Editorial: no simple solution to banking duopoly

After months of speculation, Ulster Bank has announced it will be exiting the market in the Republic of Ireland.

The bank will wind down gradually in the coming years. Irish Farmers Journal Money Mentor Margaret Nolan has key advice on what action farmer clients of the bank should take.

Where mortgages are sold to a new lender, terms and conditions will remain the same. Those with a current account and overdraft must, under the consumer protection code, receive at least two months’ notice prior to the withdrawal of these facilities. The most immediate action is for those with spring stocking loans to ensure these facilities will remain in place ahead of purchasing stock for grass.

Exposed

The Ulster Bank decision, coming almost eight years after the Rabobank-owned ACC Bank withdrew from the market, now leaves the Irish economy almost totally exposed to the two pillar banks – AIB and Bank of Ireland.

We await developments on the PTSB deal which is 75% owned by the State but who are in talks with Ulster bank on the branch network and the mortgage book.

Large businesses have the scale and capacity to move beyond the Irish banking sector and create banking syndicates. But the same options are not available to either farmers or small and medium enterprises (SMEs) – both the backbone of the national economy.

Duopoly

The subsequent creation of a banking duopoly will only serve to further challenge the equitable distribution of income and profits along the food supply chain – its creation reinforcing the extent to which the economic fortunes of over 130,000 Irish farmers are increasingly controlled by a small number of corporates operating on either side of the farm gate. But the solution to increasing competition in the market is not a simple one.

Ulster Bank was largely considered a well-run bank with a good understanding of its customer base. With a loan book comprising €20.5bn and responsible for 20% of all SME lending, it had a solid market share as the number three player in a small market. The fact that, despite best efforts, Ulster Bank was unable to carve out a sustainable business model from such a solid base means it is unlikely that we will see a third player entering the market for as long as the current regulatory landscape is in place.

Against this backdrop, should consideration be given to the potential for farmers to establish their own banking structure? Could a centralised and highly streamlined model without the legacy costs of an extensive branch network provide a range of services to farmers to compete with the pillar banks?

Challenge

Of course, it would be a challenge. But in recent weeks we have seen the launch of the first farmer-focused bank in the UK since 1928, when the Agricultural Mortgage Corporation, now owned by Lloyds Bank, was established. Oxbury Bank, backed by the agri-technology investment group Wheatsheaf, and headed up by an executive team with a deep understanding of the agricultural sector, is reported to be aiming for a £1bn balance sheet within five years. The bank offers bespoke lending packages designed for farmers, underpinning growth.

Again the scale of the Irish market and the associated regulatory burden presents challenges in replicating the standalone model within Ireland. However, farmer lending has proved incredibly safe and there is a strong argument that the capital reserves held by farmers should be lower.

Potential

Is there the potential for an existing financial institution to create a banking arm? FBD, which was established by Paddy O’Keeffe to tackle the monopoly that existed within the Dublin-based insurance market, clearly has expertise in this area. Newly appointed CEO Tomás O’Midheach, formerly deputy CEO and an executive board member of AIB, is ideally positioned to assess the opportunity. Could a number of organisations with the support of the co-op structure come together to leverage their expertise to establish a banking subsidiary? We have a move in this direction in the rollout out of MilkFlex loans, introduced by Glanbia and backed by Finance Ireland.

Meanwhile, the role of financial technology (FinTech) companies in allowing farmers access to new funding sources should be fully explored. A potential landscape of negative interest rates on deposit accounts plus inflation could bring a new wave of investors onto the market. Through the development of ag-focused technology products, FinTech has the potential to connect farmers, landowners, investors and even consumers.

The past few weeks have been encouraging for our tillage sector. The straw incorporation scheme recognises the potential of the sector to contribute to agriculture’s climate change efforts – what is achieved by one sector leaves a slightly less onerous task for others.

Tillage land needs to have carbon returned and it appears that the scheme will have sufficient flexibility to ensure that those who want straw can still get it. Now it is up to those in the sector to utilise the cash injection to support their businesses by investing in their land.

Oats research

This week sees the launch of the Oats Ireland Forum. This was established to help coordinate research across the island to help reinvent this traditional crop, which once occupied over 900,000ha. Last week also saw the announcement of a €2.7m research project on oats, a collaboration between UCD and Teagasc and Aberystwyth University and Swansea University. This project aims to find more climate resilient oat varieties that carry superior health benefits.

Given the continuing pressure to combat fungicide resistance in septoria, the launch this week of fungicide active, Inatreq, with its new mode of action, is to be welcomed.

While the pressure from Europe is to decrease pesticide usage, production here will continue to rely on these products until alternative control mechanisms are developed and used in conjunction with integrated pest management.

The TB situation continues to deteriorate, despite the level of investment in tackling the disease swelling to almost €100m a year.

As Barry Cassidy reports, over €35m of this cost is being borne by farmers; this is in addition to the financial hardship and stress faced at individual farm level in an outbreak.

A radical change in direction is need.

Fresh focus

Since taking office, Minister for Agriculture Charlie McConalogue has injected fresh focus into the issue with a new roadmap agreed on how to eradicate the disease at the end of last year. The establishment of three separate forums to cover scientific, financial and implementation aspects of the roadmap appears logical. But it will only be successful if the minister can give all stakeholders the confidence to look beyond the short-term challenges and take the tough decisions that are necessary if we are to finally grasp this nettle.

As Lorcan Allen reports, the headline figures released by Glanbia plc on Wednesday show a significant drop in profitability during 2020. However, if we look beyond the headline profit figure, there is evidence that the turnaround promised by management last year is starting to take effect.

Unsurprisingly, margins within the performance nutrition business bore the full brunt of COVID-19 during the first half of the year. But the reported double-digit performance over the course of the last six months should position the business well for 2021 – especially if a more health-conscious consumer base emerges looking to shed the COVID-19 pounds.

Nutritionals

Meanwhile, the more mundane nutritionals division and primary processing-focused JVs churned out a solid return. A 27% increase in profitability saw JVs contribute over 40% of Glanbia’s reported pre-tax profits. For 2019, JVs contributed less than 25% of pre-tax profits. While Southwest Cheese in the US is understood to have fuelled this strong performance, it is worth noting that the return from Glanbia Ireland will have outperformed the plc’s overall profit margin of 3%.