Posted on Sunday 13 October 2013 by Ulster Business

Danske Bank

Danske Bank in Northern Ireland will return to profitability a year earlier than expected if current economic and market trends continue, according to the bank's CEO Gerry Mallon.

The bank has previously given guidance that it expected to narrow its losses in 2013 and 2014 before returning to profit in its 2015 annual results.

But now, having registered a modest profit in its second quarter and with a number of economic indicators also pointing towards the early stages of recovery, that forecast may have to be revised.

"In our five year plan we expected 2013 to be a loss-making year, 2014 to be close to a break-even year and 2015 to be a return to a reasonable amount of profitability. At the moment it looks like we are about 12 months ahead of that," Mr Mallon told Ulster Business.

"We see an improvement in the underlying health of the business. It looks like the level of impaired loans is moving in the right direction. Impairments have a habit of not happening in a linear way, a lot of it is driven by business failures, but we feel we have got so deep into the portfolio that we have brought out all the risks and made appropriate levels of provision for them," he added.

Unemployment figures, GDP data, consumer confidence indices and house price surveys have recently been encouraging and the CEO is hopeful that a corner has been turned in the economy.

That has been reflected in the bank's results. In the second quarter of the year Danske saw a small profit of £0.2m and impaired loans were substantially lower at £28m in the first half of the year compared to £99m in the same period a year earlier. Though property prices are down 50% from the peak, activity has returned to the mortgage market.

And perhaps most encouragingly business lending – which has been hit by impaired loans disappearing off the books and companies de-leveraging – has stopped shrinking.

"Having shrunk by double digit percentages in the last two years, we are approximately flat in terms of our business lending this year. That might not sound spectacular but it actually represents quite a big turnaround from the trend of the past few years. That's down to new customer acquisition, but it is also being driven by us starting to see some appetite for investment among our existing customer base," explained Mallon.

"It's still early days and it is still very fragile but it is nice to see a positive inflection. The mood feels considerably different this side of the summer than it did even as recently as the spring time. All the economic indicators both nationally and locally are pointing in the right direction."

Danske grew market share last year from 29% to 33% in business banking and the CEO says he'd be "disappointed if we didn't grow it further this year".

"Of the Ulster Business Top 100 companies we now have over 50 of those as customers, so I think it is easy to say, without being challenged, that we are the number one business bank," he said.

"The key now is to see the bottom line benefit from that. We require our customers to grow in order for us to grow."

The businesses the bank has been lending to have come from a diverse range of sectors, from medical practices to local retailers, farmers to service companies, he says.

"The recovery will start with the largest companies and it will start with the exporters," added Mallon. "Norbrook for example, which has recently moved to us, is a company very much at the leading edge of businesses in Northern Ireland, which is exporting globally and which can see benefits in our capability to support their growth."


Ulster Business meets Mr Mallon, coincidentally, on the day the Northern Ireland Affairs Committee at Westminster is holding the first day of its inquiry into banking practices in Northern Ireland.

The industry is being put under the spotlight to see if private and business customers in Northern Ireland are at a disadvantage to those in Great Britain and MPs will investigate access to finance, the governance of banks, the effectiveness of national initiatives and how the lack of available regional data has an impact.

Mallon points out that Danske – despite being Danish-owned – is the only bank in the market that publishes full accounts for Northern Ireland.

"As far as I'm concerned I'm happy to disclose anything and everything on the outcome of our lending if we can match that at an industry level. I perceive some of the institutions have a real technical difficulty in being able to carve out that data because they're not structured that way," he said.

"On the other hand, what is it going to tell you? It will tell you that bank balance sheets have reduced. That's not an amazing revelation. The question is what you infer from that. I think some people want that information to blame the banks for not lending but the truth is, for us, that people haven't wanted to borrow."

Danske has submitted evidence to the inquiry citing reports from before the 2007 financial crisis and the more recent report by the Economic Advisory Group – on which Mallon sits – which concluded that businesses in Northern Ireland access finance on roughly the same terms as GB.

If we are to blame the banks for anything, he believes it should be for historically being too keen to lend in more competitive times, leading to over-leveraging and the property bubble.

Mallon thinks the inquiry may be useful to determine if there's a lack of appetite to support certain niche sectors, such as IT, in the local banking sector. Otherwise he believes the lack of business lending comes down to confidence.

"It is all about lack of demand rather than a lack of supply. If you look at our capital position it is strong, if you look at our liquidity position, we are over liquid, we need to lend money. We've been out there knocking on doors to take business off the competition and increase market share," he said.

In fact Danske has 20% more deposits than loans on its balance sheet – a surplus of £1bn – compared with 20% more loans than deposits before the financial crisis, meaning it is not reliant on wholesale funding and doesn't currently need to avail of government schemes such as Funding for Lending.

Looking out from Mr Mallon's corner office on the top floor of Danske's headquarters on Donegall Square, it is possible to see the head offices of some of the bank's main rivals.

Mallon doesn't want to get drawn into how healthy or otherwise some of them are, but reiterates his belief that Danske is among the best placed to quickly meet demand from any recovery, having taken the hit on impaired loans early.

"What's the old saying in banking, a rolling loan gathers no loss. I'm sure for some institutions there's a temptation if you don't have the capital strength to absorb the loss, to not take the loss. We've always had the view that we have the capital strength to absorb the losses so let's get it out of the way," he said.


One other issue being covered in the Westminster banking inquiry is the rapid reduction in bank branches across Northern Ireland.

By the end of this year Danske will have 53 branches – down 50% on 2007 numbers – which Mallon says is simply a reaction to how many people use them.

"There has been a huge amount of attention on branch closures but for the most part there have been very few complaints from customers. When it becomes clear customers aren't using a branch as much as they used to that's when you review its usage. It is about adjusting the network to deliver the needs of the customer," he said.

The bank is instead investing in online technology and the branches that are used to make sure they are "best in class".

"The way I see it going, and this is something which we're adapting to, is that the branch moves from what it was 20 years ago – the post office model of lots of low value frequent transactions – to being much more like a car dealership where transactions are less frequent but more complex and requiring expert advice. There are fewer of them but they are worth going to," explained the CEO.

Danske was the first bank in Northern Ireland to launch a business app and the first in the UK to launch its tablet app – something Mallon puts down to being part of a group headquartered in a more tech savvy region.

"We're organised in business unit lines so instead of us in Northern Ireland being at the end of the queue of countries who have these things rolled out in a sequence we've got these technological deliveries at the same time as the rest of the Group.

"You're talking about markets that are really sophisticated and very online orientated and Danske as a bank is at the leading edge in those countries. It puts us in a fortunate position in terms of staying ahead of the competition," he said.

"The uptake has been phenomenal. The growth in mobile access in business overtook online access to accounts within a few months of the launch of our app. We were the first of the Danske Bank countries to see that happen and now it has happened in all of them. The growth in mobile business is so explosive it is hard to know where it is going to go but the convenience of it is amazing."

Mallon says feedback shows customers have also been receptive to the transition to the "progressive and international" Danske brand, with very few grumbles about the 200-year-old Northern Bank name being replaced.

With that transition now bedded in, the focus is very much on the future, with 2014 on course to be a good year.

"A lot will be driven by the macro situation in Europe, in the UK and in Ireland. If we get a rising tide it will lift all boats and there is a possibility of a very strong recovery. We've positioned ourselves to catch the wave."


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