Green Shoots

Bank of Ireland chief says the economy is showing positive signs, but banks will feel the brunt

Jonathan Keane
Key Points
  • Francesca McDonagh said the impact of impairment costs to banks “can’t be overstated.”
  • The bank took an impairment charge of 937 million euros ($1.1 billion) to cover loans and other pandemic-related costs in the first half of the year, and plans to cut 1,400 from its workforce.
  • Brexit will create “additional uncertainty,” McDonagh said.
VIDEO4:2004:20
Bank of Ireland CEO 'cautiously optimistic' about the outlook

DUBLIN — The chief executive of Bank of Ireland said she is "cautiously optimistic" about the economic recovery in Ireland, but that banks are still facing a severe hit.

Francesca McDonagh told CNBC that while Ireland's economy contracted a record 6.1% in the second quarter of 2020, it was "less than expected".

She said that there were positive signs emerging as people begun spending again and customers exited payment breaks that were implemented earlier in the pandemic.

"Consumer spending is at the same level as it was in early March. We're seeing house prices be resilient and we're seeing some parts of society and sectors re-open as restrictions change," she said.

Any progress is at risk of being curtailed, though, as Ireland has seen a spike in Covid-19 cases of late with Dublin expected to be placed under new restrictions on Friday evening.

"My cautious optimism is about the green shoots of re-opening the economy. The actual severe impact of the impairment cost to banks can't be overstated," McDonagh told CNBC.

In its half-year report, Bank of Ireland announced a 669 million euro ($790 million) loss before tax, after it took an impairment charge of 937 million euros ($1.1 billion) to cover loan losses during the pandemic.

At the start of lockdown, Bank of Ireland and other major banks agreed to payment breaks for some customers. McDonagh said around 10% of Bank of Ireland's customers had taken a payment break since lockdown in March.

"Many of those customers have come off and resumed normal credit and interest repayment, but our focus in the latter part of this year as people come off their final payment break is to work with our customers," she said.

"We had the lowest non-performing exposure ratio of any Irish bank before Covid, of working with customers to find sustainable solutions, and that's where our focus will be."

There is still uncertainty on any future outlook, she added, with Brexit presenting "additional uncertainty" that may create further challenges ahead.

Cost cutting

Bank of Ireland recently revamped its charges and now charges a flat fee of six euros per month for current account customers, regardless of how much they have with the bank.

At the same time, it is doing away with a bunch of other charges like contactless fees and ATM fees. It also remains in the midst of an investment strategy in technology to improve its digital services.

"The focus on technology was already there before Covid, but the trends and changes amongst our customers are only going to accelerate that," McDonagh said.

This investment aside, Bank of Ireland is continuing to look at cutting costs elsewhere. When announcing its half-year results, the bank said it plans to cut 1,400 jobs from its workforce.

It is the latest in a line of Irish banks to embark on cost cutting measures. On Thursday, The Irish Times reported that NatWest was considering closing down Ulster Bank's operations in Ireland, just a week after the bank said it intended to let 266 workers go. Natwest declined to comment when contact by CNBC Friday.

KBC, meanwhile, said that it was shutting four of its 16 branches around the country.

Consolidation in the sector

Should Ulster Bank exit the Irish market, it would narrow the field in Ireland's banking sector to just a few players.

Speaking on the merger of CaixaBank and Bankia in Spain on Friday, McDonagh said "we are seeing an increased focus on domestic consolidation".

"In Ireland, it's a much more consolidated market already, so they'll be four or five large banks. We do bolt-on acquisitions where it makes sense, but I think M&A always has to follow strategy and until there is more of a banking union across Europe or a common deposit insurance scheme, cross border consolidation is less likely."

As banks face increasing revenue challenges, there will be more opportunities for consolidation in some markets but that is "not where our focus is in Ireland," she said.

"Our focus is on supporting our customers through Covid and the uncertainties of Brexit and completing the transformation of our technology in our business model."