Bank of Ireland presentation

Alan Bridle, UK EconomistCBI Economic Luncheon 18th May 2012

Bank of Ireland UK is a trading name of Bank of Ireland (UK) plc which is authorised and regulated by the Financial Services Authority. Registered in England and Wales (No. 7022885), Bow Bells House, 1 Bread Street, London, EC4M 9BE.

The Regional Economy in 2012

Balance Sheet Recession, Austerity & Growth Challenge

Agenda

Scene-setting - Regional Exposures to UK & Irish Debt issues

“Made in Northern Ireland” – our own Balance Sheet Recession as it plays out

The Business Sector Property Markets The Household Sector Banking & Credit issues

Short & Medium Term Outlook

Base case Planning Assumptions Risks Critical conditions for restoring growth

Concluding Remarks

Rebalancing - The Real Challenge ? Grounds for Encouragement?

Regional Exposure

Sandwiched between two highly indebted economies that had oversized banking sectors and both now set on a necessary course of “deleveraging”

The UK’s limited “recovery” experience to date and scale of debt-reduction plans should govern regional growth and public spending expectations for at least two Parliaments and inform current NI Executive policy-making

Source: FT, Why UK GDP continues to lag G7 (G Davies), 24TH April 2012

A Heavily Indebted & Welfare-dependent Region having to play its part in restoring UK public finances

0

2,000

4,000

6,000

8,000

10,000

12,000

UK

NI

3

4

5

6

7

8

9

10

11

12

2003/04 2005/06 2007/08 2009/10

Net FiscalTransfers

£bnNI public Expenditure per capitarelative to UK (£bn)

DEL + AME DEL only

DLA IB JSA IS

NI 102 34 32 46

UK 54 32 23 29

Claimants per 1,000 people

Sources: PESA, DFP, NOMIS, BOI estimates

Rear view mirror reveals NI’s “recession experience” has greater similarity to ROI than UK

Official ONS data released at the end of 2011 indicates that the contraction in the regional economy was much deeper than previously estimated.

In monetary terms, aggregate regional income/expenditure was estimated to be over £2.0bn or 7.5% lower in 2010 v peak of £29.2bn in 2007 ie the size of the economy is back at 2004 levels.

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0

Lon Sco UK SE SW EM NE Y&H NW Wales WM East NI ROI

Annual Economic Growth in Real Terms 2007-2009

20

21

22

23

24

25

26

27

28

29

30

1998 2000 2002 2004 2006 2008 2010

Estimated NI GVA at constant prices 1998-2010£ bn

The size of the NI economy overall is now back at 2004 levels

Sources : ONS, CSO, BOI

The Business Sector

Key private sectors of the NI economy have experienced only a very modest recovery to date and activity levels remain c15% below pre-crisis peak … while 1 in 3 firms indicate they are not profitable

NI Services,Manufacturing and Construction output indices

55

65

75

85

95

105

115

q12005

q1 q12007

q1 q12009

q1 q12011

Services

Manufacturing

Construction

Source : NI Index of Services (Experimental), NI Index of Production, NI Construction Bulletin, bdrc continental

2008=1002008=100

Profit

Broke even

Loss

DK

All UK SMEs NI SMEs

All UK SMEs Q4

NI SMEs Q4

Growth Ambitions in 2012 – while near half of firms say they will stay the same size in the next 12 months, a larger percentage of NI firms plan to

contract/sell/pass on than, than grow substantially.

Growth plans for next 12 months

Source: bdrc continental, March 2012

Current economic climate rated the biggest challenge to business growth in the short-term. NI SMEs more exercised than UK overall by other factors, including finance availability

Main reason for not seeking borrowing – All NI “Would be seekers” Q3-4 only

Principle: prefer not to lose control, or can get funds elsewhere

Process: think it’s too expensive, too much hassle, needs security

Discouraged: had asked informally but felt put off, or assumed would be turned down

Climate: felt it was not the right time to borrow in the current economic climate

Main reason for not applying

All UK SMEs Q4

NI SMEs Q4

Major obstacle to running business in next 3 months


The Property Markets

Very Challenging Climate for all Property segments

Source: LisneySource: Lisney

NI “Retail” segment hit hard by consumer spending retrenchment

Prime yields in all sectors of the local market are now at their highest level in more than a decade but investment volumes remain very muted

Residential Development Land still largely in a state of paralysis – A “Psychology of deflation” still prevails

Valuation estimates heavily depressed, particularly In rural west of the Bann

Source: LisneySource: Lisney

Very limited Open-Market sales volumes, Demand constrained by confidence issues and anticipated weak recovery in housing market.

Key decisions for banks, NAMA and appointed Administrators around disposals and warehousing

Very limited Open-Market sales volumes, Demand constrained by confidence issues and anticipated weak recovery in housing market.

Key decisions for banks, NAMA and appointed Administrators around disposals and warehousing

Residential market still difficult in 2012 - price correction seems well advanced but not yet complete

Pace of annual price decline has slowed, “pockets” of market have stabilised/tentative recovery but overall risks for average prices are still to the downside - further “stock clearing” and difficult macro environment and mortgage market backdrop. Forecasted repossession rates for 2012 still reflecting hangover/legacy issues from regional house price boom of 2006-07.

0

500

1000

1500

2000

2500

3000

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 q3 q4 q1

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

25000

50000

75000

100000

125000

150000

175000

200000

225000

250000

275000

Average Price RHSTransactions LHS £

Source: QHPI

Forecasted Regional repossession rates 2012 : CML

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2

NI

London

Scotland

West Mid

North East

Wales

Yorks & Hum

UK

East

East Mid

North West

South East

South West

CML projecting that the rate of repossession in NI will be 3x UK average in 2012

Better than UK average regions

Worse than UK average regions

Household / Consumer sector

Continuing Headwinds on Household Finances / Consumer spending

-12

-10

-8

-6

-4

-2

0

2

NI

Wales

Scotland

UK

England

ROI

New car registrations in 2011 %• A starting position of elevated levels of debt, particularly new mortgage borrowers from the 2005-07 period.

• Falling real living standards – inflation outpaced incomes in 2010, 2011 & 2012?

• Negative “wealth effect” from steep decline in asset values

• Pensions reform – Private (and Public) sectors

• Personal taxation and National Insurance increases – middle and upper income groups squeezed

• UK-wide Welfare and Benefit reforms – recurring impact

• A starting position of elevated levels of debt, particularly new mortgage borrowers from the 2005-07 period.

• Falling real living standards – inflation outpaced incomes in 2010, 2011 & 2012?

• Negative “wealth effect” from steep decline in asset values

• Pensions reform – Private (and Public) sectors

• Personal taxation and National Insurance increases – middle and upper income groups squeezed

• UK-wide Welfare and Benefit reforms – recurring impact

… but inflation has moderated and further falls should be supportive of a gradual recovery in realHH income/expenditure

Household Challenges in 2012

Region’s labour market still softening …The claimant count has now risen to 62.5k(+700 last month)On the claimant count, NI (6.8%) compares unfavourably

with UK average (4.9%). LFS measure contradictory – 6.7% v 8.2%

Increase in claimants largely from lower wage occupations

Source: DETI, Ipsos Mori

-65

-60

-55

-50

-45

-40

-35

-30

-25

-20

-15

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-5

0

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Qtr 1

Net personal financial circumstances

Net general economic condition

Household Confidence levels bumping along the bottom,Claimant increase largely from lower wage occupations

Public sector job insecurity at elevated levels, but exaggerated on evidence to date, with the projected “shake-out” not materialising and reductions much lower than rest of UK.

Source: Ipsos MoriSource: Ipsos Mori

How concerned, if at all, would you say you are about the possibility of being made redundant or becoming unemployed over the next few months?

How concerned, if at all, would you say you are about the possibility of being made redundant or becoming unemployed over the next few months?

20

1818

8

2122

0

5

10

15

20

25

2009

Qtr1

2009

Qtr2

2009

Qtr3

2009

Qtr4

2010

Qtr1

2010

Qtr2

2010

Qtr3

2010

Qtr

4

2011

Qtr

1

All full time workers Public sector Private sector

pwc Spending Review: One Year On

Change in public sector employment by region in year to Q2 2011 (%)Change in public sector employment by region in year to Q2 2011 (%)

The lowest % of losses (1.8%) in the UK despite the highest % of employees. However, the opportunity cost of any job protectionism is the impact on capital budgets & private sector, where the positive multipliers are likely to be greater.

The “Working Poor” – HMRC income tax distribution data provides some indication of the likely disproportionate “squeeze” on the region’s households from higher food, petrol and energy costs – counterbalanced by lower regional taxation v UK ?

£200,0000%

£150,0000%

£100,0001%

£70,0001%

£50,0003%

£30,00014%

£20,00023%

£15,00020%

£10,00024%

£6,47514%

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

£6,475£10,000£15,000£20,000£30,000£50,000£70,000

£100,000£150,000£200,000

Percentage point difference between NI and UK (2009/10)

A larger share than the UK

A smaller share than the UK

Income Tax payers in NI, 2009-10 Relative Income Tax payers

Banking & Credit Markets

The Regional Banking Landscape –credit vigilance, balance sheet repair, re-sizing operations

0

20

40

60

80

100

120

2002q1

q4 q3 q2 2005q1

q4 q3 q2 2008q1

q4 q3 q2 2011q1 q4

Company Insolvencies

Creditors Vol

Compulsory

Individual Insolvencies

50

150

250

350

450

550

650

750

850

0

5000

10000

15000

20000

25000

30000

35000

40000

NI

E&W

Mortgage Market stresses

0

200

400

600

800

1000

1200

2007q2

q3 q4 2008q1

q2 q3 q4 2009q1

q2 q3 q4 2010q1

q2 q3 q4 2011q1

q2 q3 q4

Mortagage Arrears,Writs&Summonses

Possession Orders

NI banks lending to the Agriculture sector

500

550

600

650

700

750

800

850

900

950

Sep04

Dec04

Mar05

Jun05

Sep05

Dec05

Mar06

Jun06

Sep06

Dec06

Mar07

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Sep11

Dec11

Mar12

£m

…. & restoring growth in core lending

Sources: Insolvency Service, NI Courts, BBA

Appetite for Credit - 7 out of 10 SMEs in Northern Ireland have no wish, or need to apply for borrowing (similar to UK)

“happy non-seekers” “happy non-seekers”

borrowing eventborrowing event “would-be seekers” “would-be seekers”


Success rate of Credit Applications? c70% according to businesses

Offered what wanted and took it

Have overdraft after issues

Took other funding instead

No overdraft

70% of overdraft applicants now have a facility

Offered what wanted and took it

Have loan after issues

Took other funding instead

No loan

72% of loan applicants now have a facility


Unsecured Credit – while penetration of cards and loans has fallen from peak levels of 2008 & 2009, there is greater evidence of “distress borrowing” by a segment of households in the last 12 months

£553 £590

£268 £295

£955 £995

£0

£100

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All credit card holders Always pay back in full Do not always pay back in full

Amount owed on credit card (on most recent statement)

£6,268

£4,467

£3,830 £3,991

£3,000

£3,500

£4,000

£4,500

£5,000

£5,500

£6,000

£6,500

£7,000

£7,500

02/1

-02/

402

/2-0

3/1

02/3

-03/

202

/4-0

3/3

03/1

-03/

403

/2-0

4/1

03/3

-04/

203

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4/3

04/1

-04/

404

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5/1

04/3

-05/

204

/4-0

5/3

05/1

-05/

405

/2-0

6/1

05/3

-06/

205

/4-0

6/3

06/1

-06/

406

/2-0

7/1

06/3

-07/

206

/4-0

7/3

07/1

-07/

407

/2-0

8/1

07/3

-08/

207

/4-0

8/3

08/1

-08/

408

/2-0

9/1

08/3

-09/

208

/4-0

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-09/

409

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09/3

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10/1

-10/

410

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210

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1/3

11/1

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411

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2/1

Personal loans Personal loans taken out in the last year

Average personal loan amount

Source: Ipsos MORI

Savings – Some rediscovering the virtues of thrift – the long decline in savings penetration being “arrested” in the <35 age cohort (student finance and mortgage market developments?)

21%

27%29%

32%32%

31%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

00/1

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400

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200

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401

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201

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402

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202

/4-0

3/3

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-03/

403

/2-0

4/1

03/3

-04/

203

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4/3

04/1

-04/

404

/2-0

5/1

04/3

-05/

204

/4-0

5/3

05/1

-05/

405

/2-0

6/1

05/3

-06/

205

/4-0

6/3

06/1

-06/

406

/2-0

7/1

06/3

-07/

206

/4-0

7/3

07/1

-07/

407

/2-0

8/1

07/3

-08/

207

/4-0

8/3

08/1

-08/

408

/2-0

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08/3

-09/

208

/4-0

9/3

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-09/

409

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209

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10/1

-10/

410

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1/1

10/3

-11/

210

/4-1

1/3

11/1

-11/

411

/2-1

2/1

16-24 25-34 35-44 45-54 55-64 65+ £5,081

£5,974

£15,653

£6,851

£26,504

£13,323

£0

£5,000

£10,000

£15,000

£20,000

£25,000

£30,000

00/

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Under £20,000 £20,000 - £39,999 £40,000 or more

£12,298

£6,237£8,934

£5,200 £3,364

£1,037

£0

£1,000

£2,000

£3,000

£4,000

£5,000

£6,000

£7,000£8,000

£9,000

£10,000

£11,000

£12,000

£13,000

£14,000

£15,000

00/1

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Total value of savingsValue of savings in main savings accountValue of savings in other savings accounts

Savings account penetration by age

Total value of savings by household income

Average savings amount

Source: Ipsos MORI

Short & Medium Term Outlook

Base Case Planning Assumption - short & medium term UK & NI regional economic growth on a significantly lower trajectory compared to pre-crisis. Regional-specific and structural factors likely to ensure NI GDP rates “lag” UK (and ROI) in recovery phase

Sources : ONS, OBR UK Budget Forecasts 2011, BOI analysisSources : ONS, OBR UK Budget Forecasts 2011, BOI analysis

-6

-4

-2

0

2

4

6

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

UKNorthern Ireland

“The Great Reassession”“The Great Reassession”

“The Great Recession”“The Great Recession”

“The Great Expansion”“The Great Expansion”

% annual change% annual change

potential for downwards revision

2012 2013 2014 2015 2016

NI 0.0 0.5 1.0 1.25 1.5

UK 0.5 1.7 2.3 2.5 2.5

ROI 0.5 1.4 2.9 3.0 3.0

GDP forecasts % change

Key Risks• pace of UK & ROI recoveries?• diminishing financial assistance without offset policy levers

Monetary “dynamics” just beginning to change for the region

Monthly QGBPEUR= 31/08/2004 - 30/04/2012 (UTC)

Line, QGBPEUR=, Bid(Last)31/05/2012, 1.2470

Price

EUR

.1234

1.08

1.12

1.16

1.2

1.24

1.28

1.32

1.36

1.4

1.44

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2004 2005 2006 2007 2008 2009 2010 2011

UK “policy” interest rates projected to be lower for longer but “market” rates showing signs of “de-coupling” / tightening

…. while Sterling/€uro appears to madea break to the upside

winners and losers …

Critical Conditions for restoring buoyancy and growth to the regional economy

Stabilising the Banking system

Credible delivery of long-term UK deficit-reduction

Structural economic reform

A widening & diversified export base

A revival in private investment and public infrastructure

Stabilising the housing & property markets

… and the avoidance of further external shocks!

Potential Growth Sectors

Agri - food Technology

Pharma & Health sciences “Green” –

renewables, Niche/high value manufacturing Tourism

Creative Industries Regulatory /

Compliance Private Health / Private Education

Traditional - housebuilding

Concluding Remarks

The Real Rebalancing challenge – from Consumption to Production (Business Investment & Net Trade)

-35 -20 -5 10 25 40 55 70 85 100 115

Germany

France

US

UK

NI

Composition of GDP in Germany, France, US, UK, 2009 % (compared with estimated GVA profile of NI region)

Net Trade

HH Consumption

Govt Consumption

Investment

Source: CBI "A vision for rebalancing the economy", BOI Analysis

The UK economy (especially regions such as Northern Ireland) are dominated by Household and Government Consumption and economic growth has become less balanced and weaker since the 1970’s. For UK (and NI), echoes of the mid-1970’s “Too Few Producers” thesis. A Time to re-visit ?

While the short-term outlook remains very challenging, there is some basis

for encouragement to support a gradual return to growth …

Despite the budget squeeze, present and future, public expenditure per head is still over 20% above the UK average (still over 200,000 public sector jobs in 2014-15?)

Overall levels of debt are falling to more sustainable levels & the “impairment cycle” for the financial sector is progressing (but not complete)

Improved affordability for residential and commercial property – now more aligned to regional economic and financial fundamentals

“Subsets” of the private sector continue to outperform (Tourism Revenues 2012&13)

Low regional tax burden for households that sustains a level of spending (but with an associated opportunity cost!)

Still almost 700,000 employee jobs (c 600,000 mid-90’s)

Edging closer to D-Day for corporation tax decision

Alan BridleUK Economist / Market AnalystBank of Ireland [email protected] 9043351907736362138

This document is for information purposes only. Bank of Ireland UK is not soliciting any action based upon it and professional advice should be obtained before acting on any information contained herein.This document is based upon information as at Wednesday 16 th May 2012 that we consider reliable but we do not represent that it is complete and it should not be relied upon as such. The Material in this document should not be reproduced in any form without the express permission of Bank of Ireland UK

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Economy & Finance

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