For Ireland’s banking sector, 2017 could be a significant year. Almost a decade on from the financial crisis Allied Irish Bank (AIB) which – along with Bank of Ireland, is one of the country’s two pillar banks – could return to private ownership in 2017.
Psychologically it would mark a major milestone for an economy that climbed out of recession just three and a half years ago.
Lurching from one crisis to the next, Ireland went on to become one of a small but unenviable group of eurozone countries forced to seek billions of euros in rescue funding from Europe and the International Monetary Fund.
The state has made significant progress on repaying the debt and this year has the chance to recoup at least some of the €21bn (£18bn) that was pumped into AIB to keep it afloat. However, it is not certain an initial public offering (IPO) will go ahead since Ireland’s top two trading partners – Britain and America – are in a state of flux. Uncertainty still surrounds Britain’s Brexit plans and it is not clear how much will be revealed even after the UK Government triggers Article 50. Meanwhile, America risks turning inwards under the protectionist stance of President Donald Trump.
Some also question whether Ireland’s banking sector really has returned to health.
What does all this mean for those law firms who act for the financial industry and benefit from the wider economy?
Q: Has Ireland’s banking sector fully recovered from the financial and eurozone crises? What evidence is there to suggest it has or has not?
Bryan Bourke, managing partner, William Fry: Ireland’s banking sector has made a substantial recovery. Reduced non-performing portfolios and an improved economic environment are just two of the key factors contributing to that. Increased volumes, in particular, in the commercial property sector are also evident and have supported activity. Of course, challenges remain, including competition from non-traditional lenders and the economic uncertainty stemming from the Brexit vote. But the government’s recent announcement that they have appointed global co-ordinators for an IPO of AIB reflects how far we have come.
Catherine Guy, managing partner, Byrne Wallace: While the sector is making progress,
the banking sector has yet to fully recover. The volume of lending activity is improving but the pace of improvement is quite modest and, as all of that is going on, the sector also has to deal with economic and political events including Brexit. Notwithstanding the challenging environment, there is a steady increase in the new non-bank lenders providing competition for traditional banks.
Simon O’Neill, banking partner, Philip Lee: Access to credit has been an issue for some time, particularly for SMEs. The Central Bank of Ireland’s SME market report for 2016 shows that the combined market share of the country’s three main banks is approximately 95 per cent of the SME market. The SME and wider market has been characterised for some time by deleveraging and debt management.
“Access to credit has been an issue for some time, particularly for SMEs” Simon O’Neill
Barry Devereux, managing partner, McCann FitzGerald: In many respects, the fundamentals of Ireland’s banking sector are more robust than at any time in the previous two decades. However, despite the sector’s remarkable recovery since the financial crisis there are a number of ongoing issues. According to a recently published Central Bank report Ireland’s banks still have non-performing loans (NPLs) of €37bn, representing nearly 17 per cent of all bank loans compared with a eurozone average of 7 per cent. While the amount of NPLs has almost halved since the peak in late 2013 the figures are still a matter for concern. The majority of these loans are mortgages and the mortgage resolution process is proving to be slow and complex. That said, the banking sector is now at an important inflection point, with 2017 likely to see a restoration of ordinary dividends by AIB and possibly Bank of Ireland, a net increase in loan books for the first time in eight years, and the possible return of AIB to the main stock markets in Dublin and London.
Ciaran Rogers, head of banking, A&L Goodbody: No, the Irish banking sector still has a bit to go before it’s fully recovered although the flow of credit is approaching ‘normal’ levels and liquidity is good. A couple of the leading retail banks in Ireland are still majority-owned by the state, so until the state offloads those shares it is hard to say the banking sector has fully recovered. While Ireland has led the way in Europe in dealing with its impaired assets by large scale loan sales, some banks are still carrying a large number of residential mortgage loans that are in arrears which they are having to manage and resolve.
Q: How has your firm adjusted to the changed banking sector? What practices has it affected?
John White, managing partner, Beauchamps: Our banking team is three times the size it was in 2008 and has consolidated a top market position in the past five years. This growth is in response to the number of complex, large scale client assignments we have won. These assignments are cross-functional, involving banking, commercial property and insolvency/restructuring. Our teams need to work seamlessly to deliver a complete client service. We have also strengthened our banking regulatory capabilities.
Bourke: Our banking teams, working with our property and tax teams in particular, anticipate an increasing number of new transactions involving both traditional and non-traditional lenders, including commercial property transactions. In addition, we are focusing increased resources on financial services regulation, FinTech and financial services litigation reputation management as growth areas in the sector.
John Breslin, banking partner, Maples and Calder: Consistent with the general upturn in activity, Maples’ finance team has seen a decline in loan portfolio sales work and a significant increase in ‘normal’ banking deals. The end of the financial and eurozone crises has impacted the firm’s contentious insolvency practice, albeit that receivership and examinership work, together with workouts arising from loan portfolio purchases and significant compulsory liquidation assignments, mean that this area is still busy.
In addition to the change in the domestic finance practice from loan sales to traditional debt transaction work, the key development has been the exponential growth in property transactions. Accordingly, the practice group most significantly affected by the new environment has been our property team.
“A key development has been the exponential growth in property transactions” John Breslin
Guy: The volume of corporate M&A activity continues to increase and our banking and corporate teams are working with increasing numbers of clients either on the funding or borrowing side – it does not appear that this activity is particular to any specific sector, which is indicative of a return to more normal levels of M&A activity. We are doing quite a lot of lending work for banks and non-bank lenders. It is clear that stakeholders are generally more cautious and considered in their approach and this has an impact on the speed at which transactions proceed to completion.
“Stakeholders are more cautious in their approach and this has an impact on the speed of transactions” Catherine Guy
Rogers: We have been a market leader in large loan portfolio sales in Ireland, acting either for the buyer or seller, so we have developed that practice significantly. We also have a dedicated project management team that manages many aspects of the loan portfolio sales for the sellers, which has been a good revenue stream for us. As the value has come back into the property market we have seen much more activity in the market and in the financing of these assets as well as development finance over the past 18 months.
O’Neill: The firm’s construction, real estate and finance practices have grown significantly in the past 18 months. In 2016 we grew our banking and finance group at partner and associate level, and are leaders in the area of project finance. Transaction complexity has increased but this has had a positive effect on our corporate practice, and practices that offer a bespoke solution for clients.
Declan Black, managing partner, Mason Hayes & Curran: The work of our banking team has been transformed. The mainstay became loan portfolio transactions rather than regular banking work – although that held up in sectors, particularly energy. Restructuring work was obviously plentiful too. So towards the end of the crisis, from about 2013, the team had never been busier. There is a normalisation in train now with the larger loan portfolio transactions ending, secondary transactions emerging and normal lending practices returning. Direct and alternative lenders and funding structures are more prevalent now than before the property crash, especially in the mid-tier market.
Brian O’Gorman, managing partner, Arthur Cox: Our finance department is ahead of the curve in relation to shifts in the finance market. We have more resources in our financial regulation practice, and lawyers who in the past did banking transactions are now advising on lending in the general sense.
Q: Does Brexit threaten undo the progress the country’s banks and regulators have made?
Bourke: Not at all. In fact, Brexit has created an opportunity for Ireland to grow and develop its financial services sector. Many UK financial service firms are telling us they cannot wait for certainty about EU passporting rights and are considering creating their own certainty by applying for authorisation in jurisdictions such as Ireland to guarantee continued access to EU markets. For many UK firms, moving part of their business to Ireland is the least disruptive option for their existing UK business. When the UK leaves the EU Ireland will be the only remaining English-speaking EU member state. William Fry has experienced a pronounced spike in enquiries from UK banks, insurance companies, funds entities, payments institutions and electronic money firms, and the UK law firms working with them on their Brexit planning.
“Our lawyers who in the past did banking transactions are now advising on lending in the general sense” Brian O’Gorman
Rogers: What we’ve seen so far is that the uncertainty created by Brexit has slowed the progress of the Irish state in offloading its ownership of one or two of the main banks. It might also impact certain sectors and their appetite for growth and capital expenditure – most notably agrifoods and other export sectors. However, the possibility of a ‘hard’ Brexit could also throw up opportunities for Ireland and its banking sector.
Breslin: That is not our perception. The precise outcomes of Brexit in the short, medium and longer terms are, of course, uncertain. While it is far too early to say what the precise impacts will be, overall we would not consider that they will be negative. Our guess for now is that in due course the Irish financial services industry will benefit from an influx of firms looking to establish in Ireland to gain straightforward and legally certain access to the EU single market. Whether than influx will be a trickle or a flood is impossible to predict.
Liam Carney, banking partner, LK Shields: Brexit has introduced uncertainty, but the UK economy has proved to be more resilient than anticipated . Both Irish pillar banks carry on significant business with the UK and Ulster Bank Ireland DAC is a member of the Royal Bank of Scotland Group. Therefore, if the harsher economic predictions made after the Brexit vote should materialise, there will likely be an impact on the profitability of the principal bank lenders in Ireland. In those circumstances, however, there may well be additional foreign direct investment into Ireland to access the single market, which should lead to additional business opportunities for banks operating in the Irish market. The principal difficulty is that uncertainty has resulted in businesses pausing on growth initiatives, which has resulted in a fall in corporate transactions.
“Businesses have paused on growth initiatives, which has resulted in a fall in corporate transactions” Liam Carney
Devereux: Brexit poses a clear risk to Ireland’s economy, including the banking sector, although the nature of that risk is difficult to evaluate as much depends on the terms of any withdrawal agreement and the subsequent development of the British economy.
According to the Irish Central Bank, over one-fifth of Irish retail banks’ loan exposures are UK-related, while the share of new lending to the UK was just under 30 per cent of total credit extended in Q2 2016. This means Irish banks are likely to be particularly affected by exchange rate movements and the effects of adverse shocks to the UK economy.
Moreover, the UK’s exit from the EU could have long-term structural consequences for Irish banks with a presence there. However, there may also be some advantages for Ireland and it’s not hard to predict financial services as a key work area: asset management and investment funds, insurance/reinsurance, MIFID and banks/financial institutions are most likely to be in demand.
Black: Brexit threatens everything. But it also gives rise to opportunities. There is a likelihood that some banking operations will move to Ireland. But if the economic environment in the UK and Ireland deteriorates as the Brexit story unfolds, that will obviously be bad news for Irish banks. Until we know the precise terms of Britain’s departure from the EU, and in particular the details around passporting and equivalency, it’s difficult to predict what might occur.
Q: What are the biggest headwinds facing Ireland in 2017, in economic and legal terms?
O’Gorman: The invoking of Article 50 in the first quarter and Trump coming to power in January both have the potential to result in changes in the world order to which Ireland will have to adjust. The rise of populism in Europe may also spread to Ireland.
Bourke: Brexit, although it creates a lot of opportunity in the financial services space, does present challenges in the broader economy. Britain is obviously our largest export market and our export industry played a key part in keeping the economy going during the financial crisis. Currency fluctuations and questions as to how we will trade with Britain outside the EU are challenging. Another area is obviously the uncertainty throughout Europe created by the move to the far right and questioning the merits of the European project.
“There is a normalisation in train with large loan portfolio transactions ending and normal lending practices returning” Declan Black
Breslin: In terms of the US, if the new administration adopts a policy of economic protectionism this could have a negative impact in Ireland.
Ireland hosts a large number of US-based companies in a variety of sectors – not only financial services but also technology and pharmaceuticals. If US trade policy meant it was unattractive for US companies to trade from Ireland this could have serious consequences.
Liam Quirke, partnership chairman and head of the Brexit Advisory Group, Matheson: The biggest challenge Ireland faces in 2017 is the same as that faced by all other countries in Europe, and indeed outside Europe, namely dealing with the consequences of political uncertainty at European and at international level.
Ireland is an open trading economy that has proven especially agile in the globalisation era. The challenges it will face in 2017 mark another inflection point in our international business history, the fourth since the establishment of the international financial services centre and the incentives for IT companies in the 1980s.
Each of those inflection points has been met with innovative solutions that have led to growth in the Irish economy. The changes promised to US tax laws by a Trump administration are being cited by some as adverse to Ireland. However, the rationale for the presence of most US companies in Ireland is a business need for a European presence to access European markets. Accordingly, this may result in Ireland being even better positioned. The European Commission has adopted an aggressive stance on state aid in the area of tax rulings. While our duties to our clients mean that we can’t comment on any specific case, we believe Ireland’s robust and principled defence of its tax sovereignty and the companies who invest in Ireland on that basis will enhance Ireland’s reputation among international companies seeking to invest in and access the EU market.
Carney: While economic commentators predict further growth for Ireland in 2017 it is likely that economic activity here will be sluggish at best until the UK strategy for Brexit becomes certain. It will be necessary to rework significantly the legal basis for commerce between the UK and Ireland.
While our expectation is that preparatory work for this change will be necessary in 2017, it is doubtful that there will be a significant move to a changed environment in 2017.
White: Uncertainty is the biggest challenge of 2017. Ireland’s economy is very globalised and has grown through positive collaboration with economies around the world. Major change on the world’s stage has the potential to have a significant impact our economy. When you look at recent events – Brexit, the US election and ongoing political changes in Europe – everybody is looking for certainty. A lack of it can create market stagnation as companies take a ‘wait and see’ approach.
Q: Do you have plans in place to mitigate these headwinds? If so, what are they? Launching new practice areas? Hiring partners? Opening or closing offices?
Bourke: We are constantly monitoring changes in the market and over the past 18 months we’ve had some strategic hires to our group like John O’Connor, who joined us from being head of technology at Matheson. We’ve also been hiring and building our resources in the financial services sector, where we see growth as well.
Guy: Our Brexit team continues to assess and monitor issues associated with Brexit, both the threats and the opportunities. Our tax team works with a considerable number of US-based clients and we will be monitoring the outcome of the appeal on the Apple/state aid decision closely. We established a financial services regulatory team in 2015 and that team has been very active with a range of projects related to complex compliance issues. We established an EU competition and regulated markets team last year, led by Joanne Finn. In the past 18 months we have appointed seven new partners in various practice areas and specialities, and we anticipate similar numbers in the coming year.
Julian Yarr, managing partner, A&L Goodbody: While there are challenges, Brexit could create a lot of opportunity for us as one of the largest, multi-practice law firms in Ireland. Already there are signs that Ireland could benefit from an increase in investment activity due to Brexit and we are in an excellent position to maximise on those opportunities. We have seven new partners this year, with three being lateral hires, and have strengthened our US partner presence. We see our Belfast office as key to offering an all-island service and our London and US offices will become even more important to us.
“There are signs that Ireland could benefit from an increase in investment activity due to Brexit” Julian Yarr
White: Looking at Brexit in particular, in addition to our client communications providing analysis of possible outcomes, solutions and recommended preparations, we have been engaging with UK firms and clients to help them understand how Beauchamps and the business community in Ireland can support them through Brexit and beyond. It’s in everyone’s interests to maintain a collaborative working style between the UK and Ireland. We have been consistently growing our partnership and legal team in areas such as banking, banking regulatory, inward investment, employment insolvency and restructuring, corporate, dispute resolution and commercial property to reflect market activity and increased client workload.
Carney: We plan to expand our teams in high business growth potential areas such as regulatory, data protection, financial services, IT and corporate where they focus on inward investment. We believe these strategies should support our business however Brexit develops.
O’Neill: The firm has offices in Dublin, Brussels and San Francisco, and in 2016 grew the team by 23 per cent. We anticipate further growth over the next 18 months.
We continue to develop new areas of expertise across the practice, with significant growth in our FDI practice. We have established dedicated teams for the expansion of our profile in Canada and Israel.
There has been an increase in demand for immigration-related advice. We are confidently predicting further growth in 2017 in the nature of these enquiries as businesses implement contingency plans to mitigate the uncertainty created by Brexit.
Black: You have to focus on what you control irrespective of external factors. So that’s service, execution, new business generation and cost control. We are looking to be match-fit in all those aspects of professional services so we are positioned to react quickly to any external changes, positive or negative.
We have put extra resources into our London and New York offices this year with Graeme Bell and David Mangan now full-time in these locations. Also, our new San Francisco office has just opened and is led by Oisin Tobin. We are expanding our data privacy team and will be launching some innovative offerings in this area in 2017.
Michael Jackson, managing partner, Matheson: We see Brexit and developments in the US as presenting opportunities for Ireland and for Matheson.
We’ve restructured our London offering, with Liam Quirke, the firm chairman and former managing partner, taking responsibility for our London office. We also established a Brexit Advisory Group earlier in 2016 and are pursuing a strategy of monitoring and updating clients on the likely impact of developments on their businesses. We have expanded, and will continue to expand, our regulatory and financial institutions group which is busy working with a significant number of UK-based institutions on establishing or expanding their presence in Ireland. Fintech is also an area where we believe Ireland is well-positioned to benefit. And we have recruited in the data privacy and technology space more generally as this is another area where we are seeing significant demand and growth. We foresee a general pick-up in domestic and international M&A next year and have expanded our corporate group with the addition of three new partners.
We’re also continuing to expand our presence in the US and will be sending additional lawyers to our US offices in 2017.
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