Credit Review Office Seventeenth Report
John Trethowan

1. Report Overview

This is my seventeenth report, which covers the period 1st January to 30th June 2016. The Credit Review Office works on individual appeal cases which also provides my team with an holistic view of developing trends in the SME and Farm lending markets and provides the basis for these reports.

SMEs and Farms in the current economy

Over the course of these reports, these trends have reflected the move from basic business survival in the period 2010-2012; to banks dealing with legacy debtsthrough restructuring in 2013-2015; tothe current trend of financing growth for recovery.
The coming years will see the impact of the,as yet, unclear challenges of Brexit for individual businesses and farms; and also the emerging demand for refinancing of distressed debts which have been sold on by banks, including loans sold both by exiting banks, and remaining players which have sold the distressed part of the their loan assets at a large discount.

I continue to observe an improving trend in the SMEs’ performance in the financial accounts presented to the Credit Review Office as part of the appeals process. These financial accounts show that the downturn bottomed out in H1 2013, and this is borne out in the results of the Department of Finance RedC SME Credit Demand Surveys:

SMEs Trading Performance[1] / Oct 12/
Mar 13 / Apr13/ Sept 13 / Oct 13/ Mar 14 / Apr14/
Sept 14 / Oct14
/Mar15 / Apr15/
Sept 15 / Oct 15/
Mar 16
  • Increased T/O in last 12 months
/ 25% / 34% / 38% / 49% / 43% / 47% / 45%
Same turnover / 37% / 38% / 36% / 35% / 41% / 38% / 40%
  • Decreased turnover
/ 38% / 28% / 26% / 16% / 16% / 15% / 15%
  • Staffing increase
/ 14% / 21% / 23% / 30% / 24% / 27% / 28%
  • Staffing decrease
/ 16% / 12% / 12% / 7% / 9% / 8% / 7%
  • Reporting Profits
/ 40% / 48% / 51% / 56% / 56% / 61% / 61%
  • Reporting losses
/ 26% / 18% / 18% / 13% / 13% / 10% / 11%

However, given the severity of the legacy challenges SMEs faced, many have still some way to go before they regain their financial strength. The reasons for the SMEs problems are well documented; many sustained losses through poor trading conditionsin the downturn; and/or losses on failed property investments which were unrelated to the core business. These past problems have affected many businesses and promoters’ personal credit records/scores, and manifested themselves in a lack of capital on some SMEs’ Balance sheets, both of which present problems when these businesses try to access finance.

Banks provide debt, they are not traditionallyproviders of capital for businesses; and those institutions, such as investment funds and venture capital providers,which are a source of capital operate typically above the €3M level, yet this is the levelbelow which the vast majority of Irish SMEs require such finance.

Lack of retained equity, and access to capital funding at appropriate levels for SMEs remains a major supply-side problem right across the EU. Many business requiring capital have to resort to ‘friends and family’ as a source of funding. An update of the Government’s Credit Guarantee Scheme is due later this year which will provide SMEs, which are otherwise viable, with a means to bridge the equity gap for refinancing their debt.

The Credit Review Office also takes appeals on farm lending, and in general farms have been going through a difficult time in the past two years with all commodities suffering downward price pressure. This has been offset somewhat by lower input prices and relatively better weather conditions reducing outlays. Farms are however by their nature better capitalised, due to the value of their lands, and the industry is used to coping with cyclical downturns in output prices. Indeed, new lending to the Agri-sector remains one of the brightest sectors in the banks’ lending figures.

Bank Lending to SMEs and Farms

The following comments are caveated to the extent that the Credit Review Office does not see ‘easy cases’. All appeals come with some degree of credit challenge to be overcome. I thus do not see the lending experiences of SMEs and Farms which successfully access credit at first request, and which then feed through to the bank lending figures which are reported to me each month.

Banks have also recovered from their post 2008 crises, and they too are rebuilding their capital strength, which is a vital requirement for them being able to make new loans. The principal source of banks’ capital is in retained profits, and conversely the greatest threat to bank capital lies in lending losses. Our banks thus need to lend at a reasonable margin to generate profit, and they need to have lending policies which avoid the wholesale losses which so damaged both the banks and the Irish economy in the post-boom period.

Each Bank has developed their own risk appetite to lending, to both generate and protect capital through their lending policies. Whilst this is good practice in each bank, I am concerned that these policies do not become overly restrictive in denying individual bankable SME and farm lending proposals.These are proposals on which the banks are unlikely to lose money – but which might not fit into what I observe to be increasingly rigid policy-driven and automated decision making. ‘One size does not fit all’!

I do not consider that SMEs/ Farms core business pose an inordinate risk to bank lending losses. It was not normal business lending to these sectors which precipitated the banking/financial crisis of 2008/9. If the pre-2008 collective madness of SMEs and Farms being allowed/ encouraged to borrow for non-core Property purchases is stripped out, then these two sectors would not have been major contributors to the huge problems which banks faced post 2008.

I see two main areas of concern for SME and Farm lending; a) the remoteness of the relationship with borrowers and; b) the increasing reliance on credit decision making software.

The remoteness of the relationship with borrowers:

Given Banks’ profit requirements, the need to reduce delivery costs has largely ended the era of local relationship banking which traditionally had served both banks and their customers well. Current service models however do not fully recognise that SMEs do not behave in the same way as larger businesses and corporates. SMEs, particularly Micro and Small Businesses and some Farms which are not as financially sophisticated, and many have difficulty in presenting credit proposals which recognise all the boxes which need to be ticked in current banks’ credit decisioning systems. In addition, it is important that the level of information provision for small SME’s seeking lower levels of credit is not automatically the same as the information requirement for larger SME’s seeking bigger credit amounts.

The skills and ability of Relationship Managers to assist borrowers is critical, particularly as the era has past of knowing your customers well, and in the local market which they operate in. Banks have an ongoing role in the education of SMEs and Farmers in relation to the presentation of lending proposals.

The increasing reliance on credit decision making software:
Banks must avoid over use of algorithms and credit scores to commoditise all SME lending, and ensure that their Relationship Managers have a good knowledge of all the credit tools which are available to assist SMEs.

These decisioning models have a proven track record in normal times,however the past and specific, credit problems which non-core property lending caused for many SMEs; coupled with the general impacts on trading performance caused by the severity of the deepdownturn across many sectors, means that recent past business and credit performance could be regarded as abnormal.As such recent past performance may not reliably reflect future potential for many SMEs in a recovering economy in these binary ‘yes/no’ historic decision making systems.

There is, for example, a need for banks to adopt a more flexible approach in relation to impaired credit ratings, when assessing requests for credit, where confirmation can be provided that debt settlements have been successfully implemented in respect of legacy debts with other banks.

Monitoring Bank Lending

I continue to receive monthly loan sanction figures from the two pillar banks. This differs from official Central Bank reporting on drawn-down balances. The figures reported to the Credit Review Office are more forward lookingin receiving information on loan sanctions, including how much new money is being approved.

There are Two key points in these figures:

  1. The Demand for new lending remains subdued, however this is offset by a lack of supply in that the SME/ Farm market, which is now being supplied by only four retail players.This lack of supply means that Banks can thus achieve their lending growth objectives, even with tighter lending policies, and on relatively low demand.

Credit Performance [2] / Oct 12/
Mar 13 / Apr13/ Sept 13 / Oct 13/ Mar 14 / Apr14/
Sept 14 / Oct14
/Mar15 / Apr15/
Sept 15 / Oct 15/
Mar 16
SMEs requesting credit / 40% / 36% / 35% / 31% / 32% / 30% / 26%
Anticipate seeking credit (next 6 months) / 25% / 26% / 26% / 27% / 26% / 27% / 20%
Credit Approved / Partially Approved / 60% / 65% / 65% / 74% / 71% / 73% / 80%
Credit Approved (excluding pending) / 76% / 80% / 81% / 86% / 84% / 85% / 88%
Sanctioned facilities not drawn / 19% / 22% / 18% / 20% / 16% / 21%
  1. The period of mass restructuring of distressed lending has largely been completed, with the emphasis in bank lending now moved to new lending.
    Some banks are reporting a reduction in overall sanctions as the restructuring activity comes to an end. There is now a need to rebase the growth figures on ‘normal lending’.
    Both banks are also reporting record levels of new money being sanctioned; and a reduction in the rate of contraction in their overall balance sheet lending.

The continuing development of SBCI credit products is welcomed; and the emergence of new challenger specialist finance providers is to be encouraged. More new players have come on stream during the past year, and these new providers can be found at a central website at

  1. Endorsements of Credit Review Office Service since last report

Majella Nolan
I would like to sincerely thank the Credit Review Office (CRO) for all their help in supporting me get finance. THE CRO are imperative for any business or person who needs funding to start a business or indeed to keep a business growing .The bank would never have listened to my story and just wore me out trying to receive funding.

Without this support, firstly I would definitely not be employed at all never mind being an employer of 5/6 people and secondly my family would definitely be on social welfare. I found it very difficult to secure employment as a previously self-employed person and without the development of an old premises, I know I would not have been able to open a business to start with.

The bank gave me the funding to grow and make a success of a business that started with a scissorsand comb (and 1 head strong mother), to a business with a turnover of €300,000 in 3 years and growing, to a development that was a rundown damp building to one that turns over approx..€100, 000 in rent a year.

I'm sure the rates department & planning department are glad of their fees and the employees, both mine and the others on this site, are glad of the employment. Also the suppliers of the business, the neighbours and business owners are glad not to have the eye sore that was on the site transformed.

  1. Credit Review Office activity

This report covers the period from 1st January 2016 to 30th June 2016.

We have started to receive the first appeals from Ulster Bank borrowers, following the bank voluntarily joining the Credit Review Office process earlier this year. We have also finalised arrangements with PTSB to also voluntarily join the Credit Review Office process. Both Banks are to be commended for making such a positive commitment to their SME and Farm customers.

The Credit Review Office limits have been 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’ or overturn rates, 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 appeals as time goes on. I value the cooperation received from the teams in all of the banks we deal with, and wish to recognise this cooperation again in this report.

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.

The helpline has taken 3164calls to date, anincrease of 209 calls since the last report. / The website has had 97,048 different
Web visitors to date, an increase of 9,810 since the last report.

Credit appeals to the Credit Review Office

We have received 742formal applications to date. Of these, 492 reached final conclusion and the Credit Review Office has upheld of the appeals in favour of 266borrowers, including those with a commitment to reassess the lending in the future if agreed performance hurdles are met in the short term.

In addition to undertaking formal reviews the Credit Review Office also operates an informal ‘Help Line’ service where the Reviewers engage directly with SMEs /Farmers who have credit/banking related issues providing advice and guidance. Many of these conversations do not result in formal appeals but the feedback from the individuals who avail of the service is that it provides an invaluable source of advice

The breakdown of the formal appeals are as follows:

From the above chart of the 492 cases which have been finalised as formal reviews with opinion issued, the breakdown is as follows:

The upheld appeals have resulted in €38.8Mcredit being made available to SMEs and farms, helping to protect /create 2,481jobs.

Banks’ Internal Appeals:
AIB / Appeals
WIP / Borrower
Appeals Upheld / Borrower
Appeals Declined / Total
Internal
Appeals / BoI / Appeals
WIP / Borrower
Appeals Upheld / Borrower
Appeals Declined / Total
Internal
Appeals
2010 / 22 / 45 / 67 / 6 / 83 / 89
2011 / 68 / 85 / 153 / 12 / 167 / 179
2012 / 93 / 191 / 284 / 7 / 101 / 108
2013 / 79 / 173 / 252 / 45 / 95 / 140
2014 / 56 / 180 / 236 / 27 / 101 / 128
2015 / 48 / 177 / 225 / 33 / 90 / 123
2016 / 11 / 30 / 83 / 113 / 4 / 3 / 7
TOTAL / 366 / 851 / 1217 / 0 / 134 / 640 / 774

AIB End June 2016BOI End Feb 2016

Other Credit Review Office Activity for the 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

Other Credit Review Office Activity for the 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,
  • Monthly attendance at State Bodies Group on SME finance.
  • Attendance at Quarterly meetings with Department of Finance and each of the Pillar Banks.
  • Separate informal ‘housekeeping meetings’ with banks to improve case management.
  • ‘Set-up’ workshops and meetings with newly joined banks
  • Liaison meeting with SBCI and MFI
  • Part of Supporting SME’s Communications team (initiative of Dept. of Finance, Dept. of Taoiseach andD JEI)

Contributions at Conferences, stands etc

  • SBCI/Accountancy firms briefings – Monaghan
  • Enterprise Ireland Finance for Growth event Croke Park
  • Local Enterprise Week presentations and stands – South Dublin, Dun Laoghaire Rathdown, Louth – Drogheda and Dundalk
  • Wexford LEO South East Business Finance Expo
  • All Ireland SME Summit
  • Funding for Growth Event Croke Park
  • SFA Annual Conference
  • FUNDSme event Ballsbridge
  • ACORNS (Dept of Agriculture program for female rural entrepreneurs)
  • UUJ Presentation at SME Conference in Belfast
  • Guidance placed on the Credit Review Office website for SMEs and Farms which have had their loans ‘sold on’
  • Update meeting with BFPI
  • Horizon Scanning meeting with Grant Thornton
  • Meeting with prospective New Entrant to SME lending market
  • Attendance at 5th ECB Post Surveillance visit on SME lending

1

[1] Department of Finance SME Credit Demand Survey Oct15 to Mar 16.

[2] Department of Finance SME Credit Demand Survey Oct15 to Mar 16.