Analysis: Bank stocks surge despite scandals

You, the bank, launch your own investigation, which you cannot publish for legal reasons. You start disciplinary proceedings against several unnamed staff. You are hauled up before a committee of legislators and you apologize for the turn of events but insist that you did not deliberately overcharge and that, anyway, the foreign exchange charges were as competitive as your rivals.
And, oh, two years earlier you had been embroiled in a scandal when a rogue trader at your U.S. subsidiary in Baltimore lost $691 million in currency dealings.
Which brings us back to the festive quiz question: What happens next to the bank’s shares? Do they a) tumble over the following months as investors lose confidence and wonder what other issues have yet to emerge from the woodwork, or b) do the shares surge because the economy is expanding and you are selling more mortgages and doing more business loans than ever?
The answer is, of course, if you are an Irish bank, that the shares surge on the stock exchange. The revelations as outlined hit Allied Irish Banks, the country’s largest bank, last spring. AIB shares have subsequently soared and the stock are among the best performing in Europe this year.
Something similar, although of a less spectacular nature, has also happened this year to Bank of Ireland, the nation’s second-largest lender. Following questions put to the bank by a Sunday newspaper, its former chief executive admitted to accessing an internet site of “an adult nature” and promptly resigned. BoI shares on the stock market also went onto prosper, though the shares have trailed those of AIB.
Overcharging banking scandals and soaring bank shares have puzzled some observers. But if you dominate Irish banking, as AIB and BoI do, and your underlying business is starting to boom, then it does not seem to matter how many scandals emerge.
Look at the graphs of the two big bank shares and it becomes clear that it was a year of two halves for leading Irish bank shares.
In the early part of the year, AIB and BoI shares lagged, amid doubts that the economy was actually picking up. What if the Celtic Tiger economic years were to slip into the past? Then the oft-repeated concerns about the Irish property market resurfaced. What would happen to the housing market and all that profitable mortgage lending business the banks generated if euro interest started to climb?
The upward graph of the bank shares from the middle part of 2004 showed that these concerns abated. First, economic growth accelerated from June to over 5 percent. Mortgage interest costs remained at historic lows for another year because the European Central Bank out of Frankfurt has set euro-wide interest rates to suit the still sluggish economies of Germany and France, not boom-again Ireland.
And Irish mortgage lending growth continued to rise at a frantic pace — up to 27 percent — and the Irish consumer reacquired the taste for spending. It’s no surprise then that the Irish bank shares have boomed.
More evidence emerged this week about the dominance of the big Irish banks on the economy and their stranglehold over a very profitable industry. After a two-year study, the Competition Authority reported Tuesday that the lack of competition was costing small personal and business customers. The
Republic of Ireland has among the most concentrated and least competitive banking markets in the world, with AIB and BoI commanding about 70 percent of personal current accounts.
According to the Authority, Irish businesses have been surcharged $112 million in additional interest payments each year because the banks have failed to pass on cuts in interest rates. The Authority hopes that its final recommendations, which will be ready early next year, will spur new entrants into the markets.
There was more evidence to the profitable nature of Irish banking, with the entry of Danske Bank, Denmark’s largest bank, into Irish banking for the first time. It will pay $1.8 billion to buy Dublin-based National Irish Bank and the much larger Belfast-based Northern from their owners, National
Australia Bank.
The Danes beat off competition from Britain’s Halifax Bank of Scotland and the Dutch Rabo Bank, and other banks, to buy the two Irish banks.
Despite scandals, the Irish economy continues to generate big profits and share price gains for the big Irish banks.
(Eamon Quinn is business editor of the Sunday Business Post in Dublin.)