are commercial property, so I think from
that you can work out the level of nonperforming loans in the
commercial property book.
Jan Wolter – Deutsche Bank - Analyst
Okay. And one last question. The level of nonperforming
In relation to the export sector, I mean, there's a mix, there's
assets in the total Irish book. I mean, the portion which is not
companies within all the sectors on the SME book and the
paying any interest, so that would be the nonperforming part,
corporate book that are export-oriented, so we don't classify
and then restructured loans, et cetera, what is that level?
them as one group within this list that you see on slide 10.
Operator: Tom Hedges from Gartmore is online with a
Grellan Dunne – National Irish Bank - CFO
question.
You can see that in slide 21 with raising category 11, so you'll
see that the level of loans in default.
Tom Hedges – Gartmore Investment - Investor
Hi. Good morning. A couple of questions on the capital ratio.
Jan Wolter – Deutsche Bank - Analyst
Could you confirm what the current equity (inaudible) ratio is
Okay. So no ... the rest of the loans in the book are paying
for the bank and whether you've had any discussions with the
some kind of interest?
regulator about the need to raise the capital ratio to perhaps
similar levels to the major banks which have now gone to
12% and ... or do you anticipate having to move that level?
Grellan Dunne – National Irish Bank - CFO
Those are the two questions please.
Correct.
12
12.5% rate, plus there's no indication of that. We don't
Grellan Dunne – National Irish Bank - CFO
believe it will happen. Ireland has shown great determination
In terms of the capital ratio, we're a branch of Danske Bank,
to ensure that the low corporation tax rate is protected. It's
so we don't hold capital separately, so we're regulated by the
central to our industrial strategy, and its success can be seen
Danish FSA.
in the performance of Irish exports over the last decade.
Tom Hedges – Gartmore Investment - Investor
The state is very determined to protect the 12.5% rate, and
Okay.
there were no indications as of the interaction with the EU
and IMF that that would have to be changed. In fact, quite the
opposite. The government came out with some very strong
Grellan Dunne – National Irish Bank - CFO
statements around the protection of that rate, so we don't
So we don't have discussions locally with the local regulator
believe it will be forced upwards.
about capital levels.
But I do agree that if that were to happen, it would be a
Tom Hedges – Gartmore Investment - Investor
negative. I did say earlier on that there are other factors that
Okay. Thank you.
attract multinational businesses to Ireland. We have an
English-speaking workforce, a young, very well-educated
Operator: Claus Therp from SEB Enskilda is online with a
workforce, and Ireland is seen as a good location to do
question.
business, but there's no doubt the corporation tax rate is a
significant attraction for businesses coming here.
Claus G. Therp – SEB Enskilda - Analyst
Claus G. Therp – SEB Enskilda - Analyst
Yes, hello, and thank you for hosting this call. I have a question
Thank you very much.
in relation to your future outlook for export companies. Can
you elaborate to what extent you will take on new clients if
they have a net lending equity (inaudible), either they will not
Operator: Peter Werleus from Carnegie Fonder is online with
contribute with deposit and funding so your loan-to-deposit
a question.
ratio will develop in a negative way. That's the first question.
Peter Werleus – Carnegie Fonder - Investor
Another question is relating to the Irish corporate tax. If the
Okay, Peter Werleus, Carnegie Fonder. Can you comment a
EU and IMF will come in with requirements to Ireland that
bit on the deposit market in Ireland? There has been usual
they will have to increase the Irish tax level, which I personally
flows from ... for other banks and it seems like you are getting
think is very likely in this future development, how do you
market share, so could you give me a flavour on that market?
think the outlook for the Irish corporate and your fully bullish
And also if you have any target on deposit–to-loan ratio as
statement on the exporting companies will develop if the
shown in slide 13 or something?
corporate tax will increase? That's all.
Andrew Healy – National Irish Bank - CEO
Andrew Healy – National Irish Bank - CEO
Well, a number of Irish banks have recently reported publicly
Okay. Well, in terms of new clients, I mean we look at each
that they've seen quite large reductions in their deposit book
opportunity on its merits. We don't necessarily look in
since the beginning of the year, and this was confirmed by our
isolation at lending or at deposits. Our ideal customer
central bank's statistics recently. As a branch of Danske, one
obviously builds up a holistic significant relationship with the
of the stronger banks in Europe from a capital perspective,
bank, so it's difficult to be any more detailed than that.
it's not really surprising for us that we have been seeing some
deposit inflows to the bank.
In terms of the corporation tax situation, I probably would
agree with you that it would be a negative where the hand of
the Irish governments to be forced around changing the
13
Particularly over the last number of weeks, we've seen some
Aaron Ibbotson – Goldman Sachs - Analyst
inflows. Not at the level that would suggest a run on the Irish
Hey there. Yeah, sorry, just a very quick follow-up. Could you
banks, but we have seen good growth.
talk just a little bit about the corporate and SME sector that
seemed to be behaving quite well despite all the problems in
Our most recent published figures would indicate a growth
the economy? What are you seeing there at the moment and
rate of 14% average deposits year-on-year. We don't set
how have you seen that particular sector develop, say over
ourselves a specific loan-to-deposit target moving forward,
the last couple of quarters, and maybe how you see it going
but we hope to keep our deposit base strong. And as I
over the next couple of quarters. Thank you.
mentioned in the presentation earlier, that ratio is trending in
the right direction.
Andrew Healy – National Irish Bank - CEO
Well, I mean, you've probably seen in the numbers there that,
Peter Werleus – Carnegie Fonder - Investor
in terms of impairments, they're coming more from the SME
But assuming that you were one of the Irish banks that have
side than from the corporate side. The corporate book tends
the cheapest funding right now because you fund yourself on
to perform better because of the international exposure of
a global ... on a corporate level, isn't that an opportunity to
that client base.
take market share versus other banks and take good credits
on book?
A lot of our corporate businesses are multinationals. They
have a base in Ireland, but much of their business is actually
conducted internationally. We do believe we have strengths
Grellan Dunne – National Irish Bank - CFO
in terms of how we service corporates within the Danske
Yes, there is, is the answer. But equally the market is very,
Group, and that extends to Ireland. So corporates that export
very aggressive in terms of interest rates being paid on
will continue to be a target growth area for us.
deposits, so there's a trade-off. We don't need to pay very,
very high rates for funding. So while there is an opportunity,
SMEs generally, particularly those that are inwardly focused
particularly around the counterparties trend, interest rates
are ... do against us a little bit because the market is very, very
in Ireland, will undoubtedly continue to experience pressure
aggressive.
as we move forward into 2011, given the general situation
with the economy and the austerity program. But as we've
said earlier, we don't have any significant exposures, our
Andrew Healy – National Irish Bank - CEO
concentrations within our SME book. So those two things
The other point is that the Irish banks have suffered, as I
combined hopefully answer your question there.
mentioned earlier on, and there has been at times an
overreaction on the part of consumers in particular to the
Aaron Ibbotson – Goldman Sachs - Analyst
safety of their deposits. And there is an onus on us to act
Okay. That's good. Thank you very much.
responsibly in this situation and not to try and leverage that
sort of level of alarm that comes up from time to time, and in
Operator: Simon Christensen from Nordea Markets is online
trying to do that but we have seen some good deposit inflows.
with a question.
Peter Werleus – Carnegie Fonder - Investor
Simon Christensen – Nordea Markets - Analyst
Okay. Thank you very much.
Yes, shortly. Once again on the expert group on mortgages:
have you agreed to participate in the other arrangements
Operator: Aaron Ibbotson from Goldman Sachs is online with
that they're proposing than the deferred interest scheme?
a question.
And just out of interest, what are the US dollar, euro, and
euro UK forecasts that you imply on your export forecast for
'11?
14
comes to the asset quality performance of your investment
Grellan Dunne – National Irish Bank - CFO
book there?
On the first one, the expert group published quite a long list of
proposals, and we will participate in some of them. Some of
And lastly also on that 3.4 billion book: what is sort of the
them provide for an appeals mechanism for customers,
maturities that are coming up in 2011 for repayment and
different arrangements for customers in stress or in
how much of that do you expect people will be able to roll or
difficulty, but nothing that would impact on our expectations
would pay and come up with the money basically? Thank you.
for impairments or arrears on the mortgage book.
Grellan Dunne – National Irish Bank - CFO
Ronnie O’toole – National Irish Bank - Chief Economist
In relation to the second question, I don't have a precise figure
In terms of the economic projections, they're based on the
for the level of maturity. But given the level of activity in the
actual GDP growth projections produced by Danske Markets,
market, it's inevitable that as these loans mature, that it's
which implicit underlying them have currency expectations. I
most likely are extended in many cases if there isn't cash flow
don't have the precise figures here, but I can get back to you
to repay them.
on it.
In terms of the investment book, again, I don't have specific
figures for the coverage in there, but the vacancy rates, as I
Simon Christensen – Nordea Markets - Analyst
mentioned earlier, running at 6% of that book is vacant, 60%
Okay. Thank you very much.
is fully let, and the remaining 34% is partially let.
Operator: Nick Davey from UBS is online with a question.
Ronny Rehn – KBW - Analyst
Okay. Thank you.
Nick Davey – UBS - Analyst
Yeah sorry. Thanks very much, everyone. Just one very quick
Operator: We have no further questions at this time.
follow-up question. On slide 9, your LTV profile, can you just
confirm that that is indexed to market prices currently or is
that origination?
Martin Gottlob – Danske Bank - Head of IR
Okay thank you. Thank you all for your interest in our Irish
operation and for your questions. As always, you're welcome
Grellan Dunne – National Irish Bank - CFO
to contact us here in Investor Relations if you have further
No, that's the current market value. They're revalued on a
questions to this topic and/or other topics. A transcript of
monthly basis.
this presentation will be available on our website shortly and
a transcript of the Q&A session will be added within a few
days. Thank you all and good-bye for now.
Nick Davey – UBS - Analyst
Thank you.
Operator: Thank you, ladies and gentlemen. This concludes
today's conference. Thank you for participating. You may now
Operator: Ronny Rehn from KBW is online with a question.
disconnect.
Ronny Rehn – KBW - Analyst
Yeah, good morning. Also my thanks for having this call. Just
a quick question again on the investment for the commercial
real estate book. You mentioned that the cash flow is very
important. That's very clear. Can you provide us with a sort of
debt service coverage leverage levels that you have in this
book and what sort of vacancy levels would be critical when it
15