Banks Back Lending - But to Whom?
We have been reading with interest over the last number of months that the various Irish Banks including Bank of Ireland, AIB, Permanent TSB and the U.K. Bank are keen to start lending again. Our Market soundings would suggest that this is proving more difficult than would first appear. We understand that most of the Banks are off-loading their impaired property assets to repair their balance sheets so that they can improve their Capital position, thereby offering new borrowers new facilities.
If and when this happens, it will obviously be excellent news for not only the Irish but also the U.K. Economy. However, one matter seems to have been overlooked: if the Banks off load their property book to the American Vulture Funds, the problem really hasn't gone away. They are merely the deck chairs on the Titanic; the borrowers remain in situ, except they now have a new lending master. This new master has neither the patience, willingness, nor desire to work with borrowers for the medium to long term. They are here for short term solutions and big, quick returns; it is a ‘smash and grab’ business model. So if the remaining borrowers are still caught up in the property debacle, even though their loans may have been bought by American Vulture funds, will the Banks lend to these people? The short answer is no. So who is left to borrow money from the Banks? Yes SME's in a small way, Entrepreneurs if there are any left, and people who have potentially re-invented themselves. Do we not hear the PR machine from the Banks crying out that there is no demand from SME’s for their loans?
How large is this market? This will not get the economy moving again and will not allow the Banks to release further capital, nor will it improve the liquidity for businesses throughout the Island of Ireland. So what is the solution? Surely the current Banks that are off-loading their property book must take a more pragmatic approach to lending and relax their overall lending criteria to borrowers who have decent proposals, but due to high levels of due diligence now required by the Banks, are still risk averse and cannot borrow the funds.
As I look around Belfast today on a bright and beautiful November morning, I can see two cranes currently in operation at the new university planned for York Street. Nothing else in the construction property market is happening in Northern Ireland. Will we catch up with Dublin? Not in the immediate short term as there is a huge lack of finance available for the industry to move forward.
Perhaps the only good thing to come out of these loan sales is the 7 years of stagnation we have had is now coming to an end, but the question is, how we will encumbered borrowers deal with their new masters and the huge overhang of debt that still has to be addressed?
We will keep a watching brief on the treatment of borrowers by the Vulture funds and by the Banks as the next 3 months will prove critical for borrowers and the economy alike.