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Chasing The Bubble & Paying The Price...

‘Wrong-Headed’ RBS, Danske, HBOS Lose in Irish Bubble...

Jan. 28 (Bloomberg) -- It’s not just the Irish who are being stung by the collapse of the property market in what was once Western Europe’s most dynamic economy.

Royal Bank of Scotland Group Plc, which bought Dublin-based First Active in 2004 in what was the largest overseas takeover of an Irish bank, said on Jan. 26 it will cut 750 jobs. Danske Bank A/S said provisions for impaired Irish loans rose by more than 10 times in the third quarter.

“They were chasing the bubble, and now they are paying the price for it,” said Alex Potter, an analyst at Collins Stewart in London. “Their timing was absolutely wrong-headed.”

Ireland’s economy is shrinking at the fastest pace in the euro area as the real estate market dives. The demise of the “Celtic Tiger” forced the government to seize control of Anglo Irish Bank Corp., which lends mainly to property developers, and to promise Allied Irish Banks Plc and Bank of Ireland Plc, the two biggest lenders, at least 4 billion euros ($5.2 billion).

Irish gross domestic product more than doubled in the decade ending in 2006. The economy may shrink as much as 10 percent between last year and 2010, Prime Minister Brian Cowen said in parliament in Dublin today. About 100,000 jobs may be lost this year and next, he said.

“We’re no longer flavor of the month,” said Ray Kinsella, professor of banking and insurance studies at University College Dublin. “There was a time when, because the Irish economy was powering ahead, everybody wanted exposure to it.”

‘Market Conditions’

Edinburgh-based RBS, now majority-owned by the U.K. government following a rescue package, acquired mortgage lender First Active for 887 million euros. It already owned Ulster Bank, which has branches in both Northern Ireland, part of the U.K., and the Republic of Ireland.

RBS said it will cut as many as 550 jobs in the Republic of Ireland and 200 in Northern Ireland in response to “prevailing market conditions.” Ulster Bank had its credit rating downgraded by Moody’s Investor Services last week because of its exposure to the crumbling property market.

In Northern Ireland, unemployment is rising at the fastest pace in 28 years and real estate prices sank 34 percent in 2008.

Ulster Bank faces “depressed profitability” and “substantially” higher provisions for souring loans over the next couple of years, Moody’s analyst Ross Abercromby said.

Danske Losses

In December 2004, Copenhagen-based Danske paid 967 million pounds ($1.35 billion) to buy National Australia Bank Ltd.’s units in Ireland and Northern Ireland.

Danske’s Irish unit lost 49 million euros in the first nine months of 2008 as it set aside 93.6 million euros for potential bad loans. The Irish operation accounted for a quarter of the bank’s impairment provisions in the first nine months of last year. It accounts for 5 percent of its loan book.

Andrew Healy, head of Danske Bank’s Irish unit, wasn’t available to comment until after the company reports full-year earnings, a spokesperson said.

“Ireland doesn’t seem to be anywhere near the bottom,” said Andreas Hakansson, an analyst at UBS AG in Stockholm who recommends investors sell Danske Bank shares. “A lot of people made the same mistake by buying into Ireland around that time.”

Edinburgh-based HBOS Plc, now part of Lloyds Bank Group Plc, paid 120 million pounds to buy former electronics stores across Ireland in 2005. The bank then converted about a third of them into bank branches as part of a plan by the U.K.’s biggest mortgage provider to tap Ireland’s booming property market.

The rest weren’t suitable for bank branches and were sold on, a spokesman said.

Falling Prices

Ireland’s house prices quadrupled between 1997 and early 2007. They have since lost 15 percent in two years, as credit froze, unemployment surged and emigration resumed.

HBOS said in October it didn’t need to join the Irish government’s guarantee of all bank deposits and borrowings, citing the bank’s strong “financial position.” Lloyds is now 43 percent owned by the U.K. Mark Duffy, head of the bank’s Irish division, wasn’t available for an interview.

KBC Groep NV, which has operated in the country of 4.4 million people for more than 30 years, said in November that Ireland has the highest share of non-performing loans across eight countries in which the Brussels-based bank does business.

Arrears on home loans at its Irish unit rose to 2.5 percent of its mortgage book in the country, double the 1.2 percent across the company. Moody’s downgraded its rating on KBC two days ago, partly because of its exposure to Ireland.

KBC said on Jan. 22 it will get 2 billion euros from the Flemish government to boost capital after a full-year loss of about 2.5 billion euros.

“Given the problems these banks have at home, it’s inevitable there’s going to be less emphasis abroad,” said Scott Rankin, an analyst at securities firm Davy in Dublin.


By Ian Guider and Dara Doyle - Bloomberg.

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