Irish Independent March 26 2009
Three years ago, Michael Fingleton’s decade and a half of hard lobbying to amend building societies legislation finally succeeded — resulting in the scrapping of a five-year waiting period for a society to put itself on the market after demutualisation.
Irish Nationwide Building Society’s (INBS) 125,000 or so members were practically salivating at the prospects of a mooted €1.5bn-plus sale of the group as shares in quoted Irish lenders continued to spiral.
But none more so than the wily Sligo man. He was expected to yield €15m from the sale which, together with a handsome pension pot of almost €28m, would have left him well placed as he faced his septuagenarian years.
The prospects of a windfall were dashed last April, however, as Mr Fingleton called off the auction amid the worsening financial crisis. Now, with the society staring a likely government bailout in the face, the man who built it up over the past 38 years is battling to keep a €1m bonus for last year and the €1m basic salary he was due to get this year.
“Fingleton should have been out of the traps as soon as the legislation was changed (in July 2006),” said one of a number of senior corporate financers who had pitched for the job to flog the society at the time. “There should have been a prospectus and process that was ready to go once he got the go-ahead.”
Mr Fingleton did little to veil his contempt for expensive corporate financiers that traipsed through the front doors of INBS’s headquarters by the Grand Canal. But, annoyingly for members, it was October 2007 before US investment bank Goldman Sachs got the gig to handle the auction. By this stage, Irish banking stocks had come off their all-time peak, reached earlier in the year, and were spiralling downwards as the financial crisis began to gather steam.
A year later, Irish Nationwide — bruised by two credit ratings downgrades and an unfounded newswire report that it was in financial trouble — found itself alongside Anglo Irish Bank as the weakest links in the system as the Government hammered out the blanket €440bn guarantee scheme.
INBS is the only one of the six original institutions covered by the scheme not to unveil figures since it was introduced.
But it is poised to reveal in the coming weeks that bad debts losses ran into hundreds of millions last year — a result of its transformation over the past decade from lowly mortgage provider to “go-go” lender to the long-mourned property development boom.
Analysts believe this could leave the “mini Anglo” nursing its first annual loss in living memory.
It would mark a dramatic turnaround from its 64pc surge in pre-tax profits in 2007 to €391m.
Bond analysts at JP Morgan highlighted concerns last autumn that the “surge in profitability may have been a direct result of tilting the business towards higher margin — and riskier — commercial real estate business in the run-up to the intended de-mutualisation, possibly in order to achieve a higher value, in our view”.
The loan book soared 171pc to a record €16bn in the five years to the end of 2007, while profits rocketed 234pc. Moody’s estimated last month that 80pc of INBS’s portfolio is exposed to commercial property and only 20pc to residential lending, as the credit agency downgraded its rating on the society to Baa3 — just one notch above speculative, or “junk” status.
Mr Fingleton battened down the hatches last year by signalling that INBS would contract its loan book by 10pc as it redeemed up to €3bn of loans and only writing cheques for the €1bn — largely just completing loans it had committed to in 2007.
But, unlike most other lenders, there is little he can do on costs, having run the tightest ship in the industry for years.
In 2007, he managed to bring the group’s cost-to-income ratio down to 10pc from 14.4pc the previous year.
By comparison, this keenly-followed ratio hovers around 50pc at both Allied Irish Banks and Bank of Ireland.
“This ratio is a function of two lines. Income at Irish Nationwide was boosted in recent years by its activities in property development, commission income from development fees and taking direct equity stakes in projects.
“You need only look at the branches to get a view of how tightly costs were run,” said Scott Rankin, a banking analyst with stockbrokers Davy. INBS’s down-at-heel branches have been run more as deposit-gathering — rather than lending — operations in recent years, as Mr Fingleton all but ignored small home borrowers in favour of big developers like Sean Mulryan and Gerry Gannon. “You’d struggle to find another bank around the globe with a cost-income ratio anywhere near Irish Nationwide’s,” said Mr Rankin.
While Mr Fingleton, a qualified barrister, received €2.3m between his salary, bonus, fees and benefits in 2007, the average employee took home less than €34,000. But the sudden government interest in Mr Fingleton’s bonus and pension pot amuses Brendan Burgess, founder of askaboutmoney.com and long-time thorn in the side of Mr Fingleton.
“Shane Hogan (a fellow dissident society member) and I have highlighted the behaviour of the Irish Nationwide for many years. We have made complaints to the Financial Regulator, we have spoken at the AGMs. The issues have included succession planning and corporate governance in general. The regulator should have sorted it out many years ago.”
While Mr Burgess has repeatedly claimed over the years that Mr Fingleton’s remuneration was excessive, he dismissed the re-stoked interest in his €27.6m pension transfer last year as a red herring.
“There are no grounds for complaint about the transfer itself, which is a legitimate transaction. If he’d left it in INBS, they would be obliged to pay up to €1.2m a year for the rest of his life. As it is, the pot is worth only a fraction of what it was a year ago and the society would have to plug any gap.” Followers of the society have been more perplexed by the fact that the regulator allowed Mr Fingleton to run a famously lean board and management team for years.
It is only in recent months that the group has gone about hiring a chief risk officer, chief financial officer and chief operations officer. It emerged earlier this week that Daniel Kitchen, the former Green Property finance director and IBI Corporate Finance executive, was being lined up to replace the 71-year-old Mr Fingleton. However, Mr Kitchen, who joined the society as a non-executive director late last year, baulked with a recent government-commissioned report which said the salary for the head of Irish Nationwide should be capped at €360,000.
The last of a breed of building society chiefs, the garda’s son has remained at the helm of his personal fiefdom more than a decade longer than his main rivals. Former Irish Permanent executive chairman Edmund Farrell fell on his sword in 1993 as the then-mutual investigated financial transactions involving his home in the south Dublin suburb of Foxrock. That same month, Joe Treacy, of First National Building Society (subsequently renamed First Active), resigned as executive chairman following allegations of sexual harassment.
When Mr Fingleton joined INBS in 1971, it was one of dozens of tiny building societies in existence. So impoverished was the society, founded in 1873, that he had to wait three years for his first company car.
Over the years, he built the mutual up into a network of 50 branches and 40 branch agents, helped by the takeover of the Garda Building Society, Irish Mutual and Metropolitan Building Society — and a flexible mortgage policy in the 1980s, when most other lenders were anything but.
Claims in an affidavit of Brian Fitzgibbon, the INBS manager who took a constructive dismissal case against the mutual in 2007, confirmed what was already widely known: that Mr Fingleton effectively ran a one-man lending department.
Mr Fitzgibbon, who feared at the time that he was being scapegoated over the society’s loans to rogue solicitors Michael Lynn and Thomas Byrne, claimed that many loans did not receive the nod from the credit committee.
He claimed the committee existed “simply to satisfy the requirements of the Financial Regulator.
“While protocols existed, they were never adhered to and the entire ethos of the society when it came to lending was entirely informal and controlled by Michael Fingleton.”
Mr Fingleton said the society took “adequate provisions” in 2007 for loans to the rogue solicitors as it booked a total loan loss charge of €48.8m. The scale of writedowns for 2008 and beyond will be exponentially higher, according to analysts.
The JP Morgan analysts estimated earlier this month that INBS could have to write off 11pc of its loan book over two years as, proportionately, the most exposed Irish lender to the troubled property sector. They estimate that €3.8bn, or 31pc, of INBS’s book is made up of development loans — and that up to €1.3bn of these would be written off over two years.
Instead of the €1.5bn windfall INBS’s members had once looked forward to, JP Morgan believes taxpayers will have to write a €900m cheque to bail it out.
As Mr Fingleton clings to his controversial €1m bonus — agreed last April, but paid out weeks after the guarantee — the Government has made it clear this week it wants him to release the grasp of society he has run for over three-and-a-half decades.
A businessman and property developer who has known Mr Fingleton for years said: “Anyone thinking he is going to walk away quietly is deluding themselves.
“He’s a fighter and a part of him is likely to be revelling in the drama.”