by Terry Browne, Head of Corporate Banking, National Irish Bank, part of the Danske Group.
A weak banking sector is in nobody’s interest. A strong, well-diversified banking sector – containing strong international banks and stabilised local banks – will be a crucial element in Ireland’s economic recovery.
But while most press coverage in recent months has tended to focus on the Irish banks, what about the role of foreign-owned banks such as National Irish Bank (part of Denmark’s Danske Bank group), and the other UK, US and mainland European banks.
The Minister for Finance stated in the Dail that the continuing presence of foreign-owned banks in the Irish market will be a cornerstone of government policy towards the sector.
They will have a key role to play in maintaining competition as the Irish banks consolidate or are wound down. They can also provide a continuing international reach, as the Irish banks downsize to meet their deleveraging targets and restrict themselves to core functions and focusing on the domestic market.
The challenges faced by the Irish banks create opportunities for foreign banks – particularly those, like Danske Bank, that are committed to the market for the long term and want to be part of Ireland’s recovery.
It’s clear that, in the new banking landscape, foreign banks have some advantages over their Irish counterparts – particularly in the corporate market – both on the funding and technology front. Large corporate clients recognise this. That said the increased focus on credit worthiness and deeper interrogation of financial information now required is more extensive than ever and an inevitable consequence of the recent crisis.
Investors, analysts and, more than ever, large corporate clients are keenly focussed on banks’ ability to raise capital and funding at appropriate levels and cost. Indeed, many are looking at their banking partners and ensuring strong and geographically, well diversified banking groups. Working with a major international bank, such as Danske Bank, with strong credit ratings and an international capability, gives that diversification and comfort.
Of course, the role of banks, be they domestic or foreign, is changing.
Capital is now a scare and cherished commodity within the Banking sector. Access to new capital is very limited and for many rebuilding their capital base will start with rebuilding retained earnings. In other words the return they get from capital expended on clients will be critical and will drive pricing and the need for significant ancillary business from those clients to whom Banks provide funding. The duration of that funding will be restricted by the availability of wholesale funding to banks. With wholesale markets virtually at a standstill, particularly for domestic Banks the ECB and the LTRO funding provided are the only source for many. Whilst providing well priced liquidity for out to three years is a short term comfort and has freed up the market somewhat it is from a longer term perspective ‘pushing the can down the road’ in terms of a longer term resolution to access to funding for Banks. Against this back drop Corporates will find pricing getting tighter and there will be a reticence to provide funding beyond the three year horizon.
Access for the corporate sector to funding must now turn more to the debt capital markets, as tight capital levels and growing capital requirements may inhibit the level of bank debt available. Again international banks, such as ourselves, will play a growing role in facilitating access to the Eurobond and US Private Placement markets and investor bases. These markets provide longer term funding at competitive levels for those that can access them. It is interesting to note that approximately 75% of term corporate funding in the US is sourced from the capital markets whilst within Europe it is the opposite with 75% of funding still sourced from Banks. A move towards the US model is inevitable given the current conditions in Europe. In this regard Banks will themselves become intermediaries rather than lenders. Investors such as Insurance Companies and Fund Managers may, indeed, be happier to take corporate risk directly rather than depositing with bank s,further driving the appetite in this regard.
The enhanced role that international banks can play is particularly relevant to exporting companies who will be the key players in leading Ireland’s recovery. International banks, such as Danske Bank, with an international reach and capabilities in areas such as trade finance, cash management and FX risk management will support this growth and, hopefully, facilitate effective and efficient foreign trade. This will, in the main, be supported by efficient technology solutions and processes.
Being able to offer and maintain state-of-the-art cash management services costs money, however. Foreign banks are better placed to invest heavily in this area in the current environment and local branches, such as National Irish Bank, benefit from the long term committed investment we have in the Danske Bank technology platform that is made available to all clients of the Group. Danske Bank is well regarded for its emphasis on technology development and we intend that our customers will continue to benefit from this.
Danske is a leader in electronic banking services and by 2010 had spent more than €160 million in developing our online product suite and looking at other ways to improve our customers’ cash flow, get the best returns out of their liquidity and save time, money and administrative costs.
For corporate customers this is really a means to increase profitability, release money tied up in working capital, and increase shareholder value.
Whether the radical changes that are taking place in the Irish banks will succeed in generating the desired level of credibility and improvement in their access to capital and funding remains to be seen. Whether and to what level the local banks can provide the necessary level of support and international reach will be a key consideration for many corporate and multinational entities that operate in Ireland. One thing is clear, however, and that is that they have a key role to play in the recovery, in sectors and areas where they can support growth and will, in conjunction with the international banks, ensure a strong and well diversified banking sector in the future.
At National Irish Bank we welcome the government’s efforts to bring greater stability to the Irish banking sector. We are clear that there are opportunities in the Irish market and we will use the advantages that come with being part of a international group to pursue them. Our technology, our international capability and our people will continue to be advantages not just for us – but for our customers.
Terry Browne is Head of Corporate Banking, National Irish Bank, part of the Danske Group.