House of Commons - Northern Ireland: banking on recovery?

Northern Ireland: banking on recovery? - Northern Ireland Affairs Contents

4 Open for business?

44. On 13 June 2013, prior to a meeting with the Irish Finance Minister, the then Finance Minister, Sammy Wilson MP MLA, was quoted as saying that "Access to finance, particularly for our SMEs, is an ongoing issue for all of us and I want to discuss with Minister Noonan how we might work together to keep the pressure on the banks to ensure that businesses can access the finance they need". [36]

45. On 3 July 2013, Mr Wilson was reported as saying that RBS-owned Ulster Bank needed to do more to help troubled businesses, adding that whilst RBS had discovered £20bn that could be lent to small firms, he was receiving, on a daily basis, "reports of businesses that are trying to work through the debts that they have with Ulster Bank and are not being given the time to work through those because Ulster Bank want to get the cash from them as quickly as possible".[37]

46. In March 2013, the Economic Advisory Group (EAG), established by the Minister for Enterprise, Trade and Investment, Arlene Foster MLA, in May 2010 to create a group of experts from business, skills and economics to provide independent economic advice to DETI on the Northern Ireland economy, published its Review of access to finance for NI businesses;[38] EAG found that:

There is clearly a significant degree of frustration within the local business community over what is perceived by many businesses to be the unwillingness of banks to lend at reasonable rates. This is attributed to various reasons including a lack of understanding of business needs and a desire by banks to build up their capital to meet the requirements of the financial regulators. On the other hand banks have told us that they are open for business and willing to lend to viable trading businesses, although the cost of credit has had to increase since the crisis. In their view the problem is a lack of demand due to low levels of confidence...

EAG also said that:

The evidence indicates that the supply of bank credit is also constrained. Banks say they are open for business but admit to strict capital requirements being in place. The reasons for restricted supply include the need to strengthen bank balance sheets, the 'overhang' of bad debt accumulated prior to the crisis, funding challenges, and current and impending higher capital requirements including for SME loans and overdrafts.

47. In its written memorandum, the British Bankers' Association (BBA) stated that "SMEs in Northern Ireland are very similar demographically to SMEs overall" and that "half of all SMEs in NI currently use external finance and 72% of SMEs in NI have 0 employees, compared to 74% in UK," setting out the information in the table below:

Risk profile All UK SMEs NI SMEs Profitability All UK SMEs NI SMEs

Minimal 6% 7% Profit 65% 63%

Low 11% 12% Broke even 12% 14%

Average 33% 31% loss 16% 18%

Above Av 50% 50% DK 7% 5%

External Finance All UK SMEs NI SMEs

Current use 46% 51%

in past but not now 2% 2%

not in last 5 years 51% 47%

48. The BBA's memorandum also listed the main reasons why UK businesses did not apply for finance:

effect of economic climate: felt it was not the right time to borrow in the current economic climate;

principle: prefer not to lose control, or can get funds elsewhere;

process: think it's too expensive, too much hassle, needs security; and

discouraged: assumed without asking that would be turned down, or had asked and were put off.

49. When the BBA gave public evidence, they stated that there had been a change in the banking sector and, since the crisis, the banks had tightened up their conditions, and were not engaging in high risk lending.[39] It seems to us, however, that the pendulum has swung too far in the opposite direction, and that there now seems to be almost a complacent attitude that banks will not risk lending other than to the most financially solid customers.

50. A Quarterly Sectoral Forecast report from Danske Bank, published in June 2014, indicated that Northern Ireland's economic growth should reach 2.4 per cent in 2014 and in 2015. Professional and scientific services, which include legal services, accountancy, advertising, architects and engineering firms, were forecast to grow by 4.3 per cent in 2014 and by 4 per cent in 2015. Other signs that Northern Ireland was in recovery were a steady improvement in the labour market, rising confidence levels and a high number of foreign direct investments during the second quarter of 2014.[40]

51. A more recent survey of businesses indicated that the Northern Ireland economy had been in recovery for a full year. The Purchasing Managers Index, whose data is produced by Ulster Bank, a monthly survey that tracks indicators such as new orders, employment and exports, indicated a return to growth in June 2013, a trend that continued over the succeeding 18 months.[41]

52. The banks themselves have also been showing that they are recovering from the crisis. In April 2014 it was reported that First Trust Bank would be back in profit in 2014,[42] and Bank of Ireland announced that it was back in profit for the first time since 2008.[43] In July 2014 it was announced that Danske Bank, which had made a loss of £1 million in the first six months of 2013, had made a pre-tax profit of £45 million in the first six months of 2014,[44] and Ulster Bank made a profit of £55 million in the first six months of 2014, compared to a loss of £381 million in the first six months of 2013.[45]

53. This encouraging news was reinforced in February 2015, when it was announced that Danske Bank in Northern Ireland had made pre-tax profits of £117.5million in 2014, which was a more than tenfold improvement on its profits in 2013.[46]

54. After what has been an extremely difficult economic period, and the resultant overhang of the property collapse, it does appear that there has been some progress in the economic recovery in Northern Ireland over the last 12 to 18 months, although it has been slow in comparison to the recovery in Great Britain.

55. For example, a number of new jobs were announced during 2014, including the creation of 628 jobs by the food company Moy Park,[47] 484 jobs were created by the First Derivatives Group Newry, global providers of trading and risk management software systems,[48] and 250 new jobs were announced for Belfast by Alexander Mann Solutions, a leading provider of talent acquisition and management services.[49] It was also announced in January 2015, that the global diagnostics firm, Randox, was creating 540 quality jobs in NI over the next four years[50]and it was then announced on 19 February that Ulster Bank was itself creating 350 jobs at its Belfast call centre, which would deal with calls from customers of RBS and Nat West, as well as its own customers across the island of Ireland.[51]

56. This good news has, however, been offset by the loss, or the impending loss, of a significant number of well-paid jobs, including 300, mainly in Coleraine, by the transfer to Swansea of the office of the Driver and Vehicle Agency[52] and over 800, by 2017, in Ballymena due to the closure of the JTI Gallaher plant.[53] Although neither of these could be directly attributed to a downturn in the economy, the losses will have a devastating economic effect not just locally, but across Northern Ireland.

57. Comparisons could be made between what happened in Northern Ireland and what happened in Great Britain; for example, toxic loans, bad debts, lack of capital and profitability and a seeming reluctance to enter into some markets are issues which arose throughout the UK.

58. From the submissions by the Northern Ireland banks, not least their responses to the apparent criticism from the CBI, the banks would claim that they are willing to lend. This claim would appear to be supported by BBA statistics on banking activity in NI for the third quarter of 2014, where it is stated that "New approved borrowing by SMEs, of £407million in Q3, was marginally higher than in previous quarters and the highest quarterly amount seen since this series started in 2010, some 15% more than in the same period a year earlier."[54]

59. However, a belief to the contrary would seem to be the reason why businesses have been dissuaded from developing plans which involve a high degree of finance, and we would agree with them that the banks have appeared reluctant to lend. We welcome the bank's apparent willingness to now lend, and believe they should do much more to convince their customers that they are indeed "open for business".

36 "Finance Ministers meet to discuss banking issues - Wilson", Northern Ireland Executive press release, 13 June 2013 Back

37 BBC News, 'Sammy Wilson says Ulster Bank needs to do more for troubled firms', 3 July 2013 Back

38 Economic Advisory Group (EAG), 'Review of access to finance for NI businesses', March 2013 Back

39 Q106 Back

40 Danske Bank, 'Danske Bank Oxford Economics Quarterly Sectoral Forecasts Quarter 2 2014', June 2014 Back

41 Ulster Bank, 'Ulster Bank Northern Ireland PMI', 15 July 2014 Back

42 Belfast Telegraph, 'First Trust Bank 'will be back in black this year'', 1 April 2014 Back

43 Bloomberg, 'Bank of Ireland Returns to Profit as Defaulted Loans Drop', 25 April 2014 Back

44 BBC News, 'Danske Bank makes pre-tax profit of £45m in first six months of 2014', 24 July 2014 Back

45 BBC News, 'Ulster Bank announces stronger results than expected', 25 July 2014 Back

46 BBC News, 'Danske Bank's Northern Ireland profits 10 times better', 3 February 2015 Back

47 BBC News, 'Moy Park creates 628 jobs in Northern Ireland', 7 July 2014 Back