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Western EuropeJune 1 2004

Plenty of action at the EU’s edge

Ireland continues to be a magnet for foreign banks conducting international business, and some are now targeting the domestic retail market. Michael Imeson reports from Dublin.
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Dublin was a fitting location for the EU officially to welcome the 10 accession states last month – not just because the Irish currently hold the EU presidency, but also because Ireland is a shining example to the new members of how a small country on the fringes of Europe can benefit from membership.

Ireland’s economy has grown faster than any other in the EU in the past decade, and banks have ridden high on this wave of prosperity. It is only 70,000sqkm in size with a population of four million, but it has more than 4000 financial institutions, 80 of which are banks and a large proportion are these foreign banks providing services to non-resident companies and institutions.

Depfa Bank, a provider of services to public authorities around the world, has its headquarters in Dublin, but its origins are German and it is quoted only on the Frankfurt stock exchange. Deutsche Pfandbriefbank, based in Wiesbaden, was split into two specialist banks two years ago this month: the public finance arm became Depfa and moved its headquarters to Dublin’s International Financial Services Centre (IFSC), where it had had an office since 1993, and the property arm became Aareal Bank and stayed in Germany.

Depfa has offices around the globe and subsidiaries in Cyprus and Germany but is selling its German subsidiary, which is still called Deutsche Pfandbriefbank. The Dublin operation has proved so successful at issuing asset-covered securities (ACS) to fund its activities that the German operation is no longer needed, and in future German public sector clients will be served by a branch.

Favourable legislation

Gerhard Bruckermann, Depfa’s chairman and chief executive, says: “We started our non-German business out of Dublin in the early 1990s and gradually the non-German business became stronger.” One reason for this growth was that legislation in Ireland in 2002 permitted the issuance of ASCs, which are based on the German Pfandbriefe concept.

“We started to use Irish asset-covered securities last year, and most of our long-term funding is now done out of Ireland,” says Mr Bruckermann. “Ireland is the only country in the Anglo-American world getting in on this form of funding.”

He says that Deutsche Pfandbriefbank is still a highly efficient, profitable and focused public finance institution. “But we now have a typical M&A situation, where this part of our group is worth more to outside investors.”

Price offers

The company has spoken to “a number of institutions, and more are in the pipeline”. Mr Bruckermann expects to get some “indicative price offers” by this month, and then start serious negotiations with a smaller group of institutions.

Depfa has a market capitalisation of more than E4bn and made E370m profit after tax last year. Yet it employs only 350 people worldwide, 140 of them in Dublin.

How can so few people run such a highly valued and profitable operation? Part of the reason, says Mr Bruckermann, is being in Ireland. “The Anglo-American corporate governance model followed here is more straightforward than the German model,” he says. “It allows you to make decisions quicker.” Ireland’s 12.5% corporation tax is helpful – “in a low-margin business, low tax is important”, he says.

An abundance of expertise available at relatively low cost was a key factor in making the decision to locate in Dublin 13 years ago, but as the economy has boomed and the financial sector has grown, talented professionals “are now more expensive than in Frankfurt”, he says.

The IFSC is home to more than 400 financial institutions. Of the world’s top 50 banks, more than half have operations there. Created in 1987 from derelict dockyards, the centre’s original attractions included a 10% lower corporation tax rate, much lower than the standard rate.

Last year the two rates were merged into one, 12.5%, for profits on trading activities, and applied to companies in all sectors of the economy, and those trading domestically as well as internationally.

A major arrival last year was Hypo Real Estate Bank International, which made Dublin its global HQ. And this year Merrill Lynch opened a European support services centre, its second office in the city where it has had a capital markets operation since 1995.

Accumulated experience

David Hanna, manager of the financial services division of IDA Ireland, the investment and development authority, says: “What really drives financial services here is 17 years of accumulated experience and the fact we have a lot of smart young people who can execute whatever it is – aircraft leasing, asset finance, securitisation, bond issuance and so on – at reasonable salary levels.”

The IDA has appointed consultants Deloitte to see how the sector can be developed further. “Despite the continued success of the industry it is crucial that we do not rest on our laurels, as new opportunities arise and competition emerges from locations eager to replicate Ireland’s success,” says Mr Hanna.

He has had visits from numerous inward investment authorities around the world. A toy camel on his bookshelf – a gift from the Kazakhstan delegation – is a reminder of the diverse places from which competition will come.

JP Morgan Bank (Ireland) has run a treasury and securities service from the IFSC since 1989. Ian Talbot, director, global agency treasury, says one of the many reasons for locating in Dublin was because it could set up tax environments that suited its clients.

However, he adds: “It would be wrong to focus just on the tax advantages. On a value-for-money basis, people here are still very good value in terms of experience, skills set and education. From our investor services perspective, Ireland also has a favourable regulatory environment for administering funds.”

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 Liam O'Reilly, IFSRA: funding 'could be tricky'

Change in retail market

There are around 10 banks and building societies with significant retail networks, the two biggest being Allied Irish Banks (AIB) and Bank of Ireland. Donal Forde, managing director, AIB Bank, responsible for retail and commercial activities in Ireland, says: “The retail market has gone through radical change and opened up dramatically since the single currency was introduced.”

Bank of Scotland (Ireland) announced in April that it was moving into retail banking, Ulster Bank (owned by RBS) bought First Active for E887m in January, and Dutch bank Rabobank bought the Agricultural Credit Corporation for E165m in 2002.

“The key drivers for competition include the outstanding performance of the Irish economy from 1994 to 2000, an increasing number of intermediaries who exercise considerable influence, improvements in technology and a discerning, confident and articulate customer who is intolerant of lack of choice and poor customer service,” says Mr Forde.

Michael Feeney, head of retail banking in the Republic of Ireland for Ulster Bank, says: “The chocks have been pulled away for the integration of First Active, and it’s going well. It is focused on mortgages, savings and investments. That complements Ulster Bank, which is a broad-reach, full service retail bank, and its branch network gives us extra coverage in the country. We are number two in the mortgage market now, with Permanent TSB the number one.”

Private banking is growing, says Mark Cunningham, managing director at Bank of Ireland Private Banking. “There’s been a big expansion in the past three to four years because the population is getting wealthier,” he says. “Rising property prices and growing family businesses are driving growth. There’s a phenomenal amount of wealth being generated in this country relative to its size.”

Ireland’s new single regulator, the Irish Financial Services Regulatory Authority (IFSRA), celebrated its first year of operation last month. Unusually for single regulators, the authority remains part of the central bank, though it has its own board and moved into its own premises a few doors away in April.

“There was a fair degree of scepticism in the press as to whether we could put together a team that could look after both prudential supervision of financial services companies on the one hand and consumer protection on the other,” says Liam O’Reilly, IFSRA’s chief executive officer. “But we have managed to square that circle.”

Funding could be a “tricky” area, he admits. The authority is already part-funded by the industry, but the proportion will increase to 50% of direct costs for the first few years, and ultimately “maybe 100% of direct costs”.

Companies might complain – but not if they see they are getting value for money. A properly funded, well-run and balanced regulatory regime is crucial for any country that, like Ireland, is a serious player in the financial markets.

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