Credit Review Office Fifteenth Report John Trethowan

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1 Credit Review Office Fifteenth Report John Trethowan 1. Report Overview (Press Release) This is my most positive report since the inception of the Credit Review Office. As reported last November, the Credit Review Office is pleased to observe the impact of the economic recovery in the improving financial figures on those businesses which have asked for their case to be reviewed. Whilst few commentators actually see the financial books of SMEs, the Credit Review Office does, and performs an in-depth analysis of the business in forming our case opinions. Also, the cases we see all pose some form of financial challenge, so the underlying health of these businesses is one of the best indicators of the recovery of the overall economy. It is therefore very pleasing to report that we continue to see improving trends in the turnover and profitability of the majority of businesses we assist. It is vital that these businesses are given every chance to recover their strength, including having access to appropriate types and levels of finance for their needs. In previous reports I have expressed concern on the risk of further market failure from the reduced number of banks active in the SME and Farm sectors. I am pleased that Ulster Bank have reaffirmed their commitment to the SME market, and importantly have now confirmed their continuing presence in Ireland as an active player; simply put, we could not have afforded to see the withdrawal of another major player. I am also pleased that PTSB have taken a strategic decision to enter the SME and Farm lending market. It may take a little time for this new division to become fully established, but the additional choice and competition in the SME market is warmly welcomed. Both Ulster Bank and PTSB have underlined their commitment to being fully active players in the SME market by voluntarily joining the Credit Review Office process. This will ensure that their SME and Farm borrowers can benefit from an independent review of any declined applications for new or increased credit facilities. I also welcome the commencement of operations by the Strategic Banking Corporation of Ireland (SBCI). Their first offering is to make keenly priced funding available through the main banks. Whilst the credit decision remains with banks, the cost of loans are more affordable as the result of the funding made available by SBCI, and in relevant cases this can also offset the cost of Credit Guarantee Scheme premiums for those SME and Farms which have a problem supplying suitable security for their lending. The Credit Review Office is working closely with the SBCI and Microfinance Ireland to ensure that these government schemes provide as much support for SMEs and Farms as possible. 1

2 Continuing Challenges Against this very positive backdrop there remain some challenges to ensure that as many SMEs and Farms benefit from the recovery and can continue to re-build their financial strength and viability. The main challenge we see in the cases presented to the Credit Review Office is the lack of capital reserves (equity), in many SMEs and Farms this is the result of poor strategic decisions by the promoters in the past, or the accumulation of losses through the long period of the severe downturn. Financing a business with little or no capital reserves is an unattractive proposition for a bank, which is assuming all of the risk if the lending goes wrong. It would be a shame however if many of these businesses which have survived through the downturn are not given every chance to recover their viability and financial strength. It is important therefore that Government policy continues to provide an environment which encourages participation by new lenders in the market A second emerging risk for SMEs and Farms is what happens next to those loan books which have been sold off to investment funds and hedge funds. Typically these loans were exhibiting some form of distress, or heavy levels of property lending, before being sold at a substantial discount to their new owners. These new entrants are not expected to hold these debts for the long term, and their objective will be to extract the maximum profit from their portfolios for their shareholders. I note that those borrowers whose loans are sold to unregulated entities will be protected by the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 when it is enacted. The purpose of the Bill is to ensure that borrowers retain the protections they had prior to the sale of their loan. In dealing with refinancing arrangements with core banks, there will be a need for the CRO to support businesses in this situation. The Credit Guarantee Scheme will also be vital in this period, and this scheme has recently been updated to incorporate refinancing and other improvements from the initial launch. As commercial and residential property values are increasing, it is likely that these new loan portfolio lenders are content to wait, as any increase in asset value will also increase the settlement figure they will seek from the borrower. This is a pity as the SMEs and Farms will see little benefit on their balance sheets of the increase in the value of their main fixed asset [property]. Monitoring Bank Lending Another piece of positive news for this report has been the lending performance of the two pillar banks, which is monitored by the Credit Review Office on behalf of the Department of Finance. As widely reported, the formal lending sanctioning targets were discontinued at the beginning of 2014, however the lending performance of the two pillar banks continues to be closely scrutinised each month. Additionally, the two banks meet formally with the Department of Finance and myself each quarter to discuss their performance and also to take their views on market developments. I am pleased to report that 2014 was easily the best year for loan sanctioning performance in AIB and Bank of Ireland since monitoring began in This is further evidence of the recovery in the domestic economy, however these figures also include the outcomes of legacy loan restructuring to finally resolve their distressed lending books, after a long period of parking problem loans; and additionally the two banks refinancing some of the 2

3 lending of the exiting banks. All of these types of lending are valid, be it new lending, restructuring, or refinancing, and all are important to the continued recovery of the SME and Farming sectors. Both Banks have publicly announced their lending figures for 2014, and it good to see almost 11bn having been sanctioned last year, of which almost 40% was new lending. The balance sheets of the two banks continue to contract however as the performance in the economy has yet to manifest itself into strong demand for new credit, to offset the trend for SMEs and Farms to reduce their high levels of borrowings post The lack of demand for new lending is borne out by the findings in the Department of Finance s six monthly surveys of SMEs, which show that most SMEs do not actually need credit at present. There was, however, a slight increase in credit demand seen in the last survey which may indicate that SMEs are beginning to seek credit for investment purposes as their fixed assets are almost fully depreciated. Credit Performance Oct 12/ April 13/ Mar 13 Sept 13 Oct 13/ Mar 14 Apr14/ Sept 14 Oct14/ Mar15 SMEs requesting credit 40% 36% 35% 31% 32% 25% 26% 26% 27% 26% Anticipate seeking credit (next 6 months) In the first 4 months of 2015, both banks are outperforming their sanctioning figures achieved in 2014, which in itself was the best year since monitoring commenced in 2010, and both banks are on track for their best year yet. 3

4 Endorsements of Credit Review Office Service since last report Testimonials Castle Foods Co Tipperary In 2013 I was in a dire situation. I had a business I had built up from 1992 and the economic climate was bleak. My customer base had been eroded by unemployment and emigration. The blame game had been in full flow and whoever was right and whoever was wrong was not the issue businesses needed to survive. As a result of this, refusal by my bank which I had remained loyal to from the outset, was a matter of course. Nobody was prepared to sanction a loan and be it officially or a conversation over the phone the answer was the same. In my refusal letter from the bank I was given a leaflet about the Credit Review Office. I decided to pursue this option and it has proved to be the best decision I have made. Initially I was met with understanding people who organised my appeal and handed it over to qualified and experienced accountants who could see the value of my business, its potential, and the need for credit facilities to keep it going. Today I have obtained my credit facility for a second time, my business continues to grow and I am extremely grateful to the Credit Review Office, without whom I would not have survived. Denis Kiely Athenaeum House Hotel Waterford I would just like to put on record the very excellent treatment we received from the Credit Review office. From the very first contact we made with your office it was explained to us how the system worked what the time frame would be. Then we were put in touch with an excellent advisor who understood our business and who could direct us and assist us in our review process. He structured the appeal for us and was able to give the Bank the background and info they required to make their lending decisions. We had a positive outcome and we are very pleased with our loan from AIB Bank it will allow our small business to grow and expand through the coming years. The contact with your office was always efficient and reassuring giving us step by step procedure and also feedback and support through this very difficult process. We really felt like it was the first time someone was looking out for us the small person! After the process with the Bank was complete we had reason to call you in again as the Bank had got themselves stuck in their securities and again you quickly picked up the reins and dealt with the situation for us and got a resolution without your help we would not have succeeded and we have managed to save not only our family business but secured 22 jobs going forward. Many thanks again for all your help and I would recommend the process to anyone who has similar difficulties to ourselves Stan Power 4

5 Colours International Dublin (Retail) At the start of 2015 we contacted the credit review office regarding the decision by the AIB not to advance funds to us. We found working with the Credit review office to be helpful, professional and very straight forward. The whole process was seamless and the time involved minimal. It suffices to say that we would recommend the credit review office to any company that has a strong case for further investment from the banks and that the credit review office can be a strong ally. Ian Bolton Managing Director, Colours International 5

6 2. Progress Update - The Report Key Overall Developments / trends This is my fifteenth report. Over the course of these reports the improvement of the Irish economy can be charted. The Troika has come and gone, growth has returned particularly to major urban areas, and the nature of the cases dealt with in the Credit Review Office has changed from almost all being about business survival in the early days, to now being the challenges posed by financing business recovery and growth coupled with the still emerging phenomenon of refinancing loans which have been sold on by exiting banks. As this progression has been by its nature gradual since 2010, my reporting is moving from quarterly to half yearly to align with the Department of Finance surveys on SME activity. These valuable surveys are one of the structural recommendations made in my fourth report; and this has provided a much clearer picture of SME activity in Ireland to assist commentators and policy makers. Since my last report, I very much welcome the voluntary initiatives by Ulster Bank and PTSB in joining the Credit Review Office appeals process. It is a further sign of the renewed commitment to the Irish market by Ulster Bank; and the entry of PTSB into SME and Farm lending is a welcome addition to improve competition further. There is also a growing number of smaller new entrants, particularly those product innovators in the Debtor Finance area which are starting to make their presence felt. Whilst it is not the role of the Credit Review Office to promote individual providers, we see some cases where their service of discounting single large invoices would be an ideal solution to a recovering SME which has landed a major order which requires working capital to fulfil. I welcome the newly formed trade association which can act as a conduit for demand to these new providers, and it would be helpful if the Irish Media could continue to help cover these new entrants. Another positive development is the work underway by the Central Bank in developing a Credit Register. This will provide a further structural improvement in the collection and controlled distribution of credit information on the SME sector. Effective Credit Registers are proven to improve credit availability in economies. Increasingly the Credit Review Office is hearing from business promoters that they are having difficulty in accessing dealer and manufacturers credit because of issues on past credit issues, such as missed payments, affecting their credit records. Banks also use Credit Bureau information heavily in their reliance on credit scoring for smaller loans. There is however at present a minimal awareness of the collection, use and potential benefits of credit information by SMEs or their advisors, with only two in five SMEs across the EU checking their own credit information to ensure that it is accurate. In preparation for the launch of the Irish Credit Register, I would call on the Business Media, Trade Bodies for SMEs, and also the Professional Bodies for Accountants and business advisers to ensure that their members awareness of credit information is improved. 6

7 My role in monitoring the SME and farm lending of the two pillar banks has also observed heightened credit sanctioning activity in 2014 and so far this year; for refinancing, restructuring and also more importantly for new credit. The Banks in their quarterly briefings to the Department of Finance report the biggest barrier to new lending is SME demand. This has been borne out in our meetings with the SME trade representative bodies, who also report businesses recovering, but not yet at the stage of borrowing to invest. Part of my monitoring of the banks figures is to ensure that no trade sector nor region is disadvantaged in bank lending. To date, whilst bank balance sheets have been contracting, there has been no disproportionate movement in either regional nor trade figures; however from case appeals to the Credit Review Office and also to some queries from Local TDs, a higher number of appeals and queries are coming from smaller regional towns, some of which were hit particularly hard by the downturn. The rollout of the Regional Enterprise Strategies in conjunction with the work of the Local Enterprise Offices should ensure that regional disparities become less pronounced in the future. With a limited level of competition, banks can make their planned lending objectives with relatively low risk lending this is understandable from a bank perspective, however many SMEs and farms have survived a severe downturn and are now starting to recover but with depleted (or no) capital reserves. This does not mean that they are not worth supporting, however financing businesses in this weakened state is very challenging but not impossible. The Credit Review Office remains committed to seeing as many SMEs and Farms survive and recover as possible. It would be helpful if this capital deficit was recognised as an acceptance of the requirement for equity injection, rather than solely bank debt. In addition, the development of a supply side for potential equity investors, in the scale of between 100K and 2M, is a structural need in the economy. A useful measure in this regard is the Employment and Investment Incentive Scheme and the enhancements to this scheme introduced in Budget 2015 should be beneficial to the SME sector in terms of filling the equity gap. Much remains to be done in raising the financial management capability of SMEs, particularly the micro/small businesses. The three SME representative bodies are all working hard with their members in this regard and should commended for this work. I would like to see much more work being done by local Accountants and Debt Consultants to upskill and support their SME and Farm clients. Refinancing As previously highlighted in my last report, one of the key areas in predicting future challenges for the SME and farm sectors is how those loan portfolios which are being sold off as investments will be realised. It is my view that the Credit Review Office will be required to play an important part in ensuring that some SMEs and Farms can survive this challenge. The Credit Guarantee Scheme is shortly to be re-launched, following consultation, to address some of the learnings on the first version of the scheme. One of the recommendations made by the Credit Review Office is that refinancing is to be included in the new version, and this is an area which will become more important over the next few years as the loans which have been sold on are realised for a profit leaving the borrower the imperative of finding a new lender. 7

8 Some borrowers have advised the Credit Review Office that they have not been informed of the reason their loans have been sold on to investment funds and hedge funds, and there is presently real concern in those SMEs and Farms on what is happening to them, however it appears that contractually there is nothing much that can be done about it at this time. The Credit Review Office has had isolated reports of some new lenders increasing the borrowing interest rates, however for most borrowers it appears that the new lenders are content to let the arrangements continue pending their eventual realisation of the profit on the loan, on which they have received a substantial haircut when the loan was purchased. The main present concern for the SME and Farm borrowers is in securing working capital facilities either from the legacy bank or a new lender. An emerging risk for SMEs and Farms is what happens next to those loan books which have been sold off to investment funds and hedge funds. Typically these loans were exhibiting some form of distress, or heavy levels of property lending, before being sold at a substantial discount to their new owners. These new entrants are not expected to hold these debts for the long term, and their objective will be to extract the maximum profit from their portfolios for their shareholders. I note that those borrowers whose loans are sold to unregulated entities will be protected by the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 when it is enacted. The purpose of the Bill is to ensure that borrowers retain the protections they had prior to the sale of their loan. In dealing with refinancing arrangements with core banks, there will be a need for the CRO to support businesses in this situation. The Credit Guarantee Scheme will also be vital in this period, and this scheme has recently been updated to incorporate refinancing and other improvements from the initial launch. (iv) Credit Review Office activity My last report was issued on 10 th November This report covers the period to 31 st May Reflecting across the previous fourteen reports I have issued, we have had the CRO limits raised twice, from 250K to 500k, and then to 3M, and this has deepened the complexity of the cases and their outcomes so that reporting scores, whilst required, no longer truly represents the situation on the valuable part played by the Credit Review Office, and indeed the Banks in this process. There is routinely much more debate and interaction between the banks and the Credit Review Office on the outcomes of the appeals as time goes on Importantly, this is not about wins and loses for the Banks and the Credit Review Office, but the outcomes for SMES and Farms and the people they employ. Helpline/ Web Activity: These charts show the level of activity across the 15 reports issued to date. Note that these figures are influenced by our media advertising activity. The recent Department of Finance biannual SME survey indicates that 60 % of respondents are aware of the Credit Review Office, however 58% of SMEs still claim 8

9 they were not made aware of the Credit Review Office by their banks (since the last survey AIB and BoI have reviewed their decline letters to ensure that the Credit Review Office service is offered. (The figure may also reflect that some of the survey respondents may not be in Credit Review Office participating banks during the survey period, or may not have had credits declined). It would be remiss not to recognise the very good and continuing cooperation provided by the two dedicated Credit Review Office liaison teams within AIB and BoI. We also have had positive contacts with Ulster Bank and Ptsb staff in setting up their appeals process with the Credit Review Office. Calls to the Helpline New Website Visitors / / / /15 The helpline has taken 2725 calls to date, an increase of 250 calls since the last report. The website has had 74,430 different web visitors to date. An increase of 23,774 since the last report, this is a result of change in advertising and marketing strategy Credit appeals to the Credit Review Office We have received 587 formal applications to date. Of these, 394 reached final conclusion and the Credit Review Office has upheld the appeals in favour of 219 borrowers, including those with a commitment to reassess the lending in the future if agreed performance hurdles are met in the short term. Some of the other appeals are work in progress, others are resolved between the borrower and the bank before opinions need to issued. The breakdown is as follows: 9

10 got funds from Bank 36 More work needed by All Cases = abandoned appeal 19 W.I.P. upheld or commitment to reassess if short term performance hurdles are achieved Bank Upheld

11 From the above chart of the 394 cases which have been finalised as formal reviews with opinion issued, the breakdown is as follows: 175 Bank Upheld Upheld Banks Upheld 24.9M s Upheld 31.4M 219 Cases Completed and Opinions Issued By Number 394 Cases Completed and Opinions Issued By Value = 56M The upheld appeals have resulted in 31.4M credit being made available to SMEs and farms, helping to protect /create 2,222 jobs. Banks Internal : AIB WIP Upheld Declined Total Internal BoI WIP Upheld Declined Total Internal TOTAL AIB End of May 2015 BOI End of May 2015 Other Credit Review Office for those report period: As part of the Office s activities, in order to gain feedback from all stakeholders and SMEs, the following groups were met with, or their member conferences and seminars addressed/attended in the last quarter: Updates/ Meetings Weekly reports to Department of Finance Ongoing liaison with Dept of Jobs, Enterprise and Innovation, including assistance with constituency queries on credit provision. Monthly attendance at State Bodies Group on SME finance. Monthly attendance at Advisory Group for Small Businesses. Attendance at separate Formal Quarterly meetings between the two pillar banks and the Department of Finance Attendance at separate liaison meetings with the three SME representative Bodies and the Department of Finance. Separate informal housekeeping meetings with both pillar banks to improve case management. Liaison meeting with ISIF Liaison meeting with SBCI Liaison meeting with CBoI on Credit Register 11

12 Liaison meeting with BFPI (the Banking Industry trade body) Separate Preliminary and preparation meetings with Ulster Bank and PTSB prior to them joining the Credit Review Office scheme Research Assistance Led one of the four workshops on Improving Credit Information at EU Conference in Brussels. Credit Review Office response to the consultation outcomes paper on Code of Practice on SME lending by CBoI. Contributions at Conferences etc Presentation in Amsterdam on the Credit Review Office service to Irish- Dutch trade meeting sponsored by Enterprise Ireland. (This resulted in the sharing of process and protocols with a group of Dutch financiers who wish to set up a similar service in Holland). Attendance at the IMF Conference in Dublin Castle Attendance at CBoI conference on the economy. Attendance at SBCI Launch on Attendance at AIB Bank SBCI Launch on Attendance at Personal Insolvency Seminar organised by Irish Law Conferences. 12