Trends and Development 2022

2021 was a year of growth and optimism following on from the uncertainty of 2020. The year began with a collective sense of enthusiasm as the country returned to 'business as usual' and looked towards the future. This being said, there were a number of new challenges which caused a pause for thought this year and the outlook for the remainder of the year and beyond.

In 2021, two of Ireland's most well-known banks, Ulster Bank Ireland DAC ("Ulster") and KBC Bank Ireland (KBC), announced their exit from the Irish market further narrowing the choice of lenders in this jurisdiction, leaving just Allied Irish Banks, p.l.c. (AIB), Bank of Ireland (BOI), Permanent TSB (PTSB) and Barclays Bank Ireland plc as the main players.

Moreover, Russia's surprise invasion of the Ukraine has cast a long shadow over 2022. With such resultant uncertainly, it has already had a substantial impact on global markets and life more generally as have the sustained levels of inflation and interest rate hikes that have been populating our headlines this year. Compounding this is the risk of a global economic downturn, a change to the US tax code to entice American multinational companies to return to the United States and the implementation of the latest OECD global tax agreement which will increase Ireland's tax rate to 15%.

Given the current backdrop what follows is an overview of the trends and development in the banking and finance market in Ireland for 2022.

Irish Economic Trends and Developments

In early 2021, Ulster Bank and KBC announced they were to cease all operations in Ireland. In the following July, PTSB announced that they had entered into a non-binding agreement that would see them acquire €6.8 billion of Ulster's loans (mostly personal mortgages and small business loans) and 25 of its branches. This was approved by the Competition and Consumer Protection Commission (CPCC) in July 2022.

In June 2021, AIB agreed to purchase €4.2 billion of corporate and commercial loans from Ulster which received clearance from the CPCC a year later in April 2022. In June 2022, AIB entered into a binding agreement to purchase Ulster's €6 billion tracker mortgage portfolio which at the time of publication still awaits CPCC clearance. Like the PTSB acquisition, the AIB acquisition awaits ministerial approval with there being no indication of when this will occur.

In October 2021, KBC entered into a legally binding agreement with BOI to acquire its performing loan assets (including mortgages, commercial and consumer loans), deposits and a small number of non-performing mortgages to the tune of €8.8 billion. This binding agreement received approval from the CPCC in May 2022, subject to a number of legally binding commitments, though remains subject to ministerial approval.

Ulster's parent NatWest cited an inability to generate sustainable long-term returns as the deciding factor for exiting the Irish market while KBC referenced the challenging operational context for European banks for its departure.

These reasons have not put off new entrants however, with the likes of Dutch neobank 'Bunq' launching its new Irish lending platform following its acquisition of alternative lender Capitalfow in late 2021. Bunq has ambitious plans to advance over €1.2 billion in new lending to Irish SMEs and property investors over the next three years. Recently, UK-based digital lender, Starling Bank ("Starling") advised that they are focusing on rolling out a cloud banking platform, Engine, into the Irish market which will allow third parties to leverage its technology and provide a platform to develop tools and apps for individual financial service providers. The cloud banking platform is certainly an interesting area of growth for consumers as it incorporates non-banking businesses with regulated financial infrastructures whilst at the same time providing an opportunity for new entrants to get ahead in the Irish banking market.

Alternate Lenders

The CBI's Financial Stability Review 2022 shows that Ireland, in line with global trends, is seeing non-bank lenders (NBLs) growing in numbers domestically and playing an increasing role in lending markets of all types with NBLs accounting for an estimated 37% of the value of total lending for SME's in Ireland. NBLs include investment firms such as Bain, Earlsfort, Garrison and Activate and are spread across all sectors and are filling gaps, creating niches and offering a tempting alternative to the incumbent Irish pillar banks.

NBLs play a vital role in driving competition in the market as they are not subject to the same stringent capital requirements of retail banks and have a greater risk appetite driven by increasing returns for their investors. It is a double edged sword as NBLs are more exposed to global financial conditions given they do not have a stable deposit base, but since the 2008 financial crisis, when traditional lenders were unable or unwilling to lend, NBLs have been very successful in increasing their market share in this jurisdiction.

The Deloitte Alternative Lender Deal Tracker Spring 20221 showed that despite concerns over the economic recovery in Ireland post Covid-19 and the interest rate hikes that were expected for 2022, 2021 was a stellar year for lending in all sectors by NBLs, boosted by deployment of 'dry powder' amassed by venture capital and private equity firms in 2020 and 2021. This increase in NBL lending reflected the trend seen across the wider EU.

Undoubtedly borrowers, both consumer and commercial, are benefiting from this diversification and given the reduction in the number of retail banks it will be interesting to see if alternative lenders can further consolidate the gains they've been making over the last number of years.

Russia Ukraine Conflict

Russia's surprise invasion of Ukraine in February 2022 has led to a period of huge uncertainty as governments, professionals and consumers distanced themselves from Russia, its regime and its businesses. This uncertainty still persists as Russia continues to show its complete disregard for the rule of law and eschews international norms of expected behaviour.

Though Ireland's exposure to the conflict is relatively minor compared to some of our EU neighbours, we have seen direct and tangible examples of the impact it has had in this jurisdiction. Ireland's primary exposures relate to aircraft leasing, pharmaceutical products and imports of petroleum and fertilisers.

As Irish aircraft leasing firms severed ties with Russia, the Kremlin, in response to EU sanctions directed at its aviation sector, passed a law allowing foreign aircrafts to be added to the Russian registers ignoring the European Parliament's demand that these aircrafts be returned to lessors, leaving up to 513 aircrafts worth circa $10 billion leased from non-Russian lessors stranded in Russia

The long-term effects of the war in Ukraine and its upward pressure on the price of commodities, fuel and raw materials generally will have unwelcomed trickle-down consequences that will leave no sector of the Irish financial market unaffected. While the initial sentiment of the CBI for 2022 was that of an improving economy, given these developments they have now signalled that there is "considerable uncertainty" for the Irish economy going forward.

Interest Rates

Over the course of 2022, we have seen central banks around the world moving to increase interest rates to tackle the growing cost of living. While we have seen these hikes before, it does not mean this is an easy task for global economic regulators as they attempt to find the right balance for economic growth while cooling potential overheating in the markets.

In response to the recent ECB interest rate hikes, Irish pillar banks, AIB, PTSB and BOI have raised their tracker mortgage rate by 0.5% in line with the ECB however, at the time of publication, they have for now at least, maintained their variable or fixed mortgage rates. The impending September interest rate hikes from the ECB have marked a return of the Irish government to the bonds market in an attempt to spending down cash reserves prior to the expected base rate increase by the ECB with rumours circulating that as much as a further 0.75% interest rate hike could be in the pipeline.

Similarly, the Bank of England has enacted a 15 per cent base rate rise in its attempt to stem inflation. In doing so, they have predicted a 15 month recession with the UK now projected to enter into a recession from Q4 of this year with real household post-tax income projected to fall sharply in 2022 and 2023. We wait, cautiously, to see how the CBI will respond.

The markets are watching eagerly as to how the effects of the end of ECB sub-zero rates and winding down of quantitative easing will play out. The appetite for debt is expected to slow down with the ECB's second-quarter bank lending survey showing that loan credit standards tightened considerably for consumers in Ireland, especially on residential mortgages, while access for wholesale bank funding also deteriorated.

As a result, we are seeing an increased level of apprehension in the market as funding costs rise and lenders are now questioning if their yield is still as prosperous as it has been over the last number of years. The macroeconomic factors combined with the increased cost of lending is leading to speculation in the Irish financial market that the pipeline of debt supply for the end of 2022 will not be as prevalent as it was for 2021.

Originally Published by Chambers and Partners

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