A Mortgage Scandal Cost Ireland's Biggest Lender More Than $200 Million

  • New chief McDonagh forced to set aside more cash for crisis
  • Layer of executives face questions over role in episode
A sign sits outside a branch of the Bank of Ireland in Dublin, Ireland. Photographer: Aidan Crawley/Bloomberg

When Francesca McDonagh arrived to take over at Bank of Ireland Group Plc last month, she flew straight into the biggest storm to hit the organization since the financial crisis.

Last week, the nation’s biggest lender told investors it was setting aside as much as 175 million euros ($203 million) to cover its share of a mortgage scandal engulfing the Irish banking sector. That means the affair is proving to be eight times more costly than the bank originally envisaged.

“This looks like an attempt by the new CEO to draw a line under the matter,” Darren McKinley, an analyst at Dublin-based securities firm Merrion Capital, said. Still, “we are concerned about the broader implications of such an announcement, weeks after Bank of Ireland stated that they had the issue under control” after a 2010 internal review.

Read more about the tracker affair

The episode throws questions over an entire layer of executives in place before McDonagh’s arrival from HSBC Holdings Plc last month, and underlines the scale of the challenge facing her as the bank continues to grapple with the legacy of the crash. While it no longer faces existential questions, Bank of Ireland is among the worst performers in the Bloomberg Europe 500 Banks and Financial Services Index this year.

The bank’s shares have dropped 9 percent this year, while the 44-member index has gained 7 percent, as concern lingers over the lender’s capacity to take the next step to a full recovery.

During the crisis, the taxpayer bailed out the bank to the tune of 4.7 billion euros. Under Richie Boucher, the lender stabilized, tackling bad loans and beginning to grow again, with the task of taking it to the next level falling to McDonagh, 42.

The first woman to head up one of Ireland’s two biggest banks, McDonagh left her role as HSBC’s head of retail and wealth management for U.K. and Europe, to move to the homeland of her father’s parents. She’s instantly had to deal with political and public outrage over mortgage overcharging.

The roots of the issue lie with so-called tracker loans, which were closely tied to the European Central Bank’s key rate. Such loans came into vogue before the crash that devastated the Irish economy from 2008.

Customer Complaints

Amid customer complaints, the nation’s regulator ordered banks that offered tracker mortgages to review their loan books in 2015. Last week, Bank of Ireland said it had found another 6,000 affected accounts, after what the central bank called a “robust challenge,” to add to the 4,300 it had already identified. Across the industry, more than 20,000 customers have been overcharged.

“The magnitude of the increase in both the provisions charge and number of cases is a surprise,” Diarmaid Sheridan, an analyst at Dublin-based securities firm Davy, said in a note. It “represents a concerted effort by the new CEO to draw a line under the issue and move forward.”

While McDonagh has increased the numbers working on the issue to over 250 from about 30, the controversy shows little sign of abating. The central bank on Tuesday stepped up pressure on banks, calling for individual executives to be held to account for their part in the scandal.

“To rebuild trust with investors, we assume that there needs to be further changes to management and culture,” McKinley at Merrion said.

“The focus of the chief executive and of her senior leadership team is on fully resolving the tracker mortgage examination and ensuring that all impacted customers are compensated as quickly as possible,” the bank said in response to a request for comment. “Since last Friday, the bank has issued approximately 3,000 letters outlining redress and compensation to impacted customers.”

Not PPI

Some analysts caution against over-reacting.

“This is a not a PPI-type issue as this relates to administrative errors on mortgages and their consequences to customers, not prolonged misselling of insurance contracts on multiple products over 10-plus years,” Deutsche Bank AG analysts David Lock and Rohan Singhal said in a note this week.

The extra cash set aside to deal with the crisis “doesn’t change the bank’s ability to pay a dividend,” according to Owen Callan, an analyst at Investec Plc. Under Boucher, Bank of Ireland said it plans to pay its first dividend since the financial crisis as part of its 2017 earnings.

For all that, McDonagh needs to do more to reassure shareholders, McKinley said, as Merrion moved its recommendation on the stock to under review from a buy.

“Despite recent management updates being relatively upbeat, investors are not happy,” he said.

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