March 2015

Ireland’s economy is expected to enjoy robust growth in 2015,

according to the IMF

AIB has announced its first annual profit since 2008

The FCA has approved the purchase of Topaz by SMS

HML News

Guest blog: Fred Crawley,

Credit Today - IFRS9; lay

the groundwork now to

avoid a last-minute rush

Fred Crawley, Managing Editor of Credit

Today, explains why with a 2018 deadline

IFRS9 may not seem urgent, but could

result in a last-minute panic for mortgage

portfolio owners if they do not lay the

groundwork now.

One theory of time management, attributed to

US President Dwight D. Eisenhower, has it

that “what is important is seldom urgent, and

what is urgent is seldom important”.

You’d be hard pressed to find an environment

that proves the exception to this rule more

neatly than the world of credit provision as it

goes through Financial Conduct Authority

(FCA) authorisation.

In the face of a regulator that has already

shown its teeth, and which is demanding

considerable administrative feats from firms, it

seems that compliance has become the

perennial hot topic: the task that is both

important and urgent.

Nevertheless, Eisenhower still has a lesson for

the market: companies that overlook important

issues beyond those that are most urgent, do

so very much at their own risk.

For me, the implementation of IFRS9 (and the

changes it will prompt for creditors) falls solidly

into this category of important but not urgent.

IFRS9 – important but not urgent?

Because while it may not seem pressing at the

moment – the change in reporting standards

won’t come into force until January 2018 – it’s

certainly important, requiring a massive rethink

on the part of any business that deals with

default risk.

The implementation will require lenders to

assess the probability of default on all

exposures, not just impaired accounts, and

make provisions for loss accordingly. As a

result, there may well be significant increases in

impairment charges across the industry.

Not only this, but businesses will need to be

sitting on a long tail of historic performance data

in order to handle this new approach to

provisioning: the bottom line is that the

groundwork for IFRS9 needs to be laid now.

If you look at things in this way, IFRS9 may be

a more urgent issue than it seems: at the very

least, it is an issue lenders still have a chance

to confront before a sense of urgency develops.

Continued over the page

HML News

What this means for debt purchasers

I’ve been interested to find out what IFRS9

means for the mortgage business, and also for

other verticals covered by Credit Today, for

example debt purchase. In the case of those in

the business of buying books of debt, the

changes wrought could have a dramatic effect

on portfolio pricing – and yet planning for

IFRS9 has taken a solid back seat to

discussion of FCA compliance, at least in the

discussions I have been a part of.

As such, Credit Today will be working with

HML to broadcast a webinar later this year,

looking at what businesses must do now in

terms of tracking, scorecarding, and data

curation to ensure they aren’t caught out come

2018. HML has been a good partner to work

with on this project due to the sheer amount of

mortgage data the business is sitting on – with

data for more than one million accounts on file,

covering all sorts of risk profile, it is in a good

position to model outcomes.

Indeed, during the broadcast, we hope to be

able to use some of this information for live

presentation, forecasting what may happen to

impairment charges across a number of

different portfolio types, in a number of

different circumstances, following the

implementation of the new standard.

As well as looking at HML’s core market in

property, we may also look to extend the

analysis to look at what material impact IFRS9

could have on other sectors, such as motor

finance and debt purchase, as mentioned

above.

It will be interesting to see what findings

emerge in the webinar, but even before the

number crunching one message is clear: this

is an issue that portfolio holders should flag as

important before it becomes urgent.

Disclaimer: The views expressed in this blog are Fred

Crawley's and do not necessarily reflect those of HML

Overview of the MFG

Conference.

The Mortgage Finance Gazette’s inaugural

conference was held at The Gibson Hall,

Bishopsgate, London on 11th March 2015. HML

sponsored the conference and the lunch and

our commercial director Paul Fryers spoke at

the event.

Originate, securitise, trade and repeat

Paul spoke to delegates about whether we will

see the return of the create and trade model. At

the start of 2014, HML expected several new

lenders to enter the mortgage market as a result

of lower securitisation costs, increasing house

prices and improved economic sentiment.

Indeed, we have seen new challengers to

traditional lending enter the sector, such as

Harrods Bank and Charter Savings Bank and a

consolidation in the position of existing

challengers such as Aldermore and Paragon.

The Council of Mortgage Lenders has said that

gross mortgage lending is set to climb to £222

billion in 2015, up from £206 billion last year.

This is expected to increase further still in 2016

to £240 billion. There appears to be plenty of

opportunity for new lenders to come to the fore,

as well as alternative funding lines. Two

questions can be asked; is the dominance of

big banks about to be shaken up by specialist

and niche lenders and are we set to see a re-

emergence of the originate-securitise-trade

cycle?

Securitisation fell out of favour following the

economic downturn, but when used correctly, it

can increase the supply of credit, in turn

supporting financial recovery.

Continued over the page

HML News

Unlike some deals at the height of the boom,

today’s securitisation deals are much clearer,

with extensive ongoing loan level reporting. It

is telling that the regulator and the Bank of

England have asserted their confidence in

securitisation, so long as it is deployed in the

right way.

Investors, asset traders and lenders coming to

prominence are in a much stronger position

(thanks to improved confidence and macro-

economics) to originate new loans, securitise

their portfolios and trade - raising funds and

repeating the process. Portfolio trades can be

a robust foundation for asset traders to quickly

scale up, enabling them to expand the

originate-securitise-trade model to maximise

return on investment.

FCA approval received for

SMS acquisition of Topaz.

Specialist Mortgage Services (SMS), a

subsidiary of mortgage administration

company HML, has received Financial

Conduct Authority (FCA) approval for its

acquisition of Topaz Finance Limited (Topaz)

from the Royal Bank of Scotland.

Topaz is the master servicer for approximately

£700 million of residential mortgages held in

the Uropa Series I and Series II

securitisations. SMS is a specialist manager of

mortgage portfolios, managing master

servicing and applying its advanced analytics

and mortgage expertise to enhance the

performance of mortgage portfolios on behalf

of the beneficial owners of those assets.

Andrew Freeley, managing director of

SMS and proposition director at HML,

said: “We are delighted that the FCA has

approved the purchase of Topaz. The acquisition

of Topaz supports our strategy, giving us further

scale and enhanced capability in mortgage

portfolio management. With HML being the clear

market leader in mortgage servicing, the ability to

deliver the most advanced end-to-end mortgage

management solution in the market sets us apart

from our competitors.

“The commitment by Computershare to grow the

loan servicing business is significant and the

acquisition by SMS of Topaz is an important part of

this strategy. Now we have FCA approval, we can

progress our plans to grow our business and

support asset traders and other investors in their

mortgage portfolio acquisition strategies.”

Industry Statistics

Date reflects what the statistic was during that period, rather than when the statistic was published

Consumer Price Index (Central

Statistics Office)

FEB ‘15

-0.5%

JAN ‘15

-0.6%

DEC ‘14

-0.3%

European Central Bank (ECB)

Base Rate

MAR ‘15

0.05%

FEB ‘15

0.05%

JAN ‘15

0.05%

Unemployment Rate (Central

Statistics Office)

FEB ‘15

10.1%

JAN ‘15

10.3%

DEC ‘14

10.6%

Average National House Prices

(Myhome.ie)

Q4 ‘14

Up 0.6% from Q3

€194,000

Q3 ‘14

Up 1.4% from Q2

€193,000

Q2 ‘14

Up 1.3% from Q1

€190,216

Arrears

(Central Bank of Ireland - CBI)

PDH – total

PDH – 90 days+

BTL – total

BTL – 90 days+

Q4 ’14

110,366

78,699

35,583

29,224

Q3 ’14

117,889

84,955

38,463

31,619

Q2 ’14

126,005

90,343

39.669

31,749

Home Repossessions (CBI)

PDH

BTL

Q4 ‘14

1,393

634

Q3 ‘14

1,274

634

Q2 ‘14

1,110

611

Industry Statistics

Consumer Price Index

The CPI in February was 0.5% lower than the

same month in 2014. Notable downward

pressures came from the Transport (7%),

Clothing and Footwear (3%) and Food and

Non-Alcoholic Beverages (2.9%) sectors.

ECB Interest Rate

The ECB base rate remained at 0.05% in

March. Mario Draghi, president of the

ECB, said: “We have already seen a

significant number of positive effects from

these monetary policy decisions. Financial

market conditions and the cost of external

finance for the private economy have eased

further, also following our previous monetary

policy measures. In particular, borrowing

conditions for firms and households have

improved considerably. Moreover, money and

credit dynamics have been firming.”

Unemployment Rate

The unemployment rate stood at 10.1% in

February 2015, down from 10.3% in January.

This represents 355,600 individuals

unemployed when seasonally adjusted.

House Prices

The national average house price in Ireland

stood at €194,000 in Q4 2014, a 0.6%

increase on the previous quarter, according to

Myhome.ie’s analysis of asking prices.

During 2014, house prices rose nationally by

2.6%, the strongest year for value growth

since Q2 2007.

Angela Keegan, managing director

of Myhome.ie, said: “The Property Price

Register indicates that in the year to

September over 27,000 transactions had

taken place.

Based on current trends, total transactions in

2014 look set to hit the 40,000 mark, an

increase of 38% on the 29,000 recorded in

2013. This is very heartening and while still

short of the level required for a properly

functioning property market it shows the

recovery is gaining ground.”

Arrears

Principal Dwelling Houses (PDH)

The number of PDH mortgage accounts in

arrears declined by 6.4% between Q3 2014 and

Q4 2014. Out of the total mortgage accounts,

14.5% were in arrears, representing 110,366.

The number of PDH mortgage accounts in over

90 days of arrears also declined during Q4,

falling by 7.4%. These accounts totalled 78,699

10.4% of all the PDH mortgages in arrears.

Accounts in arrears of more than 720 days

increased in number by 294 during Q4, the

lowest increase recorded to date. The total

outstanding balance on accounts over 720 days

in arrears was €8.2 billion, 7.9% of total

outstanding balances.

Buy-to-let (BTL)

The number of BTL mortgage accounts in

arrears decreased between Q3 and Q4 2014 to

35,583 (25,2% of the total accounts).

Home Repossessions

At the end of Q4 2014, there were 1,393 PDHs

and 634 BTLs in lenders’ possession. Of the

PDHs, 429 were taken into possession during

the quarter, 123 of which were the result of a

court order, while 306 were abandoned or

voluntarily surrendered.

Top News Stories

Ireland will enjoy robust

economic growth in 2015.

This is according to a new report from the

International Monetary Fund (IMF), which

noted that falling energy prices have helped to

aid increased consumption.

The country is also experiencing a

combination of improving bank profitability,

climbing mortgage approvals and the support

of low-cost funding channels for lenders.

With the budget forecast to have a 2.7% of

GDP deficit this year, Ireland looks set to exit

the EU’s Excessive Deficit Procedure.

The IMF report stated: “Executive

Directors welcomed Ireland’s strong economic

recovery, the further decline in unemployment,

and the strengthened fiscal balances.

“They noted that medium-term growth

prospects appear favorable, though facing

headwinds from risks of protracted slow

growth in advanced economies, especially the

euro area.

“Directors agreed that the priority is to

maintain solid growth, which would require

continued prudence in fiscal and financial

policies to build policy space, while addressing

legacy issues in the banking and housing

sectors.”

Owners of sub-prime

mortgages are increasing

legal action against

customers. Michael McGrath, Fianna Fáil’s finance

spokesman, made the comments after

requesting arrears statistics from finance

minister Michael Noonan.

The figures show that at the end of December,

19,935 mortgages issued by sub-prime lenders

were in arrears of 90 days or more. This is an

increase from the 18,064 noted at the end of

September.

The sub-prime sector accounts for 18.6% of all

residential mortgages that are in arrears of

more than 90 days.

Mr McGrath commented: “There is a

clear need for a specific response to the

problems of this sector including clear targets

for resolution measures. The first proposal I

would make it to extend the Mortgage Arrears

Resolution Targets to the sector. Currently, the

targets only apply to the six main banks

operating in the state.

“In addition, there would be considerable merit

in establishing a dedicated mortgage to rent

scheme targeting this group of loans which

would potentially prevent thousands of families

from being evicted from their homes. Finally, the

Central Bank investigation in to the sector

needs to be expedited as the people affected

need practical support now.”

AIB has made its first annual

profit since 2008. The bank revealed group pre-tax profit of €1.1

billion for the year ended December 31st 2014, a

€2.8 billion improvement on 2013.

In addition, the total number of impaired loans

has fallen by almost a quarter since December

2013 and the number of accounts in arrears for

owner-occupiers has declined by 22%.

Continued over the page

Top News Stories

AIB’s chief executive officer David

Duffy said: “2014 saw AIB successfully

execute its three-year plan to deliver a bank

that is sustainably profitable, adequately

capitalised and appropriately funded. We have

a strong momentum in our business and are

committed to supporting our customers by

understanding their needs, providing suitable

solutions and serving them through our

branches, online or on the phone. We are

focused on growing our lending to support the

Irish economy and delivering sustainable

returns for our shareholders.”

Approximately 16,000 customers were granted

approval for a mortgage last year, with around

15,500 Irish small and medium-sized

enterprises supported, the bank revealed.

Lending drawdowns also rose by 50% in 2014

compared to the previous year.

Meanwhile, it has been suggested that AIB’s

director of retail and business banking Bernard

Byrne is the current favourite to replace Mr

Duffy as CEO.

Speaking to the Sunday Independent, Mr

Noonan said a second round of interviews

would soon be underway.

Mr Duffy is taking on the chief executive role at

Clydesdale Bank in Scotland. According to the

newspaper, other internal candidates that

could become his successor including Fergus

Murphy, director of corporate and institutional

banking and Mark Bourke, chief financial

officer.

PTSB plans to raise €525m

from private investors.

In the lender’s financial results for 2014, it

noted that it intends to use €400 million of this

to repurchase contingent capital that is

currently held by the state.

PTSB also revealed plans to sell around €5

billion in non-core assets. Of this, €3.5 billion is

from the CHL mortgage book (50% of the total

book) and €1.5 billion represents a portfolio of

mainly Irish commercial properties.

An agreement to sell the CHL legal entity and

its loan servicing platform has also been signed.

A profit before exceptional items of €5 million

was posted for 2014, an improvement from the

previous year’s loss of €694 million.

There was also a decrease of 8.000 mortgage

accounts in arrears of more than 90 days, a

decline of 32% from the peak in 2013. Almost

27,000 long-term and sustainable treatments

have been offered to customers in arrears.

Commenting on the results, Jeremy

Masding, group chief executive, said: “The sale of these non-core loans is a key

objective for the Group and it will allow us to

concentrate on our core retail banking business

in Ireland. Completion of the three transactions

announced today [11th March] will mean that we

will have completed over 50% of our total

deleveraging target for non-core loans; this is

well ahead of schedule.”

Fairfax Financial plans to sell

2.9% of Bank of Ireland.

The company was one of several North

American purchasers that took a combined 35%

stake in the bank in 2011.

Fairfax expects to sell 935 million shares. On

the basis of Bank of Ireland’s closing price on

31st March, this would provide Fairfax with a

€266 million profit.