Housing market more attractive than commercial lending
The two largest high street retail banks operating in Northern Ireland now have something to celebrate.
The years of banking losses, coping with major impairments, have come to an end. The bottom line, pre-tax profits, is back in the black. These banks will feel reassured.
Through a period of distress and questions about their survival, these banks and other retail banks have enjoyed the support of their shareholders (particularly in the case of Danske Bank) and the taxpayer (particularly in the case of the Ulster Bank).
The prospects for many former customers with large commercial loans, often based on ephemeral property values, are less buoyant.
Excessive borrowing often proved too risky, write-downs in property values became a hazard and continuing balance sheet stress often relied on sympathetic tolerance by lenders.
For several decades, prior to 2006, bank commercial customers who borrowed heavily against property developers served both themselves, as developers, and their banks handsomely.
Since 2007, the developers have seen property values peak and then fall dramatically.
The worst of the recent recession and collapse in property values for these retail banks is over. They now face new challenges in adjusting to the next decade.
The banks face the hangover problems of rebuilding their profitability and sustaining an adequate capital base
The borrowers now living with adjusted property values are less comfortably placed to rebuild their business investments through renewed local financing.
Negative equity in property values is influencing non-property investment. Real recovery in the private sector in Northern Ireland now faces the temporary handicap of a property debt overhang in commercial companies.
This poses a policy dilemma. Will the property market recover quickly enough to erode this handicap - probably an over-optimistic thought?
Alternatively, what, if anything, can the banks or Government do to ease this barrier? The reports this week from these retail commercial banks have emphasised that they have funds and are ready to lend, presumably with sensible credit checks.
The part-year reports suggest two features. First, the amount of (net) bank lending is still falling.
Second, these retail banks make heavy emphasis on the scope for increased mortgage lending with the implied link to recovery in the housing market. The domestic housing market is proving more attractive than commercial lending for business development.
In today's environment, with constrained Government budgets, the economic recovery is less secure than we would wish.
- John Simpson is an economist