The third banking force awakens
For well over a decade, we’ve been hearing talk on and off about the need for a third banking force in Ireland.
The notion gained legs in the wake of the banking crash, when Ireland was left with two dominant banks in AIB and Bank of Ireland and a multitude of less significant players, like Ulster Bank, Permanent TSB, KBC Bank Ireland and some of the other foreign brands.
The theory went that in order to create a truly competitive banking landscape, some of those smaller banks should coalesce to build a third pillar.
Collectively, that new pillar would be more than capable of taking on the dominance of the big guys.
But for a variety of reasons, it never gathered steam.
There was the potential cost of bringing lenders together which would inevitably have required an injection of fresh capital.
Politically, it also never grew legs.
And among the banks themselves, the idea of working together rather than against one another did not prove enticing enough.
But could that third banking force be awakening again?
The exit of Ulster Bank from the market here creates a unique, almost compelling opportunity, for the idea to be revisited.
On paper at least, it makes perfect sense for the sector.
Take some of the loans, the deposits, the accounts and the branches that Ulster Bank no longer wants and mash them into Permanent TSB.
That would create a force, or at least the seed of a force, that could grow and take on the big guys.
For Permanent TSB, which has struggled for years under the legacy of the crash, it would give it much yearned for scale overnight.
According to well placed sources, if the talks that are already under way between the two institutions reach fruition, PTSB could end up snaffling the bulk of Ulster Bank’s €14bn mortgage book.
This includes around €7bn in unattractive low-margin tracker mortgages, but this might be something PTSB would have to swallow to make the deal work.
Also part of the transaction could be €700m in SME loans that Ulster Bank currently holds.
These would fit nicely with PTSB’s stated strategy of growing that part of its business.
It might also have to take on retail operations of Ulster Bank, including some branches.
With 76 of its own, it certainly wouldn’t want 88 more.
But synergies could be found in some areas, and in other parts of the country where PTSB doesn’t have a presence but Ulster Bank does, it could help fill in gaps.
PTSB might also have to accept some of the €22bn in deposits currently held by Ulster Bank, even though it might not want them because of the current cost of holding cash in a negative rates environment.
In the end, what you’d end up with is a PTSB that would be twice as big as it currently is, a prospect PTSB’s relatively new and ambitious CEO, Eamonn Crowley, would relish.
To pull it off, though, the bank would have to receive additional funding, and here is where the problems might arise.
Permanent TSB is still 75% owned by the State, but it doesn’t have as strong a capital position as AIB, which is also majority owned by the Government.
Would the Government risk the public relations nightmare that would accompany a further State injection of cash in yet another bank? And at a time when the State is borrowing billions just to keep the economy afloat through the Covid-19 crisis.
Cue the comparisons to the depths of the financial crash, when bailing out the banking sector cost the State €64bn.
But the flipside is, if faced with the prospect, could we afford not to do it?
Failure to re-engineer a banking sector post-Ulster Bank that is truly competitive could prove hugely damaging for consumers, businesses and the economy as a whole, with the real prospect of constrained credit, higher borrowing rates and even negative deposit rates.
Asked about the issue yesterday, the Minister for Finance kicked to touch, saying it would first be up to to PTSB to come to him with a proposed transaction it thinks is in its commercial interest before he would have to carefully consider the issue of how to fund it.
It is likely that getting to that point will take some time and a deal may never be concluded.
But if it is, then the Government may have to make some challenging decisions about whether the force is strong enough to take the plunge.