UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 650-ix

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Northern Ireland AFFAIRS Committee

The Banking Structure in Northern Ireland

Wednesday 15 January 2014

DES CROWLEY, IAN SHEPPARD AND SEAN SHEEHAN

GERRY MALLON AND KEVIN KINGSTON

Evidence heard in Public Questions 512-590

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Oral Evidence

Taken before the Northern Ireland Affairs Committee

on Wednesday 15 January 2014

Members present:

Mr Laurence Robertson (Chair)

Mr David Anderson

Mr Joe Benton

Oliver Colvile

Lady Hermon

Naomi Long

Dr Alasdair McDonnell

Nigel Mills

Ian Paisley

David Simpson

________________

Examination of Witnesses

Witnesses: Des Crowley, CEO, Bank of Ireland UK, Ian Sheppard, Head of Corporate and Business Banking NI, and Sean Sheehan, Regional Manager NI, Bank of Ireland, gave evidence.

Q512 Chair: Gentlemen, you are very welcome. Thank you for joining us. As you know, we are conducting an inquiry into the banking structure in particular relation to Northern Ireland, so we are very much looking forward to hearing what you have to say. In the interests of time, can I say I do not think there will be a need for an opening statement? You have very kindly submitted a written paper to us, which has been very useful, so thank you very much for that. We can get straight into questions, if that is all right.

Des Crowley: Thank you very much, Chairman. We are delighted to be here and we are keen to help the inquiry into the Northern Ireland banking situation. Could I make just two or three comments?

Chair: If you could be very brief, yes.

Des Crowley: Yes. Bank of Ireland in Northern Ireland has a customer base of about 200,000 customers, 35 branches, and we have been operating in that region for 200 years. We complement that particular branch access with our long-term partnership with the Post Office. In general terms, we have branch representation either with Bank of Ireland or the Post Office in every single community across the region. We have been working hard to resolve our own issues within the bank, and in 2010 we incorporated a separately licensed subsidiary in the UK, which is separately regulated, capitalised and managed and overseen by an independent board. I am the chief executive of that board, and I have my own independent directors. Our anxiety is to work with all the parts of Northern Ireland to grow the economy, create jobs and be a good part of the recovery. Over to you, Chairman.

Chair: Thank you very much. You are very welcome.

Q513 Ian Paisley: Structurally, you also have an arm into NAMA. Is that not correct? You manage NAMA’s debt of €22 million and less.

Des Crowley: No, we do not.

Q514 Ian Paisley: What is your relationship, then, in that aspect of it?

Des Crowley: NAMA would have taken across some loans a number of years ago from Bank of Ireland Group and Bank of Ireland in Northern Ireland. We provide an administrative service, but we have no input into the advice or the strategy for NAMA and their loans.

Q515 Ian Paisley: But you manage an aspect of their-

Des Crowley: We only administer.

Ian Paisley: You administer it.

Des Crowley: Yes.

Q516 Naomi Long: Good afternoon. We are glad to have you with us here at the Committee. The CBI Northern Ireland Chairman was here to give us evidence on 20 November, and he made some remarks. He said that, when he became Chairman two years ago, "the biggest risk factor and the key blocker to the Northern Irish economy was the banking situation". He does not feel that that has changed, and he said "the biggest single risk factor and the single biggest blocker to growth in Northern Ireland today" was the banking sector. Do you have any comment you want to make on that analysis by the CBI Chair?

Des Crowley: I certainly would like to comment on that. It is our view at Bank of Ireland that we have sufficient capital and liquidity to support lending into the Northern Ireland region. We have had no constraints in the last number of years about the amount of lending we can do. Our view is-and it is supported by the InterTrade report, which has been delivered in the last number of weeks-that the biggest issue facing the economy is a lack of demand for credit, rather than supply. It is our absolute determination to grow our business in Northern Ireland. We feel that there are structural issues in the economy. For example, we would like the private sector to be bigger and more dynamic. We believe there are some sectors that are quite competitive-that is the agriculture sector; there are good exporting businesses; and there are quite good businesses in the farming area-but it needs to be more broadly based. While banks must play their role, and a healthy and normal banking system is very important, there are other broader macroeconomic and structural factors that we feel are equally important. But again, Bank of Ireland is open for business and anxious to support customers-both existing customers and new customers-to develop their businesses.

Q517 Naomi Long: Could you comment on why you think the CBI would have that view if you are, indeed, offering those services and offering liquidity and so on, and are in a position to develop lending to large, medium and small businesses? Why, then, is there a perception, not just with the CBI but, I have to say, in terms of SMEs that have given evidence to us, that that is not the case? Why is the message not getting through?

Des Crowley: The economy has been in deep recession. The crisis has had a big impact not only on the bank, but, indeed, on the customers of the bank and on the confidence of the economy. It is our view that we have got to work together. We have launched a number of initiatives, such as our agri fund, our export fund and our mortgage-lending fund, to try to help customers feel that if they wish to take credit, they can take credit. I cannot comment on why the CBI has a particular view. What I can say from our perspective and lens is that it is a competitive banking system. There is plenty of competition every day, Sean, in your market, and in Ian’s market. We are not seeing supply as the issue. It is around confidence and people’s anxiety to invest. We have seen different trends, Ian, in the last six months.

Ian Sheppard: Yes. From our point of view, through 2012 and the first half of 2013, the requests we were having for funding were primarily for working-capital purposes, to manage their cash flow. We have seen a distinct uplift, primarily in the last six months of 2013, in businesses now looking for term funding, either to make acquisitions or to make capital investments. That is the first time we have seen that demand being consistently applied over a number of months.

Des Crowley: Sean, what about the retail side?

Sean Sheehan: We encourage all our staff to do a full needs analysis with any customer that has a need. We try to meet that need through that needs analysis review-so, affordability, suitability-and we encourage bringing that to application. There is a strong investment in sales and credit capability and identifying needs, and we encourage our staff to make sure those applications get to a decision.

Des Crowley: I will make one additional comment, if I can. There is, and has been, significant deleveraging going on in the Northern Ireland economy. The value of the product is down by about 14% from peak. House prices are down by 45% to 50%. Our bank is extremely anxious to do enough lending to grow its loan books, but we are still seeing quite considerable deleveraging from businesses and consumers. That is a natural consequence, we believe, of the economy and the crisis. It is in all our interests to turn that around and see positive growth. That is still a number of months away, but we are seeing, as Ian and Sean say, some positive signs.

Q518 Chair: You mentioned growth. What growth are you forecasting for this year?

Des Crowley: We are looking at economic growth in the order of 1.5% to 2%, which is a considerable improvement but probably lagging behind what we would hope to see in the rest of the United Kingdom.

Q519 Nigel Mills: Mr Sheppard, you said that you had seen a move in demand from cashflow finance to term lending. Is that because customers have changed what they want, or because you have told them they cannot have their overdraft anymore; they can only have a term loan or asset finance or something?

Ian Sheppard: No, these are primarily for investment purposes, so they are incremental funding rather than amendments to existing funding. Those tend to be from companies that are export-led manufacturers or companies that are looking to try to broaden their product range. It is an incremental request for funding rather than a restructure of existing funding.

Sean Sheehan: We have seen a significant increase in the utilisation of those overdraft facilities. We have supported our customers in the last 12 months with enhanced facilities and we have seen the utilisation of those move from broadly 40% to 52%. We have been very supportive on that front.

Q520 Lady Hermon: It is very nice indeed to see you here this afternoon, Mr Crowley, with your colleagues. The Bank of Ireland has got such a long, distinguished history, and you are doing so much that is positive to encourage customers to bank with the Bank of Ireland in Northern Ireland. I am just reading here that you have only got about 10% of the personal current accounts in the region of Northern Ireland. Why is it so low?

Des Crowley: We have 10% share of the personal current accounts, and we have approximately 20% share of business, just in round terms. Our main response to that would be that it is a very competitive market. Certainly pre-crisis, there were as many banking institutions-and, indeed, other financial services companies-there as in the rest of the United Kingdom. We have been in the market a long time and we have worked hard; 10% to 20% is a reasonable market share of any given region. We would like to be doing better, Lady Hermon, and we would like to have more customers, but it was, and continues to be, quite a competitive market.

Q521 Lady Hermon: Which bank do you consider to be your biggest competitor in Northern Ireland?

Des Crowley: The market-share statistics would show that there are four, five or six banks that have in excess of 10%. We do not regard any one of them as particularly standout.

Lady Hermon: That is a very diplomatic answer.

Des Crowley: You can look at Danske, Ulster, First Trust, Santander and Nationwide. We find that a lot of banks are good at certain things. Our ambition is to be seen by the economy as a broadly based bank in Northern Ireland that services all constituencies and all parts of the community. That is the way we have played it. Other banks are very good at mortgages, for example, or at credit cards or asset finance. We are a broadly based financial services firm.

Q522 Lady Hermon: Do you put a lot of emphasis on training your staff to reach out and to engage with consumers so that they choose you over and above the other banks?

Des Crowley: Yes. We have continuously had a programme where we do outreach. Sean will describe one or two of them in a moment, but in the last two years, despite the crisis, since we incorporated in the United Kingdom and since we stabilised the operations, we have had teams that are involved only in outreach to customers of other banks, seeing whether or not we can recruit, be it in agricultural areas, export areas, etc. Sean, can you talk about the initiatives you have taken?

Sean Sheehan: We have put a number of teams together, Lady Hermon. We have a business acquisition team-we have decided to try to put a team out there that does nothing else than seek opportunities for growth. We have put current account teams together. We have put an agriculture team together, which would have been very visible in the Northern Ireland marketplace in the last 12 to 18 months. We have seen significant growth on the back of that in terms of our share of the agri market. Our ambition is to grow, and hopefully we are evidencing that in the funds that Des alluded to earlier across agriculture, mortgages and small business lending, and we are clearly evidencing it by putting people on the ground to try to make that happen, as well and supporting our customers and trying to make sure those opportunities get to something for them.

Q523 Dr McDonnell: You are very welcome. Your memorandum tells us that you have 200,000 customers. Chair, could I declare an interest as one of those? You have 35 branches, and you have a work force of almost 13,000.

Des Crowley: That is an error, Dr McDonnell. That should be 1,285, not 12,850.

Dr McDonnell: That looks more presentable.

Des Crowley: I would like to be a much bigger bank, but unfortunately not yet.

Dr McDonnell: Any time I go into the branches, they are not that well staffed. You have touched on it generally, but you swept over the thing, so let me ask you again: do you have strategic plans to expand? Indeed, what are your strategic objectives? Or are you just taking a wide scope, with a bit of this and a bit of that?

Des Crowley: No. Dr McDonnell, we, as the Bank of Ireland UK board, did a strategic review in 2012. That is a normal part of the cycle of the bank, to see how we are going to grow our business, or, indeed, repair our business. In 2012 and 2013, for Northern Ireland, our job was to try to re-establish and stabilise the bank. We have gone through a very difficult programme of branch rationalisations. We have had some redundancies in our network. We have got through that, albeit it has been painful for our people and for some customers, and we are now focused on becoming a growthorientated bank in the business sector, the consumer sector and the mortgage sector. We deal with the Post Office growth ambitions separately, through a separate governance process. We see that within the region there is a lot of business we can be doing and are doing, and our strategy is for growth. Sean has described our focus on the business market. We have launched the mortgage fund. We have been very successful in the last 12 months at recruiting business customers and, indeed, personal current account customers, but we have more to do.

Q524 Dr McDonnell: You mentioned the Post Office. Who decides on the programme with the Post Office? Is that Post Office-led or Bank of Ireland-led? Who sets the strategy there?

Des Crowley: The Post Office/Bank of Ireland arrangement is a partnership. We jointly govern and jointly agree the financial services that we launch, how we govern them, what price position we take and what propositions we take. It is a true partnership.

Q525 Dr McDonnell: Who is the lead partner?

Des Crowley: In a partnership there are equal partners.

Q526 Dr McDonnell: In the light of some of the questions already asked and, indeed, the questions that will be asked as we go forward, one of the biggest problems we face and have faced during the inquiry is the complaint that there is no competition and that the banks are in a cartel, if you like. Would you welcome more competition? Do you think that there is too much competition? In other words, is Northern Ireland well served already?

Des Crowley: We would have a view that Northern Ireland is as well served as any region in the United Kingdom. Lady Hermon asked me to describe the competition that was in the market, and it reads like the Who’s Who of any region that we compete in, including the Post Office, credit unions and specialist lenders. It is our view that there is lots of competition in the market, and what Bank of Ireland needs to do is to compete well against that competition, win customers, retain customers and offer more services. That is our orientation.

Q527 Lady Hermon: I am really interested in the very good working relationship that you have with post offices. I am intrigued to know about post offices around the border of Northern Ireland. Let me take, because I have met with them, the subpostmaster for Crossmaglen, who is very hard-working indeed and where there has been huge investment in the post office; there is a wonderful post office in Crossmaglen. Are the exchange rates for euros and other foreign currency at the post office on the Northern Ireland side of the border exactly the same as at the Bank of Ireland in the Republic of Ireland a few miles across the border?

Des Crowley: That is a very good question. The provision of foreign exchange through the post offices is run by a partnership between Bank of Ireland and the Post Office, run out of BOI UK, which is my company. That company is a standalone company; it is called First Rate Exchange Services. It sets the rates daily and, indeed, it may change rates during the day if the funding costs change. There is a totally separate operation for Bank of Ireland, run by the governor and company in the Republic of Ireland, and they decide what rates they are setting. They are separate operations. What I would like to get across to the Committee is that, as I sit here with my team before you, we are a standalone bank in Britain. We are regulated fully by the regulatory authorities in Great Britain. We run the operation based on having received significant capital from the shareholder, which is Bank of Ireland Group, but within that envelope of capital, we need to decide how we go to market through Ian’s business and corporate bank, through Sean’s retail bank, and, indeed, with the Post Office, and how to allocate our effort there. Proposition and price are set very much by myself, the board and the executive team that is with me here today.

Q528 Nigel Mills: There is a report quoted in the submission by the Danske Bank people who are coming after you that says interest rates were lower in Northern Ireland before the crash than they were in the rest of the UK because of the level of competition. Is that something that you see as the case now, or do you think lending rates are the same as perhaps you might offer in the UK or Ireland, at least in margin terms, or is it now higher in Northern Ireland?

Des Crowley: Let me give a general comment, and then I will ask Sean and Ian to comment. In general terms, we would be inclined to agree that pre-crisis, the cost of money was broadly the same across the whole United Kingdom, but there were lower margins in Northern Ireland than we saw in the rest of the United Kingdom. That may have been because there was more competition in that region; we cannot comment on that. Our pricing at the moment for mortgages, credit cards and business lending is common across the United Kingdom. We do have variations depending on the type of product the customer wants. Maybe, Ian, you can comment in terms of business and corporate lending.

Ian Sheppard: We would still consider Northern Ireland to be a very competitive market for good-quality businesses. There are a number of banks actively seeking to secure that type of business. Mrs Long quoted from the CBI submission. They specifically put an example on the table of a GBbased chairman who indicated that, for his business, the rates he could secure in Northern Ireland were probably lower than he could have done in the GB market. We have our target rates to try to get an appropriate return, but we have to be cognisant of the competitive environment in which we operate.

Des Crowley: What about mortgages, for example, Sean?

Sean Sheehan: My staff would evidence that competition every day. If you take the mortgage market, we have had to put new propositions and new pricing into the marketplace three times in the last 12 months. It is a very competitive space with a lot of players: not just the local banks, but building societies and other niche players. That evidence of competition is very much there every single day.

Des Crowley: Mr Mills, we as an organisation have decided to be part of the Help to Buy scheme, for example, and those products are being made available through our Bank of Ireland brand and through the Post Office brand in the next couple of weeks and months. Those products typically will be orientated around the distribution channels. There may be some features that are different, but generally, the basic pricing will be quite similar.

Q529 Nigel Mills: Do you get pressure from your head office saying, "Why are your margins so low in Northern Ireland?", or is it not quite as straightforward as that?

Des Crowley: It is. I am the head office, and these are my colleagues on the ground in Northern Ireland. It is the case that we have had to repair our franchise in Northern Ireland through a variety of initiatives, and the team have done well. The key thing is that our pricing for customers needs to reflect the cost of our raw material and the capital that we have to hold based on the regulatory requirements. We are looking for a reasonable return; we are not looking for anything extraordinary. We need to make sure that that is well explained to our customers, and then they have choice.

Q530 Lady Hermon: Are bonuses paid within the bank?

Des Crowley: In BOI UK plc, we have not paid bonuses since incorporation in 2010, either at executive-director level or, indeed, staff level.

Q531 Lady Hermon: Do you have any plans to change that?

Des Crowley: I would dearly like to get back to a situation where we are fully normalised. Just for the Committee’s sake, Bank of Ireland Group, as you know, is very grateful for the support it got from the Irish taxpayer and the Irish Government. That was in the order of a capital commitment of €4.8 billion. That has now been, as of the end of 2013, fully paid back. The total amount reimbursed was €5.9 billion. We hope now to move on. The Irish Government, as you know, through the pension fund owns 14% of the bank, but the bank is privately owned and privately managed. We are still not back on to what we would consider as normalised remuneration. At some point in the future, when we demonstrate sustainability of profitability, we would want to reward our people in accordance with whatever is the regulated requirement around reward, and there are a lot of new guidelines, as you know, Lady Hermon, on that.

Lady Hermon: Yes.

Des Crowley: We would not deviate from that, but we are a bit of a way off still.

Lady Hermon: I am comforted to know that. Bankers’ bonuses are not particularly popular.

Q532 Dr McDonnell: One of the great concerns is that yourselves and the AIB are Dublincontrolled; Danske is controlled in Denmark; and the Ulster Bank is the only bank with UK control and UK regulation. How independent are you of the governor in Dublin? How accountable are you to Dublin? Do you have a totally free hand? In other words, are you almost a semi-detached UK bank?

Chair: We are moving slightly on, which is okay, but, Ian, can you come in behind that?

Ian Paisley: Yes, I will come in behind Alasdair’s question. First of all, you are very welcome to the Committee. I refer Members to my declared interests, and I am a business customer of the Bank of Ireland as well. This really comes off the back of what Alasdair said, because it is an issue. You said you are "standalone"-they were your words, Des-but you are also the child of a parent company in Dublin. Do you consider yourselves ultimately responsible to the Bank or England or to the Irish Government through the Central Bank of Ireland? Where does your ultimate loyalty have to lie, when the chips are down? And the chips have been down for the last four years.

Des Crowley: They have indeed. The licence for Bank of Ireland UK plc is granted by the Bank of England. We are fully regulated by the PRA-Bank of England-and the FCA. Our board is responsible to our shareholder; our shareholder is Bank of Ireland Group. Dr McDonnell, it is not black and white, but our determination of our strategy and the allocation of our lending and capital is fully within the auspices of the Bank of Ireland UK board, which is fully regulated by the UK regulatory authorities. We do have to demonstrate to our shareholder, which is Bank of Ireland Group, that we are being sensible, we are not taking unnecessary risks, and we are evenhanded in the way that we manage our affairs, but that is under a shareholder-type relationship rather than-

Q533 Ian Paisley: Yes, but, Des, any financial organisation that operates within the UK has to be licensed.

Des Crowley: No, it does not.

Ian Paisley: As a bank, you have to apply for your licensing arrangements and comply with those licensing arrangements in the UK.

Des Crowley: You could be branch-based. Prior to the incorporation, Bank of Ireland’s operations in Northern Ireland, for example, were under the auspices of the Central Bank of Ireland. The concept of the incorporation was to create a level playing field for our customers in terms of protections and guarantees, and to effectively make sure that the PRA was the key determinant of capital and liquidity for our operations in the UK. That is now in place, and has been in place since 2010.

Q534 Ian Paisley: But are you able to say, when the chips are down, whom you are ultimately accountable to? It is your shareholder, ultimately.

Des Crowley: It is, yes.

Q535 Ian Paisley: We have received evidence that the Bank of Ireland has been instructed by the European Commission to sell some of its business banking operations. First of all, is that information accurate? If so, perhaps you could bring the Committee up to date with the current position.

Des Crowley: Yes. Bank of Ireland Group has done two EU state aid plans, and I personally have been involved in the structuring of those plans. EU state aid plans are agreed between the government and the European Commission, with the bank standing one seat away from the table. In 2009, when the bank received state aid in terms of capital, there was a requirement to do a state aid plan. That state aid plan had to hit three objectives. It had to demonstrate that the bank was viable in the future. We did that. It had to accept certain burdensharing measures, which in 2009 involved the disposal of 10 businesses that Bank of Ireland then owned, and, indeed, the deleveraging of the loan book from €140 billion to €90 billion. The third requirement was to be competitive in terms of its markets. Under the most recent state aid plan that was agreed-and is the final state aid plan-the bank was allowed to retain one of its businesses, called New Ireland Assurance, which is a Republic of Ireland life assurer, and the substitution measures were that we were instructed, under legal requirements, to exit business banking in Great Britain, but there is no impact on our Northern Ireland operations. There are a number of other measures required in the Republic of Ireland around competition, and the bank is not allowed to distribute products through certain types of channels in the Republic of Ireland as part of the burden-sharing for that arrangement. In summary, the most recent change-and the final change-is that the Bank of Ireland, between now and 2015, has to deleverage or exit its business banking operations in Great Britain, but that has no impact on our Northern Ireland operations.

Q536 Ian Paisley: In vernacular, does that mean you have to sell off your banks in England operation?

Des Crowley: It is ring-fenced into what is called our business banking and corporate banking books. What is not affected at all is our relationship with the Post Office, our mortgage business, our credit card business, or our Northern Ireland franchise. In the future, at some point, we can revisit those segments. The concept in the EU is if you get state aid, you must go through a process, as indeed some of our peer banks here in Great Britain have had to do. We are largely through that process now, which I can assure the Committee has been a painful process for customers, staff and shareholders. That was a very difficult period for everybody. We are largely through it, and we are now focused on growing our business.

Q537 Ian Paisley: Under the stuff that you do for NAMA, are you left to manage any of those accounts under that management arrangement, or administration arrangement, as a result of that?

Des Crowley: No. I would summarise it as, NAMA makes its own decisions and we process the paperwork.

Q538 Ian Paisley: So you could not write off debt forgiveness to a client within that organisation.

Des Crowley: No. NAMA’s borrowings, and indeed the customer obligations, are owned by NAMA, not by Bank of Ireland.

Q539 Ian Paisley: Finally, if you had a blank page, Des, what changes would you make to the structure of banking in Northern Ireland, if at all?

Des Crowley: The Northern Ireland marketplace is a marketplace we see as having potential. We are determined as a bank to grow our share of consumer business and business and corporate banking. There is an active market in place and there is a lot of competition, spanning from our colleagues here behind us right through to credit unions, the Post Office, etc, so we are not very clear that there is a requirement for additional structural measures in competition in Northern Ireland. We do believe, however, that the three important things are that we all work together to stimulate growth in the private sector; to try to address the areas of the economy where there is comparative advantage, such as agriculture and exporting; and to generate jobs in a sustainable way. I do strongly support the InterTrade finding that the issue in the economy is not the supply of credit but the demand for credit, but we still have things to do, because we know there are customers out there who may not want to approach us, for fear of being rejected or declined. We have work to do on the mentoring programmes and the outreach programmes to make sure that customers feel that they will get a fair hearing, or more than a fair hearing, from the bank. That is the task that I will be giving Ian and, indeed, Sean on a daytoday basis.

Q540 David Simpson: You are very welcome, gentlemen. Can I also declare an interest, Mr Chairman, in relation to banking? I want to deal with closure of branches. I think maybe all of the banks have done this, but we are dealing with yourselves at the minute. Would you have the figures to hand on how many branches you have in rural areas? Is the bank going to close any of its rural branches?

Sean Sheehan: About 80% of our 35 branches are rural-based. In fact, we announced on 2 January that we are opening a new branch in Culmore Road in the city of Derry. It was not just all about closures for us in the last 12 months; we also saw the opportunity that arose for us particularly to support the SME sector in that part of the city, and we announced that new opening on 2 January.

Q541 David Simpson: But the research papers have given us details that the Bank of Ireland has closed down nine offices and suboffices in the Province during the financial crisis itself. What has happened to the customers of those? Have they gone to other branches, or do they do their banking online?

Sean Sheehan: Clearly, any decision to close a branch is a difficult one and was not taken lightly. We would have worked with the customers in that area; we would have worked with our local management teams; and we would have worked with the Post Office. We worked very closely with the customers that wanted to continue to do facetoface transactions, so that they could do them through the Post Office. We made a range of new developments, in conjunction with the Post Office, to make that banking very easy for those customers that wanted to continue to transact face to face. Clearly, we invested in our online capability and other tools and, for those customers that wanted to move in that direction, they were given the support and the education around those capabilities as well. The evidence for us is that, seven months on from the announcement and the physical closures, 94% of those customers are still with us today. That comes down to all of the factors I talked about, but it also comes down to the quality of our staff and how they approached that and engaged those customers, and the relationships we continue to have with our customer base.

Q542 David Simpson: The closures themselves would have been based, I assume, on pure business logic-whether they were viable to keep open or not. As a business, you would look at the figures and say, "Are they viable? They are not. We have to make changes here." Is that how you would handle it?

Des Crowley: The debate and the analysis would have had a number of criteria, including the commercial viability of the standalone branch, but also the footfall that we saw both at the moment and in the future, and the behaviour of the customers, in terms of whether or not they were dealing with us online or maybe using the Post Office already-because, as a partner, we are actively saying, "Look, you have choice about your cash in/cash out". We took a decision about what size of optimal footprint we would need in terms of physical locations. We have 35 branches and six business pods. We decided that we would invest £10 million in upgrading those to a really good standard and have them absolutely in the right places. As Sean has said, we have just opened a new branch as well. We took a commercial decision, but it was around footfall, customer behaviour, and making sure we did not leave anybody in the lurch-that they had servicing operations. We are a little disappointed that only 94% came with us, but that is part of the dynamic of that process. We have no plans to close branches in the foreseeable future beyond the nine that we have done. We are looking to an economy where there is job creation and growth. We do accept that customers are changing their habits quite dramatically, with online shopping and not using branches, but our sense is we are in the right places with the right configuration at this point.

Q543 Lady Hermon: You have no plans to close any more, and we are very appreciative of and grateful for that announcement today. Have you further plans to open more branches, apart from the one that you have recently opened in Derry city?

Des Crowley: Lady Hermon, Sean has, but he has not got approval from me yet.

Lady Hermon: Excellent.

Ian Paisley: In Ballymena?

Sean Sheehan: We have a very good branch in Ballymena.

Chair: We will leave you to that one, then.

Q544 Mr Benton: Good afternoon, gentlemen. Recently, the Committee took evidence at Stormont and, to our surprise, we discovered what can only be described as the "fear factor". That is to say that businesspeople and associates were under stress and fear of giving evidence in public. They were concerned about things like anonymity. The major concern seemed to be that if they gave evidence in public that was in any shape or form critical of banking facilities, it would react upon them in terms of existing loans, the possibility of extensions of loans, and so on and so forth. To me personally and, I think, generally to the Committee, this did not suggest good practice and, in fact, it is totally undemocratic, because anybody on any Select Committee or involved in the democratic process would feel very strongly that witnesses should be enabled to come forward and speak openly, honestly and frankly without any repercussions. It became described as the "fear factor". To me, that is very worrying. If that exists, it is not conducive to good banking practice; nor is it going to be an aid to the economy. I would like to ask your opinion on this, and to ask if you could give a categorical assurance that the Bank of Ireland would not indulge in any practice like this.

Des Crowley: Mr Benton, I share your view that it is disappointing if a customer felt that they could not articulate concerns either to the bank or, indeed, to an appeals authority or to this inquiry. We are not aware of any behavioural characteristics or cultural things that we are doing that would cause that. We do note from the InterTrade report that 93% of customers are willing to apply for credit and take their chances. There are 7% who are saying they need credit or want credit but are unwilling, because they are afraid. Our outreach programmes are aimed at trying to convince customers that they will get a fair hearing. Sometimes people apply for credit and are declined and we need to explain that. That does not mean they will not get credit in six months’ time. Our job should be to say, "Look, we cannot do credit for you at the moment, because of a certain factor. If we can work with you to improve your stock flow or your cash flow-your legacy issues-then we should be in a position in six months’ time." I will maybe ask Ian to comment, but Bank of Ireland’s code of conduct and its requirements of its people are to be open and transparent with customers and encourage them to voice their opinions, come through the complaints process and escalate to me. We have good whistleblowing procedures in place, both for customers and staff, and I would be disappointed that people felt they could not voice their opinions, both publicly and to an inquiry. Ian, what is your experience?

Mr Benton: Before you do that, could I just assure you that the purpose of that question is not to say that banks do not have to go through certain procedures in terms of security, guarantees, etc? I do not mean it as a criticism in that way. I just find it appalling that people have to be in fear of giving evidence in public. That is the main thrust of the question.

Ian Sheppard: We would, again, share that disappointment. We are very clear with our staff on the front line that we have to encourage customers to bring us applications. We have made it very clear that we are looking to grow our market share and that we are looking to grow our lending commitments in Northern Ireland, and the best way we have of doing that is the staff on the front line being professional and opening those negotiations and discussions with customers or potential customers. It is something we stress on a regular basis when we get our staff together, and, again, I would be very disappointed if Bank of Ireland customers felt they could not bring issues or concerns forward, either to us or to external parties.

Des Crowley: We have been running, Mr Benton, what we call Enterprise Week twice a year now for the last couple of years. Enterprise Week is where we invite businesses to demonstrate their products and services within our branches. We invite customers and noncustomers, so it is quite innovative in that sense. We do not restrict it to Bank of Ireland customers. We host events right across the Province, in terms of helping customers understand how you apply for credit, why you should come to us for credit, and the schemes we have in place. There is a continuous need to educate and build confidence. Part of this is to make sure people do not have concerns or fears about coming to a bank or talking to a bank, or talking about a bank. We certainly would take that position.

Q545 Lady Hermon: When you are inviting businesses, customers and noncustomers, to come to these Enterprise Week events, do you ever think about sending an invitation to the local Member of Parliament or MLA?

Sean Sheehan: We certainly do.

Q546 Lady Hermon: Am I left off the list? Can I be included on the list?

Sean Sheehan: I can certainly commit to correcting that.

Lady Hermon: Yes please.

Sean Sheehan: We regularly would share the stage with the local MLAs and local MPs. We would have had substantial evidence of that over the last couple of years, whether it is at an agricultural event, whether it is at a new business lending, small business market, or whether it is just at the Enterprise Week itself. We very much open the net to the community, because that is part of what we are trying to do: to get our bank back into the community. Whether it is through an outreach programme, whether it is through helping young people, whether it is in schools, or whether it is going to the business community itself through Enterprise Week, we have got to get back out into that community-and that is everybody.

Q547 Lady Hermon: Yes. I look forward to receiving my invitation. Thank you very much. I was very interested in the reference to the code of conduct of the Bank of Ireland. Have you supplied the Committee with a copy? If not, could you do so?

Des Crowley: We can do so.

Q548 Mr Anderson: Good afternoon, gentlemen. A particular issue has been raised with us about what is called "aggressive banking", where particularly RBS, we are led to believe, in order to seize assets from some companies, has driven businesses out of doing business. Would you care to comment on that? If you do not feel capable of doing that, I understand.

Ian Sheppard: I can only comment on the Bank of Ireland. From our point of view, we very much work in partnership with our customers when they get into challenging situations. At no point do we have any mechanism to take over ownership of customer assets; those assets always remain with the customer. When it comes to trading businesses, we are very much working with those businesses to try to help support them in terms of their cash flow. If necessary, we will reduce capital repayments; we will look at amending repayment structures to allow those companies to rebuild their cash flow and, ultimately, to return to our "business as usual" side of the house.

Des Crowley: Mr Anderson, based on what we have read about the allegations, we are satisfied, and I can assure you, that Bank of Ireland does not indulge in those practices.

Q549 Mr Anderson: Can we take it as well that you would not do it in the future?

Des Crowley: No, we have not done, nor would we do.

Q550 Mr Anderson: We heard from the Chair of the Assembly’s finance committee in December, who called for an extension of the inquiry that Tomlinson has done. Would you welcome such an investigation in Northern Ireland?

Des Crowley: We would not see the need for it in Bank of Ireland, but if there is an inquiry or any request for information, we will supply it.

Q551 Nigel Mills: We have already touched on how you are keen to expand your lending and help businesses grow. Can you just talk us through what you think you can do to help SMEs in Northern Ireland grow over the next few years?

Ian Sheppard: We are undertaking a number of things. We see a marked difference in financial performance for those businesses that can export outside of Northern Ireland, and even beyond ROI and GB. If we look at the companies that are most successful in Northern Ireland, they tend to have that export capability. We run a series of seminars helping people through the challenges of exporting. We made a conscious decision a number of years ago to retain a full treasury-dealing service in Belfast, so if customers want to manage their foreign currency, we can do that for them, plus we also have a full trade finance capability in Belfast to help them with letters of credit and documentary requirements for export. We work closely with our business acquisition team and our "business as usual" teams, with those colleagues in the treasury to make sure customers are well aware of how they can access those export markets. Enterprise Week is another example where we try to help those customers get a showcase or an opportunity. Our agri fund is another opportunity where, again, we are looking to lend in those areas. It is very much trying to help those companies on a growth agenda.

Des Crowley: The Kernel Capital investments that we have made, which is in the private equity space, the work Ian is doing on the science parks, and some of the other mentoring that we are doing, is what we need to do. Mr Mills, the EAG report and the InterTrade report have some good recommendations that we feel would be constructive, and we would be happy to engage, but, to some extent, 80% to 90% of what needs to be there in our view is there. Now it is about filling in the gaps, because there are always gaps, and continuous gaps. That would be our sense of it.

Sean Sheehan: We have also made the decision to keep a business adviser in our branches. The ability to meet, engage and converse on an opportunity and build the business case and the business plan is available in all of our branches.

Q552 Lady Hermon: The evidence has been very interesting indeed. If you have been keeping up to date with the evidence-taking sessions preceding this, you will know that we had evidence from the British Bankers’ Association, and we were a bit frustrated at that stage about the lack of transparency about the regional lending data that are available, but certainly were not made available to us at that evidence-taking session. What plans does the Bank of Ireland have to give a bit more detail-in terms of percentages and amounts-without identifying its customers? Confidentiality is critical, but can you shine a light on the lending rate of the Bank of Ireland in Northern Ireland?

Sean Sheehan: You are aware, Lady Hermon, that we already share that data with the BBA.

Lady Hermon: Yes, but they do not share it.

Sean Sheehan: We are very supportive of the work that is under way at this point in terms of how that dataset could be expanded. In fact, all of the commitments to that BBA process we have already delivered on. We have delivered our data to it, and we continue to meet all the deadlines, all the commitments and all the asks of the Bank of Ireland. We have been very supportive of the work that is under way to expand the dataset. We equally would like to see what lessons or observations or what else is in the marketplace that we should be focused on. We are very supportive of the work, and we evidence that through our commitment-that we have met every single deadline to this point.

Q553 Lady Hermon: The plan of the British Bankers’ Association in Northern Ireland is that they will be publishing a disaggregated picture "in due course", to which all of the seven major institutions have agreed.

Sean Sheehan: All the data that have been asked of us at this point in time have been submitted and delivered.

Q554 Lady Hermon: Why are you so nervous about publishing more detailed statistics as an individual bank?

Des Crowley: There are a couple of issues. One is the commercial sensitivities around it.

Lady Hermon: Yes, which we accept.

Des Crowley: It is a market where there are a lot of eyes. We are trying to compete in the market and be sensitive about how much we disclose, but, through the BBA and the Bank of England, we have supplied a lot of data which would help get a picture of lending in the economy. If there are surveys, either on demand or supply, we will actively participate, on the basis that it is aggregated and then disaggregated without undermining our competitive position.

Q555 Lady Hermon: When do you expect that information to be available in Northern Ireland?

Des Crowley: I note that you said the BBA said "in due course". I will use my powers with Anthony to try to get that accelerated.

Lady Hermon: That is very kind of you. Thank you. I appreciate that.

Q556 Naomi Long: Lady Hermon has already referred to the disaggregation at regional level, but I want to talk about a slightly different bit of disaggregation around the lending figures. That is about the definition of what constitutes new lending in the figures that you do produce. I understand most banks’ figures for new lending include both genuine new lending and also the extension of existing lending. For example, if someone has borrowed previously £100,000 from the bank and borrows an extra £10,000, the "new lending" figure will be £110,000, not £10,000, which is what most laymen would expect "new lending" to look like. They also include the renewal of existing credit arrangements-often credit arrangements that have been reduced. For example, an overdraft reduced from £3,000 to £2,000 will go down as £2,000 of new lending, when it is actually a reduction in those figures. That can distort people’s understanding of what new lending looks like, unless they read it with your loan book as well and can see the full picture. Could you just answer this simple question? Do you have the capacity and the information within the bank to disaggregate what the layperson would understand as new lending and what the bank defines as new lending, so that people would have a clear picture year on year of what additional lending you are making into the marketplace?

Des Crowley: We do, and indeed we have demonstrated that. As you are possibly aware, under the Central Bank of Ireland requirements, within the Republic of Ireland that is exactly how we report data. We saw in the InterTrade report a recommendation around that reporting, which we can subscribe to if that is going to be something that would help. In setting out our requirements for the businesses, we set them requirements to retain customers-because often it is easier to hold on to a customer than acquire a new customer-and also to do new lending. We can break it out into new and renewals, etc, as per the requirements.

Naomi Long: I understand the reason why banks will be able to lend to existing customers, because they have a credit history with them, and so there is a lot more information; it is a lower risk, almost, than to go with a completely new customer. But it is really a question of disaggregating what is actually new lending in terms of additional lending out into the business and, indeed, the retail sector and so on. When we have tried to do that in the past, my understanding has been that some banks have said that they are not able on their current systems to separate the two out. It is helpful that we know that you are, and that will be possibly useful for us going forward. Thank you for that.

Q557 Nigel Mills: There has been a fair amount of concern in Northern Ireland about the integrity of some banks’ IT systems. Can you just reassure us that your IT systems are modern and fully effective and not likely to stop working one day or something?

Des Crowley: Bank of Ireland has a stable set of IT systems. We have very sophisticated outsourcing partnerships with the likes of IBM and BT, who are very well reputed. We work hard to preserve our stability and have a good track record. As Chief Executive, I always say to myself, "I may have a glitch occasionally and I need to be able to fix that quickly and keep continuity of service to customers", and we have demonstrated we can do that. We have stable systems, and we continuously hope to improve the stability of those systems going forward.

Chair: We have run beyond time, but that is because it was a very interesting session. Thank you very much for joining us; it has been very useful.

Examination of Witnesses

Witnesses: Gerry Mallon, CEO, and Kevin Kingston, Deputy CEO and MD of Business and Corporate Banking, Danske Bank, gave evidence.

Q558 Chair: Gentlemen, you are very welcome. Thank you for joining us. I think you probably heard my introduction in the last session, so I will not repeat it.

Ian Paisley: And most of the questions.

Chair: And the answers as well. Thank you for your written submission. Is there anything you would like to add to it, just very briefly?

Gerry Mallon: If I may make a couple of very quick remarks. Thank you again very much for inviting me back, with a different hat on this time. My name is Gerry Mallon. I am the Chief Executive for Danske Bank in Northern Ireland. My colleague, Kevin Kingston, is Deputy Chief Executive and is Managing Director for Business Banking, so he has a particular business responsibility. Danske Bank was formerly Northern Bank, and we have a 200year history in Northern Ireland. We are a wholly owned subsidiary of Danske Bank Group. Danske Bank is the biggest bank in Denmark and one of the largest in Scandinavia. The bank was acquired from National Australia Group in 2005. We are incorporated in the UK, and we are regulated by the PRA and the FCA. We are, for the purposes of regulation, a British bank with a Danish shareholder. Our focus is entirely on Northern Ireland. We have a local management team and a local board, which are based in Belfast. We have a strong position in the Northern Ireland market, with approximately 30% market share in business banking and approximately 20% market share in personal banking, and we are very active in the market and looking to grow. Our capital and liquidity positions are very strong, and in 2013 we were delighted to return to profitability, which is not typical of the sector yet post-crisis. We know that we have a very significant role to play in the Northern Ireland economy, and we are committed to continuing to do that for the long term.

Chair: Thank you very much. You are very welcome. We will get straight into questions, if we may.

Q559 Naomi Long: It is very good to have you with us. You will have heard the question, so I will not give you the preamble. I will simply ask you: how do you respond to the comments made by Ian Coulter, the then Chairman of CBI NI, who said that the banking system issues remain "the biggest single risk factor" and key "blocker to growth in Northern Ireland"?

Gerry Mallon: There are two things I would say. First, I was here for the EAG session as well, and Kate Barker gave her view, which I think was a slightly more nuanced one, which suggested that perhaps macroeconomic factors in both the national and regional economies were much more significant than the nature of the banking industry. I also know Ian Coulter very well and have probed those questions with him separately. My understanding of what he meant by that is that the risk factor for future growth is the fact that we have legacy debt problems, and particularly a legacy property debt overhang, which may constrain the ability of a large part of our SME sector to borrow and grow in a healthy way.

Q560 Naomi Long: So his criticism is not so much of the bank but just a realisation that the banking problems that we have had, particularly related to property, will have an impact going forward in terms of business confidence and so on.

Gerry Mallon: That is my belief, yes.

Q561 Naomi Long: In the memorandum that you sent to us, you said that "Danske Bank currently holds 33% of the business current account market", of which 91% is held by the four main banks in Northern Ireland. That is a very high proportion of that. Why do you think your bank has such a large proportion? Why do you think you have had that success in attracting business accounts?

Gerry Mallon: There are two things I would say. One is, we have been here for a long time, and we have been very active in the business market for a very long time, so our customer base looks like a cross-section of Northern Ireland business. We have got more or less every kind of business that there is in Northern Ireland, and we have built that over a long time. It is a bank that has been very focused on stability of relationships and on being there for the long term. We have got a particularly strong market share in agriculture; we have almost 50% of farmers in Northern Ireland, in terms of our market share. We have continued to invest in staying there and staying committed to those long-term relationships. In recent years, we have focused particularly-very-hard on trying to win new customers. Since Danske Bank acquired us, we have invested in our technology systems, we have invested in our people, we have invested in training, and we have demonstrated, in particular through the last few years of the crisis, that we do have the appetite and the capability to lend, and I think customers are seeing that.

Q562 Naomi Long: Would you welcome more competition in Northern Ireland, or do you think that there are already enough banks operating in Northern Ireland to give customers the right amount of competition? What is your view on that as a bank? We will understand if you say "no more competition".

Gerry Mallon: Generally speaking, more competition is a good thing for the economy, and a strong, vibrant and healthy banking sector is good for the overall economy. Anything that is good for the overall economy has got to be good for us, with a mature market position in Northern Ireland. Having said that, do I believe that there are problems of insufficient competition in Northern Ireland? I do not. In particular, we flagged up also in our submission both the EAG report and, prior to that, an Institute of Chartered Accountants survey that was carried out pre-crisis, which suggested that if you look at business lending rates as an indicator of the degree of competition, Northern Ireland was, pre-crisis, more competitive than the rest of the UK, and now is comparable with the rest of the UK in terms of the lending rates that are available.

Q563 Naomi Long: From your perspective and the work that you do with your customers-and you have grown your customer base-do you think that they share that view, or do you think that they would welcome new competition?

Gerry Mallon: I don’t know if anybody is ever happy with the price they get, and I don’t perceive that there is enormous transparency in terms of what their price is, so people don’t necessarily believe that they have got the best deal that is available, and will always be looking for more and for better. To the extent that further competition increases transparency around pricing, it is a welcome thing.

Q564 Naomi Long: You heard the questions that we were asking Bank of Ireland. In terms of your own responsibility and where you feel that your accountability lies, do you see yourselves as ultimately responsible to the Government of the UK through the Bank of England, or to the Danish Government through the Nationalbank in Denmark?

Gerry Mallon: It is very clear that we are incorporated and regulated entirely in the UK. It is the PRA and the FCA that we have close contact with. Our parent company is our shareholder, so we have responsibility to our parent company as a shareholder, but we do not primarily have responsibility to any of the Danish regulators.

Q565 Oliver Colvile: Can I apologise first of all for coming in late? I have been sitting, unfortunately-well, fortunately-on a Bill Committee elsewhere in the House. I understand your wish potentially to see some further competition and all that, but the key thing, surely, is trying to make sure that the Northern Irish economy is rebalanced. A high percentage of people who work in Northern Ireland depend upon the public sector, and it seems to my mind that that is the key thing. How would you use the banking system in order to try to encourage greater private investment?

Gerry Mallon: There are two things. First of all, yes, as a bank, we make our money from the private sector. We provide some banking services to the public sector, but we want to see growth in the private sector overall, which increases the potential market for customers for us. Our focus is very much on helping Northern Ireland companies to grow and giving them support to be able to do that, and particularly focusing on resources for viable companies. We have plenty of support available for SMEs, and particularly for those in growth sectors. If you want, we will talk a little bit more about how we support those companies in growth sectors, but we do see that there is strong potential for them to be able to grow. There are other macroeconomic tools that can be used; we would be supportive of a reduction in corporation tax in order to stimulate further investment in Northern Ireland, and we do believe that there is greater need for venture capital and support for startups, where the seed bed for new companies in Northern Ireland will come from.

Q566 Nigel Mills: Can I just ask you the question on competition about how you assess lending margins in Northern Ireland now we are post-crisis-he says optimistically? Your submission said they were lower than the mainland pre-crisis. Are you seeing that they are now in line? Are they higher? Are they lower? What do your Danish bosses think about your margins in Northern Ireland? Are they excited that you can get such higher margins than Denmark, or is it the opposite?

Gerry Mallon: Whenever the Group as a whole looks across the entire banking market, I think they will see that we still have a market that is economically challenged, and in particular where we have a higher level of credit risk and impairments because of the fragile nature of the recovery and some of the legacy debt issues that exist in Northern Ireland. We do not perceive that we have a more advantageous position here than we do elsewhere. What you would expect to see with global free movement of capital and lending is that, generally speaking, lending rates should be normalising across markets where capital can freely move. To the extent that you have a banking group that operates on an international basis, it can deploy its resources in markets where it sees better returns, and if there is a market with a lower return, it would be more difficult for it to attract further investment and capital.

Do you want to comment, Kevin, in relation to our assessment of lending margins in Northern Ireland at the minute?

Kevin Kingston: Yes. Just to focus on the evidence that is there in the public domain, the Ulster Society of Chartered Accountants report into access to finance precrisis very clearly called out that Northern Ireland was a favourable place to borrow, and they put that down to the level of competition that existed in the market. It might have been a relatively small number of players, but those players were competing very aggressively together, and the result of that was lower average margins. Within the EAG report, that is echoed, but in the current situation, moving back to more normal rates in the context of what they would see within the GB situation-and that would be broadly our experience.

Q567 Nigel Mills: If we want more competition in Northern Ireland and the UK generally, the regulatory environment and how easy it is to start up and grow is quite important. Do you have any experience, from Danske Bank’s angle, having been a new entrant to the UK by acquiring the bank in Northern Ireland, of how easy that is or how encouraging that is? I am sure we would love to have you lending to small businesses right across the whole of the UK rather than just in Northern Ireland. What is your view on how easy it is to start doing that?

Gerry Mallon: The UK is a really heavily regulated market. We get some exposure as to what it is like to deal with different regulators across Europe when we compare notes in Danske Bank, and it is generally seen that the UK regulator is at the leading edge of metrics, regulation and innovation in terms of the things that it wants to do. Generally speaking, those developments also move to other markets after a matter of time, but, at a Danske Bank level, we certainly feel fairly intensely regulated in the UK.

Q568 Nigel Mills: So I shouldn’t look forward to Danske Bank Derby turning up and serving my constituency.

Gerry Mallon: I wouldn’t rule out there being scope for us to expand in the rest of the UK. It would certainly be something that would be a nice aspiration for us to have.

Q569 Lady Hermon: It is very nice to see you back again in front of us, Mr Mallon, and very nice to have you for the first time, I believe, Mr Kingston. Could I just ask you to explain how Danske Bank has managed to turn around its fortunes in such a short period of time? I am looking at a report here in the Belfast Telegraph dated 1 November 2013, which records that Danske have moved from a loss of £35.5 million in the first nine months of 2012 to a pre-tax profit of £1.4 million in Northern Ireland in the same measurement of nine months in 2013. How on earth did you manage to come up with a winning formula?

Gerry Mallon: There are a number of elements to it. We have a level of income; we have a level of costs; and we have a level of bad debts. All three of those things we have to try to manage as best we can. By far the most significant influencing factor in the move from loss to profit was the fact that we have seen a tail-off in the level of impairments-charges we have had to make for bad debt. We believe that we did that by recognising the problems early in the crisis and by taking as many of those bad debt charges as we could early on in the cycle. We have gradually seen a decline in the number of new problems that are arising for our customers. In other words, we have identified all the businesses that are having difficulties and made the appropriate charges on our balance sheet for those, and we are gradually working our way through all of those problems while at the same time still winning new customers, still trying to grow our income, still trying to support healthy businesses to survive, and trying to manage our cost base as well as we can.

Kevin Kingston: It is worth saying as well that the sheer volume of lending that we would have done last year, particularly to business, would have been a record year for us. We saw a substantial increase in the level of business lending in 2013 relative to 2012-in the order of 50% growth in actual lending.

Q570 Lady Hermon: Was that to large companies in terms of Northern Ireland?

Kevin Kingston: It was right across the board. In 2013, we would have lent-I am not talking pipelines or approvals; I am talking about drawn cash facilities-in the order of £450 million across the business teams. Some of that would have been large business; a very large proportion of it would have been to medium-sized enterprises in Northern Ireland, which are the powerhouses of the Northern Ireland economy, as we know; and a portion would have been to small business. A very large proportion of that would have been newtobank business-"switchers", as we say.

Q571 Lady Hermon: New to bank?

Kevin Kingston: New to bank. What I mean by that is businesses that are moving to Danske from another provider. Of that £450 million, roughly £200 million would have been money that we have lent to businesses of other banks that are moving their business to Danske. Those are substantial figures.

Lady Hermon: That is very interesting.

Q572 Dr McDonnell: You are both very welcome. Could I congratulate you particularly on the last question there, in the context of turning Danske Bank round? It has brought a lot of confidence and reassurance to the public. I have a couple of quick questions around the changes that you have made, though. You have closed a number of branches. You have an increased emphasis on online banking. As we have gathered information, it would appear that that has been to the detriment of many long-standing elderly and rural former Northern Bank customers, who now have to travel long distances to reach a Danske Bank branch. Is that a realistic assessment?

Gerry Mallon: We have certainly closed branches. That is absolutely true. When we make a decision that we need to close a branch, we do not do so lightly; we choose branches, as much as possible, where we can see that there is another nearby branch, so we merge it into another nearby branch and try to keep customers within a natural market area. In addition, we look at what mitigants we can put in place. The biggest mitigant for people who live in rural communities or who are elderly and cannot travel, or who do not want to travel, is the fact that we have an arrangement with the Post Office also, where customers can transact on their Danske Bank account through over 400 post offices in Northern Ireland. By far the largest volume of transactions that we see in branches are cash deposits, cheque deposits and cash withdrawals, and you can do those in any post office in the UK, I believe, on a Danske Bank account.

Q573 Dr McDonnell: So it is not as significant as it would appear to be.

Gerry Mallon: We do not believe so.

Q574 Dr McDonnell: Have you any idea what has happened to the customers who have been put out by this? Again, if you look at the rural areas, some of them are not well served with post offices either.

Gerry Mallon: Again, there are over 400 post offices in Northern Ireland, and everywhere that we have closed a branch, there has been a post office there to be able to serve it. We have worked with the local post office in all of those cases and with the customers to try to educate them as to what they can do. We have retained the vast majority of our customers-I think it is in excess of 97%-in the branches that we have closed. We do not have any indication that there is major dissatisfaction generally amongst our customers. We continue to provide the same facilities. In other words, if we are closing a branch, it is not like we are withdrawing lending facilities to customers. Our main form of support in terms of provision of finance continues to be there.

Dr McDonnell: But you retain 97% of your customers. That pre-empts the final line of the question. That would appear to be a relative degree of satisfaction.

Q575 Ian Paisley: You are very welcome. Again, I refer to my entry in the Register of Interests, and I am a customer of your bank. Going back to the earlier set of questions about how you were able to manage the situation from bad debt back into the black, is it true that you parcelled up and sold off your retail banking arrangements in the Republic of Ireland? Did that help address some of the bad debt issues, or the restructuring issues?

Gerry Mallon: The Republic of Ireland is a very different market for us. In Northern Ireland, we are a large incumbent bank; in the Republic, we have been a small challenger bank. It was run with two separate management teams until about 18 to 20 months ago, at which stage we in Northern Ireland took responsibility for the Republic of Ireland retail and business banking book as part of a broader restructuring within the Danske Bank Group. We conducted some strategic analysis and research and quite a long project to understand the viability and the likely return to profit, or otherwise, of the Republic of Ireland retail bank, and we came to the conclusion that it was unlikely to return to profitability in the medium to long term. What we have decided to do, therefore, is wind that bank down, effectively, and we are exiting a lot of the products and advising a number of customers to rebank. We are continuing to provide the debt products-for example, we continue to support mortgage customers-but current account customers we are helping to re-bank to other institutions instead.

Kevin Kingston: It is worth emphasising that is separate from the UK entity.

Q576 Ian Paisley: Yes, I understand that point. In terms of the Northern Ireland entity, how big a role have venture capital companies played in buying up some of your bad debt portfolio?

Gerry Mallon: None at all. We are not aware of any that have been sold.

Q577 Ian Paisley: So you do not use them as a marketing tool. You did recommend earlier on that venture capitalists could play a role in the Northern Ireland economy-to understand the distinction-but they have not played a role in buying up portfolios from Danske Bank.

Gerry Mallon: No, not at all.

Kevin Kingston: I am not aware of any transactions.

Gerry Mallon: My earlier suggestion was much more in relation to provision of private equity, particularly for start-up and growth-phase companies, rather than bad debt.

Q578 Ian Paisley: Are you aware of private venture capital companies operational in Northern Ireland? From what you are saying, they clearly do not bank with Danske, but are you aware of their operations in Northern Ireland? If so, what is the profile of those venture capital companies? Are they mainly US-based? Are they EUbased? Are they other British venture capital companies? What is the profile?

Kevin Kingston: The issue of access to finance in its broadest sense is a very important point. Debt has a fundamental role to play in supporting business, but equally, it is crucially important that the business should be structured in the appropriate way and that it is appropriately capitalised. If we go back to the point around competition, one of the arguable downsides of the high level of competition we have seen historically in Northern Ireland was that very often, smaller family businesses, as they grew, did not consider equity to the same extent as perhaps they did in other parts of the United Kingdom. I would be positive in terms of the work that Invest NI have done over the course of the last couple of years with their access to finance continuum, if I can describe it in that context-the likes of NISPO, the Growth Loan Fund, and in particular the two £30 million development funds.

Q579 Ian Paisley: But what about private venture capital companies?

Kevin Kingston: Those sit there, and they are to be welcomed in a Northern Ireland context. We have good relationships with those.

Q580 Ian Paisley: The bank has a good relationship with them.

Kevin Kingston: Yes, because very often we can work successfully in partnership.

Q581 Ian Paisley: Give us a profile, Kevin. What type of companies are they?

Kevin Kingston: I can certainly think of businesses in Northern Ireland that have been supported by the likes of Crescent Capital in the past. If you forgive me, I will not name names, but there have been businesses in the past that have had ambitious growth plans and required a reasonably high level of leverage. In those situations, a bank working supportively and positively alongside a provider of equity can allow a transaction and a step change in the performance of that business that simply debt on its own, to be quite honest, would probably not be appropriate for, or, equally, for which the quantum of equity on its own would be too much.

Q582 Ian Paisley: Very briefly, just for a taster, are they principally American-based?

Kevin Kingston: No, I am talking about Northern Ireland funds. Crescent, as you know, has been in Northern Ireland in the form of Crescent 1 and Crescent 2, and this is now Crescent 3. Alongside that, to come to your point about other venture capital interest in Northern Ireland, there has been a relatively small playing field in terms of other venture capital businesses in Northern Ireland. We do have an interest in holding out some of the best that is in Northern Ireland. There are some fantastic businesses in Northern Ireland that perhaps are below the radar in a UK context for venture capital. One of the things we have done over the last few years is support the Insider Conference, which is essentially a platform for inviting VCs from across the United Kingdom to come into Northern Ireland and to hear a little bit about some of our success stories-some of the great businesses that are in Northern Ireland that otherwise, to be honest, probably wouldn’t get the airtime in a UK context. Within that conference, we invite venture capital companies to come to Northern Ireland to hear some of the best of what we have to offer and, through that, hopefully develop a more regular interest in what is going on here to support some of this.

Q583 Ian Paisley: Are they investing? Is the outcome of that investment?

Kevin Kingston: Yes, we have certainly seen a lot more interest. Once executives from those venture capital entities are in Northern Ireland, we do have a very good story; we do have a very positive message.

Q584 Ian Paisley: Kevin, give me some figures. What sort of money is coming in from venture capitalists, if at all?

Kevin Kingston: I would not have figures off the top of my head, Ian, but they certainly exist. If you go to the CBI access to finance report, the figures on the level of VC investment in Northern Ireland are in there.

Q585 David Simpson: You are very welcome, gentlemen. Can I also declare an interest, in banking with Danske? At this stage, they probably own everything, lock, stock and barrel.

Kevin Kingston: We are always keen to support good growth businesses, David.

David Simpson: There are a number of points that I would like to make. You will have heard the questions to the Bank of Ireland about media reports in the press indicating that certain banks were purposely allowing companies to go to the wall so that they could get their assets to build their capital. What is your view on that?

Gerry Mallon: The only clear allegations that I have seen relate to the Tomlinson report. I know that the FCA are conducting an investigation into those specific allegations, so I think we should reserve judgment until we see what the FCA’s investigation comes up with. From a Danske Bank perspective, we do not and would not and could not ever indulge in that kind of practice, where the bank takes ownership of the assets. We do not have a vehicle to do that; it is not structurally possible. That is not our modus operandi.

Q586 David Simpson: That is fine. You have sort of answered the second part of the question. In relation to loans to companies, you have said you have a bigger market share at the moment, but one of the major complaints that we have received from a lot of companies who have given us evidence in confidence-you have heard Joe’s previous question to the Bank of Ireland about the fear factor-is that they cannot get money from banks. Overall, is that your view? What is it based on? How do you make the decision when a small business, or a startup business, comes to you and wants to borrow money? How do you make a decision on that? What criteria are you looking for? We are hearing-and, in fact, it was raised today in Prime Minister’s Questions-that there is not sufficient money going to the small companies to help them.

Gerry Mallon: I will ask Kevin to answer that specific point in a second, but I am a member of the EAG, and the clearest evidence of the overall picture of the Northern Ireland lending situation is in the EAG report, which suggests that while there has been some shift in the level of supply of finance to the SME market, it has been more in terms of the risk appetite, the price of lending and the nature of lending than the absolute ability of companies to access it. There has been much more of a fall in demand for lending than there has been a fall in supply of lending to the market. We are certainly very hungry, and we want to grow. The thing that is constraining us most in terms of our growth is a lack of demand. We have a very strong capital position and plenty of money to lend; we cannot find the customers to lend it to.

Kevin, do you want to answer the specific point?

Kevin Kingston: Yes. There are two issues within that. First of all, in relation to the "fear factor", that is simply not a statement that resonates with me in any way in terms of our relationship with our customers and how Danske does business. One of the most successful initiatives that we have launched this year is, in the context of trying to grow confidence, asking business customers to participate publicly with us in saying how their businesses have grown, to tell their success stories, and to publicly say what Danske has done in supporting that growth journey. In the last 12 months, almost 40 businesses in Northern Ireland have publicly said that they are happy to be associated with us and what we have contributed to growing their business. I honestly do not believe that would be happening if we were behaving in the way that some of the concerns have suggested.

In relation to sufficient money, the best thing I can do is go back to the lending figures that I shared with you. We are seeing a significant level of switching. For me to be sitting here saying that, of the £450 million of cash lending that we put into the economy last year, £200 million of that came from switchers, tells a story in itself. I have been in business banking for over 20 years; I have probably never seen that level of switching to Danske, or to any bank, in that time. It is very significant. But we have the capacity and, as Gerry says, we certainly have the ambition and the appetite to meet that demand, and are very happy to do it.

Chair: Can I just mention to the Committee: looking at the remaining questions, we have touched on pretty well all of them, and there will be a vote in less than a minute. Do Members want to come back for more after? I think we have touched on most of the questions, so we will break when the vote happens, which will be any minute now.

Q587 Lady Hermon: Could I just ask a specific question? It is to do with procurement contracts. How content are you that, when a contract is put out to tender-for example, for courier services-Danske Bank properly complies with all legal requirements in awarding that particular contract?

Gerry Mallon: I am fully satisfied. We have strong governance around our procurement systems, we have strong broader governance in terms of internal audits, and I am very comfortable with our level of management there.

Q588 Lady Hermon: I have a second question, and that is to do with the evidence that was given to us by the British Bankers’ Association and the lack of transparency about lending rates. We have heard from two successive-and very successful, I have to say-finance ministers in Northern Ireland that they would like to have more details. Does Danske Bank not see the point in giving the Finance Minister confidential information that could influence and improve the policies within the Northern Ireland Executive? Thank you for being complimentary about Invest NI.

Gerry Mallon: We are 100% supportive of increased transparency. We have supplied the BBA with all the information that they have requested from us. My understanding is that their intention is to publish fullyear data before March of this year.

Q589 Lady Hermon: As disaggregated data.

Gerry Mallon: Disaggregated by sector.

Q590 Lady Hermon: Do you accept that there is an advantage to giving data to the Finance Minister within the Executive, whoever he or she might be, to help Government policy?

Gerry Mallon: You have to be very careful with commercially sensitive information, but if we can get the appropriate non-disclosure agreements in relation to that, then I don’t see any problem with it.

Chair: We will finish there, but it has been a very useful session. Thank you very much indeed for coming.

Prepared 22nd January 2014