A number of people have asked me since I wrote this post about AIB and Bank of Ireland failing to meet their SME lending commitments whether we should have expected this outcome because of the deleveraging targets set in last year’s Financial Measures Programme (FMP) agreed with the Troika. The PLAR (Prudential Liquidity Assessment Review) element of this programme aimed at reducing the quantity of loans on the balance sheets of the domestic Irish banks. So isn’t the reduction in SME lending just a consequence of the agreement with the Troika?
The quick answers to these questions are:
1. There is no contradiction between the pillar banks meeting their SME lending commitments and also meeting the PLAR deleveraging targets agreed with the Troika.
2. AIB are going well beyond their PLAR commitments in tightening credit within Ireland and Bank of Ireland may also be but haven’t reported their loan book in a way that allows one to check.
For the longer answer, I’ll describe two aspects of this issue. First, the data from the Central Bank on stocks and flows of SME lending. Second, I’ll discus the deleveraging plans outlined in the FMP document and the evidence on the actual changes in loan books in 2011 provided in AIB and Bank of Ireland’s recent annual reports.
Stocks and Flows of SME Lending
When examining the question of whether or not banks are providing adequate amounts of lending, it is important to distinguish between stocks and flows. If you see the total stock of loans this year being the same as last year, that doesn’t mean that the bank has made no new loans. It just means that the amount of loans given out equalled the amount of loan repayments made by customers.
As I noted in the previous post, the language in AIB’s announcement of its commitment to SME loan targets made it clear that they were referring to a target for new loans.Whether a commitment to a given amount of new loans equates to an increase in the total outstanding stock of loans depends upon what fraction of existing loans are being repaid. SME loans have a relatively short average maturity, so agreeing to a given amount of new loans will be well short of agreeing to increase your balance sheet by that amount.
Thankfully, the Central Bank now provide figures to help us sift through the stocks and flows of SME lending in Ireland. They have also provided an explanatory note explaining the meaning of the various figures.
The Central Bank figures show three different “totals” for SME lending: Total SME lending, SME lending excluding financial intermediaries and SME lending excluding financial intermediaries and property-related sectors. I think the best guess as to what the €3 billion per year loan commitment likely referred to was SME lending excluding financial intermediaries.
The first tab in the spreadsheet reports outstanding amounts of Irish SME loans. In December 2011, total SME loans outstanding was €73.6 billion, SME lending excluding financial intermediaries was €61.5 billion and SME lending excluding financial intermediaries and property-related sectors was €27.3 billion.
Looking at changes in the outstanding amounts is not a good way of assessing what’s happening with SME credit. The totals can be affected by various re-classifications that change the total without new lending occurring, e.g. there was a big jump in June 2011 in property-related SME loans.
To deal with this problem, the Bank publishes a “Transactions” series which
are calculated from quarterly differences in outstanding amounts adjusted for reclassifications, other revaluations, exchange rate variations and any other changes which do not arise from transactions.
In other words, “Transactions” tells us the amount of new loans issued minus the amount of loans repaid. The Bank also publishes a “New Lending” series that does what it says on the tin. Using these two sets of figures, we can back out the amount of loan repayments that are occurring. Here are the figures for last year.
What these figures show is that the Irish banks could have made an additional €2.9 billion in loans, i.e. €6 billion in total, without increasing their total exposure to Irish SMEs. This is a market in which non-pillar banks (in particular Ulster) used to play some role but, by 2011, I suspect they would have had a fairly small involvement. So effectively these figures show that AIB and Bank of Ireland could have honoured their SME lending commitments without doing much to raise their balance sheet.
Domestic Deleveraging Targets and Outcomes
But what about the deleveraging plans? Wouldn’t even a small increase in SME loan balances have run counter to the PLAR plans? Well, no. It turns out these plans were based upon a very limited amount of deleveraging in the “core” activities of the banks such as domestic SME lending. It is worth checking out the planned deleveraging and comparing it with what is actually happening.
Here are the three-year deleveraging targets set out in the PLAR.
Note that AIB were actually supposed to increase their core loans by €1.5 billion by the end of 2013. AIB have since been merged with EBS who were supposed to reduce core loans by €2.6 billion but this still amounts to a very small combined reduction of €1.1 billion over three years. Bank of Ireland were supposed to reduce core lending by €2.6 billion by 2013. There can be little doubt that the banks could have absorbed the small increase in SME lending required by their public commitments and still meet these deleveraging targets.
What is actually happening with core lending? AIB helpfully provided a table describing core and non-core lending on page 34 of their annual report. The table shows that, once you subtract off the additional €13.6 billion from taking over EBS, core loans at AIB have declined by €2 billion. You can also work out from information in the report and EBS’s 2010 annual report that the EBS total is €0.2 billion lower than their end 2010 figure, so the combined AIB-EBS reduction in core loans in 2011 is €2.2 billion, which is twice as large as was agreed to as part of the PLAR over the three-year period 2011-2013.
AIB’s report doesn’t split out SME lending in the same way as the Central Bank statistics. However, page 83 of their report does tells us that there has been a reduction of €1.3 billion, from €17.6 billion at end-2010 to €16.3 billion at end-2011, in a non-property-lending category labelled “SME\Commercial”. These figures suggest that AIB likely accounts for the majority of the €1.7 billion reduction in 2011 in non-financial-intermediary non-property SME lending recorded by the Central Bank. And remember this is a wholly state-owned financial institution.
What about Bank of Ireland? Unhelpfully, their preliminary statement for 2011 fails to report their loan book in a way that is compatible with the core\non-core targets set by the PLAR. However, it does report a table (on page 49) that shows a small increase in 2011 in “Republic of Ireland non-property SME loans” of €342 million. Elsewhere though, a category labelled “non-property corporate” lending was reduced by €4.5 billion and “property and construction investment” was reduced by €3 billion.
From these figures, it also seems likely that Bank of Ireland is also over-shooting its PLAR target of fairly modest reduction in core lending and thus tightening domestic credit more than had been planned. It would be helpful if the Minister for Finance would request that Bank of Ireland provide an update on where they stood at the end of 2011 in relation to their core lending relative to the targets set in the PLAR.