Northern lights in uncertain times
David Elliott speaks to Northern Bank CEO Gerry Mallon to hear how the Danish-owned bank is performing
Very early on in Business Month’s interview with Gerry Mallon, he succinctly sums up the one factor in Northern Ireland business that has stymied the economy’s progress: uncertainty.
“The uncertainty surrounding public sector austerity is probably worse than the cuts themselves will be,” the Northern Bank CEO said in the bank’s Donegall Square office in Belfast. “Uncertainty affects 100% of the population and impacts consumer confidence, which, in turn, impacts business.”
Mallon was speaking before David Cameron unveiled the extent of the coalition government’s public sector spending cuts, but his theory applies equally to the waiting room we now find ourselves in as the Northern Ireland Executive ponders how it will carve up its share of the cuts.
“The performance of a retail bank is a bellwether of the economy,” he said. “While there are some early signs of recovery in the housing market, we can see some of that confidence sliding away.”
That can’t be good news for Northern Bank, which made a pre-tax loss of £16.7m in the first half of the year, a figure which initially sounds a lot of but pales when compared to the £75m loss it made in the same period in 2009. Like most banks these days, the big hit to the profit and loss account is found from impairment charges — accounting losses which occur when assets are valued at today’s levels — most of which relate to property.
But the bank’s operating profit stood at £25.5m for the first six months of the year and it’s that which is giving both Mallon and parent company Danske comfort.
“I would be happy to forecast that underlying profitability is going to grow, but the imponderable in all that is the level of impairments, something which depends on whether the economy recovers.”
And it’s this which means Danske isn’t looking to offload Northern Bank, or indeed National Irish Bank, despite both dampening the mood of an otherwise buoyant group executive meeting Mallon recently attended in Copenhagen.
“The mood was positive, with Denmark and Finland performing well, Norway and Sweden having their best-ever quarters and the Baltics also on the up,” he said. “Only ourselves and National Irish Bank were more cautious, but that’s because the problems in the Irish economy are more deep seated, while the public sector cuts in Northern Ireland haven’t been felt yet.”
Hopefully, the positive performance elsewhere in the world will eventually pervade the economies both sides of our border, but in the meantime Mallon said there are positives in terms of the underlying structure of the bank.
“We’ve got much greater capital strength than anyone in the UK at the moment — in terms of capital ratios; we’ve got great liquidity in terms of our long-term funding position and we’ve an appetite for growth,” he said.
So, no sale then? “Completely out of the question. The group’s got long-term expansion plans and we’re part of that strategy. They always saw themselves being in it for the long term.”
Danske reports its third quarter results tomorrow and |is forecast to double its |pre-tax profits to 1.1bn Danish Kroner while halving its impairment charges.
In terms of a relative performance, Mallon said Northern Bank has emerged pretty much unscathed.
“Relatively speaking, we’ve had a good crisis,” he said. “The conservative approach, which has always been associated with Northern Bank, has served us well.”
In fact, he attributes much of the bank’s current problems to the downturn in the wider economy, rather than any overtly risky lending. “When you lend sensible money to sensible people to do sensible things and they still can’t make money, then you can see where our problems lie,” he said.
But the accusation thrown at banks in these difficult times by business people on a daily basis is that they aren’t lending money even to sensible people.
“Our biggest problem has been that there hasn’t been a market for us to lend to,” Mallon said. “The year after the crisis we were more judicious, but that was a natural correction from a situation where credit was far too freely available.
“I don’t feel we’ve changed as dramatically in terms of our lending criteria. We were and are a cash-flow lender and have approved £500m of lending in the first half of this year, half of which is new lending.”
It’s this cash-flow model, used for both business and individuals, which means Northern Bank still offers the poster child of the credit crunch, the 100% mortgage.
“In exceptional circumstances, we’re still prepared to lend to 100%,” Mallon said. “It sounds irresponsible in some ways, but, for example, in a situation where the borrowers might be a teacher and doctor, they’re at the start of their careers and have good-earning potential, we know their parents and know they have some worth, well, then we can make those kind of decisions. It’s not just a case of the ‘computer says yes’.”
Certainly, such an approach is a refreshing change to the disengagement that had been forming between banks and customers in recent years, and, although it seems to fly in the face of the conservative approach Mallon had alluded to, on a human level it makes good common sense.
It’s not often said, but it seems conservatism is cool.