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Irish Banks Reeling From Bursting of Property Bubble

Ireland's property bubble has burst, sending its banking industry — and economy — into a downward spiral. But bank consolidation and automation efforts may help the small island's financial technology sector regain its roar.

Beyond the fact that Europe's biggest property bubble burst with the biggest bang, Ireland faces particular problems now from the failure of one bank that lent mostly to property developers and the domino effects of its collapse on other banks to which it owed money. Anglo Irish Bank was the nation's third-largest bank when the government nationalized it in mid-January, responding to the rising debts and plummeting share price — from a high of US$25.30 to 15 cents — of the bank once known as "Europe's most successful bank."

Such a failure hits particularly hard in a country with such a small banking sector. There's only a handful of sizable banks in Ireland, two of which — Bank of Ireland (BOI) and Allied Irish Banks (AIB) — hold three-quarters of the country's consumer accounts. Anglo, known as "The Builder's Bank," focused on business banking.

The extent of what Anglo owes other banks is only now becoming known, but bad debts at Anglo were only the beginning. As it emerged that Anglo habitually obtained fleeting loans from other banks to make its accounts look stronger immediately prior to audits, a string of top bank executives have resigned. So has the head of the Irish Financial Services Regulatory Authority, known simply as the Financial Regulator.

Opposition politicians are agitating over what they term the "cozy club" of banks and their regulators, and on Feb. 28 the Irish government, facing its lowest popularity rating ever, announced sweeping bank regulatory change, including the appointment of an industry monitor from outside Ireland. The government also named the first recipients of its bank recapitalization plan, pledging US$4.4 billion each to AIB and BOI, on condition of up to 30 percent increased lending and no 2008 or 2009 executive bonuses.

What It Means for the Irish Tech Market

To understand what the turmoil means for the Irish financial technology sector, one must first look at the unique makeup of that market. There are three major constituencies in the financial technology market in Ireland, each of which is likely to be affected differently by the current crisis: Irish banks as technology consumers, multinational finance and technology firms with big European bases in Ireland, and indigenous Irish software firms. Extensive BS&T research suggests that the banks are preparing to move from a "hold" to a "buy" attitude toward technology; multinationals as vendors may fare well after a slow patch, but as operators in Ireland may partly pull out; and for many Irish software suppliers, whose market is the world market, it's business as usual.

When it comes to bank technology, discrepant pictures of Ireland emerge. On one hand, Ireland is high-tech — believed to still rank as the world's second-biggest exporter of software in the world after the U.S. and having a population long accustomed to electronic forms of banking. On the other, a number of financial industry sources in the country whom BS&T contacted seemed to not quite grasp the advantages that can be gained via bank technology. ("I don't know what financial technology is," replied the PR representative for several top Irish financial firms when declining an interview request.)

"We're focused on banking," relates Cora White, a spokeswoman for BOI, one of Ireland's two dominant banks. "IT is just in support of that. It's not an area we talk about," she adds, noting, "HP does our core processing."

In fact outsourcing of bank IT operations has become fairly typical, the Irish Banking Federation (IBF) tells BS&T. But most of this business appears to be going to multinational technology firms.

Though many members of the Irish Software Association, a 32-year-old trade group, focus on financial services, ISA chairman Pat Brazel says, "Irish banks don't buy from indigenous firms. We joke that we should have a trade mission to Ireland."

For now Irish banks are dealing with reduced IT budgets, and their global technology suppliers are likely to suffer in the short term (though Ireland may represent just a drop in their revenue oceans). But pending the recapitalization of Ireland's banks and other action by the government, there are signs that this will give way to a new view of technology as a way out of the crisis.

The Irish representative of one multinational vendor, who did not wish to be named, notes a shift in attitude just in the past few months. In January he gave Ireland a thumbs-down compared with the rest of Europe and despaired, "In Ireland there's no cap-ex', no budget." Just three weeks later, he is hopeful, stating, "Before, nobody was looking at cost savings. Now everybody is looking at optimizing their operations."

Roel van Veggel, managing director of Dublin-based Rabo Direct (US$1.6 billion in deposits), which was established by Dutch banking giant Rabobank Group (Utrecht; US$800 billion in assets) in 2005 and is Ireland's only bank operating exclusively on the Internet, agrees that there is more opportunity in Ireland than in most banking markets to cut costs through automation, adding that motivation to cut costs, particularly in branches, was low in the past 10 years. "Success makes you a little lazy," he says. While the argument has been advanced in the U.S. that banks have largely exhausted efficiencies that can be achieved through technology, in Ireland there "absolutely" is still scope to cut costs, van Veggel says.

M&As to Fuel Tech Spending?

Van Veggel adds that a likely wave of bank consolidation in Ireland should create a market for merger-related technologies. "The whole range of services from consulting — hardware and software selection and purchasing, and the actual system integration, both front- and back-end — will be in demand," he says.

"The question is 'When?,' not 'If?' " van Veggel continues, referring to the industry shakeout. "You'll have literally two or three branches in the same street. Six major banks is a lot for a relatively small country. That was all good and fine in the Celtic Tiger era ..."

The first case in point for M&As is Ulster Bank, an Irish unit of Royal Bank of Scotland Group (Edinburgh; US$2.68 trillion) into which First Active, another RBS unit in Ireland that was focused on mortgage lending, is being folded. Shortly before announcing in February the biggest loss ever by a U.K. company — US$34.2 billion for 2008 — RBS reduced its Irish staff by 10 percent. An Ulster Bank spokeswoman in Ireland, Orla Bird, says it is too early to say what the technology implications will be from the merger, which is scheduled for completion by the end of the year.

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