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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.

Given the state of Ireland's banks — bank stocks are down about 95 percent from their highs — there's an expectation that either AIB or BOI will acquire a smaller bank or that smaller banks might come together to form a third major competitor to the big two. AIB, along with several other Irish banks and executives, declined to be interviewed for this story.

One likely acquisition candidate is Irish Nationwide Building Society (INBS), which, it recently emerged, lent heavily to bankrupted Anglo Irish Bank. INBS, one of Ireland's six major banks, had its corporate debt rating lowered almost to junk bond status in February. Later INBS revealed that it ended 2008 with twice the national average of mortgage loans on which borrowers were late, at 0.02 percent.

Beyond technology in support of M&As and, as KBC's Hughes says, "anything that can help banks control their costs and assess the risks in their portfolio," some tech spending is likely to be driven by changes in regulation. As an EU member country, Ireland will have to comply with EU initiatives, be they routine forms of mandatory spending, such as on the Single Euro Payments Area (SEPA), or laws specifically in response to the crisis, such as curbs on bank executives' pay.

But Ireland also will have a distinctive technology response to the crisis. For example, while there's a big push in the U.S. behind remote deposit capture to attract deposits, there is no such talk in Ireland, where the population is largely weaned off of checks. But sources expect other areas that previously were largely unexplored in Ireland, such as reducing cash handling costs in branches or the automation of loan application pipelines, to gain prominence on banks' radar.

Further, direct banking — an area in which Rabo's van Veggel says Ireland is "a little behind" — is likely to prosper in Ireland partly because the country's slow move to a broadband infrastructure is likely to get a push. Van Veggel says his Internet-only bank will become the first Irish bank to invest in Web 2.0 features, such as blogs and a presence on Facebook and YouTube. "We'll add live chat, hopefully within six months," he adds, noting that Rabo also will focus its award-winning ads on the less costly online medium.

Mortgage Brokers Need IT to Survive

Perhaps the area to receive the most investment, however, will be technology to allow mortgage brokers to submit applications to lenders automatically. "There's a huge drive to use technology to bring the cost down for lenders, and lenders will put pressure on brokers," Haven's Moroney says. Moroney points out that Haven was the first to accept only electronic applications from Day One, in 2007. A saving of US$7 per application amounted to "a lot," he adds.

The next step, Moroney notes, would be to automate the receipt of supporting documentation, such as borrower declarations and statements of income. But that's a step Haven is avoiding because, while it would cut costs, it also would increase loan flow, according to Moroney. Given the tight credit markets, "Lenders are doing everything they can to stop loans coming in," he contends, adding that Haven put the brakes on when its lending volume was "48 percent ahead of plan" by June 2008.

Until four years ago, Irish lenders typically funded mortgages from deposits. As the value of loan assets (i.e., mortgages) grew disproportionately, they offered loans with borrowed money. Before the credit crunch, Moroney explains, "The average percentage of wholesale funding was 160 percent," meaning most banks had US$202 lent for every US$126 in deposits.

GE Money, one of Ireland's few subprime lenders, pulled out of the Irish market because it would have had to charge an untenable 15 percent interest, given the difficulty now of raising corporate debt, a source with knowledge of the situation who spoke on condition of anonymity tells BS&T. When Stamford, Conn.-based GE ($211 billion in assets) announced its retreat in December, it said in a statement, "Mortgages are capital-intensive businesses, and the returns available at present no longer justify the cost of funding these products in Ireland."

Haven's Moroney says, "A lender squeeze is becoming a borrower squeeze." Some 1,800 brokers used to generate about half of the mortgages in Ireland, but now lenders instead want to use their own staff for their scant loan originations, sources say.

"Technology could help everyone reduce their costs," says Michael Quinn, CEO of Mortgage Brain Ireland, a Dublin-based technology vendor that automates mortgage applications for Haven, among other institutions. "But it's almost impossible to get the attention of technology buyers in banks right now. They're focused just on keeping their jobs."

But while "The Irish market has essentially ground to a halt," according to Haven's Moroney, he is sanguine that the recapitalization of the banks will bring clarity and, "The world will return to normality in due course." He adds, "Governments need banks to lend."

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