Francesca McDonagh, Bank of Ireland’s chief executive of three years, has seen more of her colleagues’ domestic lives than she might have bargained for over the past eight months.
With more than 70 per cent of the group’s 10,000-plus employees working from home due to the Covid-19 pandemic, McDonagh has found herself on video-conferencing calls with staff operating on laptops from their beds or navigating the intricacies of flat-shares or dealing with young children.
McDonagh also found herself having to wait 15 minutes earlier this week while I tried to navigate technology issues to join her for a Zoom interview in these times of Level-5 Government restrictions. If she was frustrated by the delay, she didn’t show it.
“That’s okay,” she says, graciously. “You could have blamed the traffic back in the day.”
Three years into the top job at the only domestic Irish bank to avoid nationalisation during the financial crisis, McDonagh was forced earlier this year to lower a key financial target she set early in her tenure for 2021 as ultra-low interest rates squeezed lenders’ incomes across Europe – and Brexit and low levels of house completions hampered Irish banks’ ability to grow loan books.
The chief executive said in February that she was then aiming to deliver an 8 per cent return on shareholders’ equity investments in the bank – a key measure of profitability – next year, down from 10 per cent, even if the higher ratio remained an objective “over the longer term”.
Payment breaks
Within weeks coronavirus was sweeping through the Irish and UK economies, Bank of Ireland’s main markets. It led to the lender having to grant 106,000 payment breaks between March and September under an industry-wide approach to give households, businesses and banks breathing space to get their heads around the shock.
The crisis also severely hit new lending and other banking activities – even if branch networks remained largely open during the worst of the spring lockdowns and prompted Bank of Ireland to set aside €937 million for the six months to June for an expected spike in bad loans. McDonagh estimated in August that the full-year loan impairment charge would come to between €1.1 billion and €1.3 billion, plunging the bank into loss-making territory for the first time since 2013.
McDonagh hopes the bank will have taken the “vast bulk” of loan charges this year, even if there is little prospect that provisioning will return to “normalised” levels in 2021.
"Whereas people thought Covid-19 would be a 2020 event and that 2021 would be exclusively about recovery, we're seeing that Covid is likely to have an impact, with some continuing restrictions, as we go into 2021," says the former HSBC executive and London-born descendent of Irish emigrants.
“I think that is quite different to what we would have thought in the summer. There would have been a hope that things might be getting back to normal sooner. There’s been a much more shallow contraction of the economy [so far] from Covid but arguably it could last longer.”
Irish banking stocks are down about 55 per cent so far this year, making them among the worst performers in Europe. Analysts at Deutsche Bank said in a report a few weeks ago that the market was pricing in a "highly unlikely" repeat of bad-loan losses and emergency-capital raises seen during the financial crisis.
Investors, therefore, were relieved to see the banks come out in the past 10 days to report better-than-expected trading for three months leading to September when the economy had largely reopened, while maintaining their full-year loan impairments guidance.
Restrictions
With the State having succumbed in the past weeks to the strictest set of restrictions under the Government’s plan for living with Covid-19, was the third quarter just a brief reprieve?
“I don’t feel that the fourth quarter will be the same as the second quarter [lockdown],” says McDonagh. “If this crisis has taught us one thing, it’s how to adapt to very unprecedented circumstances that no one really planned for. Business adaptability has been much higher under the latest increase in restrictions than in March or April.
“We’ve seen small businesses that had to totally shut earlier this year turn to an online presence now that they’ve had to close the front door again. In the hospitality industry companies have adapted with home-delivery systems rather than just a pick-up service,” she says. “That doesn’t necessarily mean that they are going to be more profitable. Some of them will still be really challenged. But the adaptability is really noteworthy.”
McDonagh says the fact that schools, construction and manufacturing have stayed open this time around also helps.
Bank of Ireland’s latest trading statement said that 20,000 payment breaks – less than a fifth of the original total – were still outstanding as of the middle of October, just before the latest restrictions kicked in. This equates to 3.5 per cent of its total €76.3 billion loan book being subject to the relief.
McDonagh says that so far, at least, there hasn’t been a fresh surge in demand for forbearance – and that the vast majority of those rolling off payment holidays continue to return to regular payments.
“November will be a very important month,” she says. “While consumers in high-social-contact sectors like hospitality and tourism aren’t a significant proportion of our mortgage customers, we expect that small and medium enterprises will need further support.”
The level of loan-loss provisions taken by banks so far signals that the industry is also preparing for many businesses to fold next year – or need fundamental restructuring of debt.
At the height of the crisis in May, Bank of Ireland predicted that its total new lending for this year would fall by as much as 50 per cent and that business income would slump by up to 40 per cent. McDonagh was less pessimistic in early August as the bank unveiled interim results, forecasting that new lending would decline by 30 per cent and business income would drop by 20-30 per cent.
While the bank was faring better than expected as of the end of September, it has held off from raising guidance again. “It’s difficult to be optimistic,” says McDonagh. “As a bank it’s natural that we’re prudent and quite cautious but we did see better trading than we expected in the third quarter.”
Brexit
Aside from Covid-19, Brexit continues to hang over the economy. Michel Barnier, the European Union’s chief negotiator with the UK, said in recent days that although negotiations on a trade deal have intensified, they have yielded only moderate progress on key issues as both sides eye a mid-November deadline for an accord. Transition Brexit arrangements are set to run out at the end of the year.
“Even if a trade deal is done, there will still be an element of disruption for businesses that import and export through or across the UK,” says McDonagh. “I don’t think Brexit is going to benefit any economy but I would certainly hope for some kind of trade deal.”
Bank of Ireland announced in August that it was seeking to eliminate the equivalent of 1,400 full-time jobs – or 13.5 per cent of its workforce – in the coming years. It confirmed last week that 1,450 roles will be cut by the end of 2021 – with a total of 1,700 full- and part-time staff taking up a voluntary-redundancy offer. The programme will cost €169 million, within a €250 million restructuring budget set in 2018 and will cut its annual staff bill by €114 million when completed.
What does that tell us about the state of the bank, to have so many scrambling to exit at a time of such economic uncertainty?
“I don’t take it as a negative,” says McDonagh. “The [voluntary-redundancy] offer was enhanced. So if someone had ever thought about leaving the organisation whether it was because they wanted to retire early, do something else, change their industry or go for another job in the sector, this was an opportunity for them to reflect over the summer.”
She says the layoffs would not affect the branch network (Bank of Ireland is alone in the sector for not having shuttered a large part of its network after the 2008 financial crisis) or ability to deal with distressed customers.
“We’re not accepting any deterioration in customer service as a result of this,” she says. “We would not make the customer pay for our cost efficiency. That is bad business.”
Technology overhaul
The programme was an inevitable consequence of “lower-for-longer” interest rates, muted loan growth and the bank’s ongoing €1.5 billion technology overhaul. The IT programme has had its share of teething problems with a rollout of its new mobile banking app, originally set for 2019, only taking place over the summer. The bank finally rolled out Apple Pay for iPhones this week, well behind its rivals.
McDonagh insists that the IT-revamp costs will not run over its budget. “But is it all complete on the 31st of December, 2021? No. But that was never the intention.
“The future of banking in the next five to 10 years will be so much more about technology being efficient. I am pleased with the progress. I am hungry for us to continue to modernise the bank.”
While McDonagh says that the “number one” item on her agenda is “supporting customers through every stage of the pandemic and supporting the reboot and recovery of the economy”, she insists that she has not taken her eye off the overall strategy of transforming the business and delivering sustainable returns for shareholders.
“I’ve been quite clear with the team that I don’t want to a ‘Covid ate my homework’ kind of excuse,” she says. “There is a lot of people whose role is to manage products, to manage transformation and we’ve been very clear that we need to keep going with our strategy.”
The bank had reduced its administrative office space by 27 per cent in the past two years and quit the lease on one of its three central Dublin hubs during the summer – though this was in train before Covid struck. When asked about the future of the 258-strong branch network, the chief executive said the bank had “not agreed” any reductions, aside from the temporary closure in recent months of 12 locations at hospitals, colleges and workplaces with restricted access.
Could branch closures be on the cards?
“If you ask any chief executive of what is effectively a retail business, they are looking at all their channels because people’s behaviour is changing,” she says. “But the branch network is an important differentiator for us.”
McDonagh will remain tight-lipped until next year on the outcome of a strategic review of the bank’s Northern Ireland business, first flagged in August. Speculation is rife that the bank will either dramatically reduce its footprint across 28 branches – or exit entirely – a market where it has been for 190 years.
The unit’s £5 billion (€5.53 billion) of customer deposits and current accounts is double the size of its loan book. That’s an inefficient business model at the best of times. But in an era of ultra-low interest rates, that has been extended by the Covid-19 crisis, it seems unsustainable.
Meanwhile, the banking market in the Republic is preparing for a potential major shake-up. Ulster Bank's UK parent NatWest is said by sources to be seriously considering a wind-down of the unit here. McDonagh is coy on whether she would be interested in parts of Ulster Bank's business.
“We want to continue to grow our business in Ireland. We’ve done that organically for a long time, but we’ve done some bolt-on portfolio acquisitions as well. If the competitive environment were to evolve we will look at those.”
