BNI0023

Written evidence submitted by the CBI Northern Ireland

1                  CBI Northern Ireland is an independent, non-party political organisation funded entirely by its members in industry and commerce. Across the UK, the CBI speaks for some 240,000 businesses which together employ around a third of the UK private sector workforce. Our membership stretches across the UK, including businesses from all sectors and of all sizes. It includes the majority of the FTSE 100 companies, some 200,000 small and medium-sized enterprises (SMEs), more than 20,000 manufacturers and over 150 sectoral associations.

2                  CBI Northern Ireland welcomes the opportunity to respond to the Northern Ireland Affairs Committee Inquiry into the Banking Structure in Northern Ireland. The issue of access to finance was a key priority for CBI Northern Ireland in 2012 and led to the publication of ‘Getting Growth Finance Going’ in June 2012. In the following sections we respond to the questions set out in the Inquiry’s Terms of Reference.

3                  In a discussion around banking it is important to remember the particular structural challenges which face the Northern Ireland economy. These include:

-          The large size of the public sector and the high level of dependency on public expenditure (and benefits) – on which many companies also depend

-          A small private sector, which is structurally more dependent on lower productivity sectors and lower wages and which is only now starting to emerge slowly from a deep and lengthy recession

-          A lack of large companies (employing over 250 people)

-          An SME community with a high dependence on bank overdraft facilities, and many with poorly capitalised balance sheets

-          A funding environment where there has been an under-developed venture capital market with a broken funding continuum

-          Emerging from a major property boom/bust (where a great deal of lending was focused in the 2003-2007 period) leaving significant legacy issues both within many companies, as well as across the banking sector

The structure and governance of banks in Northern Ireland

4                  Is there a difference in the structure of banks in Northern Ireland, compared to their structure in Great Britain? Is there any disadvantage for customers, both private and business, in NI as a result?

• Of the four largest banks in Northern Ireland only the Ulster Bank, as part of the RBS Group, is represented as one of the largest banks in the UK
• Two of the other biggest banks have Irish ownership (Bank of Ireland and First Trust Bank) while the forth (Danske Bank) is Danish owned
• Over the last decade or so HSBC and Barclays have established and developed a physical presence in NI, while both Santander and Halifax and a range of other building societies have a presence. Other banks have exited Northern Ireland including the Anglo-Irish Bank and the Bank of Scotland. There are only two Northern Ireland parented financial lending institutions – the Progressive Building Society and the City of Derry Building Society, though there are also a range of Credit Unions. HSBC has reduced its physical presence over the last couple of years
• Banking functions in Northern Ireland tend to be focused on domestic, SME and corporate banking – with little or no Investment Banking operations. There are Treasury services though more limited project financing expertise/skills – though customers may link into other services via the parent banking organisation
• Historically there has been no significant disadvantage, though all the main four banks have been restructuring in light of the property boom/bust which has resulted in considerable losses for some years. Generally businesses and the domestic sector have been well served by the banks, and there has been a high level of competition between the banks/financial institutions. 

5                  Do banks that operate in both GB and NI, eg, Barclays and Santander, operate differently in NI than in the rest of the UK? Does this result in customers in NI being at a disadvantage compared to customers in GB?

• We are not aware of these organisations operating ‘differently’ in Northern Ireland than in other regions/nations within the UK, though the branch network of some banks is considerably less in NI
• Since the economic downturn decisions on significant lending appear to be taken outside of Northern Ireland by most of the main local banks, with less authority/discretion left with NI managers, though some lending decisions up to around £15m are still taken in NI. There has also been a shift from decision making at local branches to Belfast in many cases
• Access to finance to property development is particularly difficult in NI due in part to the over-exposure (and liabilities) facing most of the banks and the difficult market conditions which exist – in Belfast there is now an emerging shortage of Grade A office space. Banks are no longer willing to consider funding speculative build office blocks, while the local market is inhibited by the lack of developers with sufficient equity.

6                  What are the consequences for customers in NI of banks and bank debts being owned by non-UK banks; what role does the Republic of Ireland play in NI banking; what effect does the sale of bank assets by the National Asset Management Agency (NAMA) have on NI property values?

• As noted above key decisions appear to being taken outside of Northern Ireland – this can add time with regard to lending decisions and remove local discretion
• With two of the largest banks being Irish owned they clearly have an important part to play within the NI economy – their lending policies and indeed other policies relating to ‘bad loan’s etc will have an impact on the economic recovery in NI
• NAMA is major property owner and to date has been managing its assets (totalling around £3.5bn in NI) in a sensible manner. We do not believe there is a significant risk of any fire sales. Indeed NAMA has recently committed additional funds (in excess of £100m) to various developments to bring these to completion and to the market. There is no evidence to suggest that NAMA’s strategy for asset sales has impacted significantly on property values in NI – they have a vested interest in the recovery of the property market. As a dominant player in the market some members believe NAMA could have played a more active role in stimulating the property market – there is clear evidence in the Republic of Ireland that international and institutional investors are now active in the market
• There is a likelihood that NAMA will take over the assets/liabilities of the IBRC (previously known as the Anglo-Irish bank) which will give NAMA and even larger role within the NI market

The possible breakup of RBS/Ulster Bank

7                  It has been reported that HM Treasury are considering trying to persuade the Irish Government to take control of Ulster Bank. This would involve removing Ulster Bank from RBS Group and swapping all, or part, of the bank for the British loans and investments currently owned by NAMA.

• This appears to be largely media speculation
• A recent presentation from the Ulster Bank board to RBS investors set out a clear strategy for the sustainable development of the bank within RBS ownership and to bring it back profit
• It is difficult to conceive why the Irish Government would wish to take ownership of Ulster Bank and participate in such an asset swap – this does not make sense to us
• The CBI believes it is in everyone's interests, including business customers, to get Lloyds and RBS off the Government's hands and back into private ownership. RBS is already well down the road of restructuring and the focus should be on lending and growth

8                  What would be the implications for NI of such a move?

• As the largest bank in Northern Ireland, with over 700,000 customers and with a wide geographic presence, this would have significant issues – there are clearly benefits of Ulster Bank falling within the umbrella of RBS (including access to national finance schemes eg the Ulster Bank has for some time been the only one of the main four banks accessing the Funding for Lending initiative – while the Bank of Ireland gained access to FfL in June 2013)
• CBI members do not believe it would be in Northern Ireland’s interests to break up the bank

The position of the staff of the former Irish Bank Resolution Corporation

9                  Due to legislation introduced in the Republic of Ireland (without prior consultation with HMG), those people formerly employed in Dublin by IBRC, the successor to the Anglo-Irish Bank, would be able to transfer to Capita, whereas those employed in Belfast had no such rights, and had been made redundant.

• The Anglo-Irish Bank had one office in Belfast with a relatively small staffing numbers in Northern Ireland – we are not familiar with the details of the closure of this office.

Access to finance, particularly for Small and Medium Enterprises

10             Historically, finance for start-ups and expansions had been largely provided through Government agencies – ie, Invest NI & its various predecessors – with the result that bank finance traditionally played a lesser role in NI than in GB.  Have NI banks continued to play a lesser role in commercial finance than elsewhere – in particular, have economic and financial conditions since 2008 exacerbated that position?

• The assumption here is incorrect. Invest NI has been a significant contributor in the past to helping finance SMEs etc in Northern Ireland but it was in general a minority funder, and their level of support for investment/expansions has been generally in decline for some years. There was a large reliance on bank lending too - indeed lending rates were very competitive in Northern Ireland traditionally, partly, due to Invest NI involvement (and lowering the risk of the overall project) though margins currently are more in line with Great Britain, though in some cases current rates are considered more competitive than the Republic of Ireland. Bank lending plays a relatively more important role in Northern Ireland due to an  under-developed venture capital market. There is also been a large dependence on overdraft facilities, even for core borrowings, rather than more structured loans and trade finance solutions which are more prevalent in Great Britain – in recent years the banks have been looking to transfer some of these overdraft facilities onto term loans
• There still remains a high dependence on bank lending – though clearly in the last few years the demands for finance have weakened considerably
• A new mezzanine fund, the Growth Loan Fund, is playing a positive  role in filling a funding gap in the local market place, providing unsecured loans with interest rates of 8-11% (in most cases working closely with the local banks)
• More information on the ‘access to finance’ was published by CBI Northern Ireland in June 2012 in a report ‘Getting Growth Finance Going’ – a summary of the key issues emerging from this report are attached in the Annex
• The Economic Advisory Group published a report in March 2013 – ‘A review of access to finance for NI businesses’ which also provides a useful overview. This research include a survey of SMEs which revealed that around 44% describing themselves as ‘reducing/survival at all costs/winding down’, and with only 8% actively seeking external finance in 2012 (another 7% describe themselves as ‘discouraged borrowers’)
• It is important to get the message out to SMEs (and small companies in particular) that the banks are lending, though clearly the bar has gone up on risk. There is also a need to increase awareness of the appeals process which all the banks have in place - there is a disproportionately low percentage of appeals in NI according to the most recent 2012/13 report by the Independent External Reviewer (1.2% of total UK appeals)

11             If so, what impact does the problem have on (a) business, (b) Government and (c) economic growth/rebalancing the economy, and what measures might be taken to tackle it?

• These issues are addressed in the CBI NI report ‘Getting Growth Finance Going’ published in June 2012 – see Annex. Clearly without sufficient funding many companies will struggle to grow and the economic recovery will be weaker – ensuring sufficient access to funding remains a key issue in Northern Ireland
• Some initiatives have already been taken to address the issues set out in the CBI report, including the introduction of Finance Vouchers, and two new Venture Capital Development funds. Key priorities remaining include:
• Senior NI government representative to co-ordinate and take responsibility for driving the necessary actions in this area – regular forum with the key banks to address non-commercial issues
• Agree with the banks a quarterly aggregate information flow to go straight to the Executive (ideally including lending by sector/size)
• Executive to ensure availability of sufficient risk capital
• Development of common lending application and business plans
• Influence national schemes

Lack of effectiveness of national initiatives to help aid economic recovery

12             Is the population of NI at a disadvantage to the rest of the UK as a result of the lack of uptake of national economic recovery initiatives by banks in NI?

• We believe national initiatives have not served the needs of the NI economy well – many of the national schemes have been developed with national banks rather than ‘regional banks’, and have insufficiently been tailored to address regional needs
• The Northern Ireland economy is different from the rest of the UK, with a higher dependence on smaller companies and fewer larger companies. There are also a significant number of trading companies in Northern Ireland with associated property exposures – many of these companies  are in effect unable to raise bank finance because they are cross-collateralised or supporting these property loans.

13             If so, is a more tailored approach from HM Treasury required for Northern Ireland?

• Absolutely,  we would recommend the following:
• Develop an ‘application-lite’ process for the remaining banks which have not been able to access the ‘Funding for Lending’ scheme
• Amendments to the Enterprise Finance Guarantee Scheme – where the claims limits is a major restriction on regional banks.
• Raise awareness of the ‘appeals process’, and the Independent External Reviewer
• Consider a fund to help support good businesses that have a property overhang – we understand the Irish government are considering such a fund
• There is little confidence that the UK Business Bank will tailor its offering to the needs of the NI economy – a better solution maybe to allocate funds to the NI Executive to bolster their Access to Finance strategy and use these funds to leverage equivalent EIB funds to develop a significant funding pot which could have a material impact on the local economy over the next few years 

Lack of availability of detailed regional lending data

14             The lack of available data means that it is difficult to properly assess the impact of the reduced availability of credit in NI, and also means that there is not sufficient visibility about whether banks are reaching their agreed lending targets. How is new lending recorded; how much ‘new’ lending recorded is actually made up of extensions or additions to existing loans; and what are banks actually doing compared to what they are advertising?

• The bank lending targets have little meaning/impact in NI as they only apply to the top 5 big banks that signed up at a UK level, and there is no regional lending targets (they only applied to 2011 aswell)
• It is critical that the Executive understand what is happening within the local economy, in order for them to determine what interventions may be necessary – a clear requirement is the need to understand the level of lending on a regular basis, including on a sectoral/size basis – this was a  key recommendation within CBI’s ‘Getting Growth Finance Going’ report. Unfortunately progress in this area has been slow – we understand that IT systems in some banks are an issue – we agreed that this remains a priority

Access to banking in rural communities

15             Following the closure of Danske Bank of some branches in rural areas, are the interests of those living in more rural areas, particularly the elderly, sufficiently fulfilled by the banking structure as it currently stands? How significantly will the situation be exacerbated if Ulster Bank also closes some of its rural branches?

• We do not have the evidence to comment on detail on this issue
• There has to be a recognition that all financial institutions are facing the situation of a rapid increase in telephone, online and mobile banking channels (latter two have doubled in last few years), and at the same time a significant drop in use of branches (down by around 30% between 2009 and 2013) – these trends are likely to continue and are likely to continue to put pressure on the viability of rural branches
• It would be sensible to see how rural communities could be served by banks ‘co-operating’ to provide some form of ‘shared service’ – this is likely to fall foul of competition policy but may be worth exploring with the banks – are there lessons to learn from other regions within the UK or indeed further afield?
• Greater use of the Post Office network may be one option to help address the needs of rural communities

Annex              

CBI Northern Ireland’s ‘Getting Growth Finance Going’ report’, published June 2012 – key points

Supply and demand of growth finance in Northern Ireland

• Lending and borrowing must be seen against a very shaky economic backdrop which could get worse
• Bank lending has not stopped ….. but the bar has gone up on risk and SMEs are reporting frustration
• The flow of venture capital is patchy and needs greater sums of capital to support sustainable growth
• The overall funding landscape is not suitably geared for success…
• Businesses must do more themselves to get funding-ready and create a gear shift in demand

Recommendations

Understanding the problem

• The Executive must get more accurate live data on the scale of the funding gap and current lending trends
• The Executive’s ‘Access to finance’ strategy should be updated to take account of recent developments

Treatment

• Executive should allocate additional funding of c £25-30m per annum
• Greater budget flexibility should be provided to Invest NI
• Banks should consider how they can introduce longer-term lines of credit

Rehabilitation

• Executive’s Access to Finance’ strategy must develop a funding continuum – with greater standardisation, and new deal structures should be designed to reduce costs and increase attractiveness of VC
• Invest NI to consider how SMEs can be supported to build better financial capabilities – create a ‘finance voucher’

September 2013