Irish Mortgage Brokers Blog

Along with many others, I was confused at the fascination with EBS as a takeover target. You see, EBS’s best year recorded a profit of less than €50 million. Which given the size of its operation and loan book is rather unimpressive. The company is also heavily staffed by union members meaning it would be difficult for present management to wade in and cut the numbers in a meaningful manner.

So what is the obsession with private equity and EBS? And what about PTsb?

For a start, PTsb are not currently my lead favourite as a bidder, there are two reasons, one is that the bank rescue plans are being looked at from a competition aspect in Europe, and if PTsb were to take over EBS it would reduce competitive forces, secondly, PTsb may not be in condition to do a takeover. They have their stress-test due out in September and for now we have no idea of how that will look, EBS would add a large chunk to their loan book but deposits in the society are only c. €1bn and that may not aid in creating the loan/deposit balance that banks are looking for, especially given that PTsb are still firmly over the 200% mark. Lastly is a political consideration, every person working in EBS has a significant other in PTsb, if they were to take over it would make great sense from a costing perspective because you could literally fire almost everybody. However, the government are not likely to be in favour of that given the fall out that would result. If private equity took over EBS might (hypothetically) go from 1,000 workers to 700, but if PTsb took over it would go down to more like 200.

Which leaves private equity in the front line, for two reasons, they will bring some of their own capital (who ever wins the bid will be doing it with implicit state support included), and they will help to maintain competition while not reducing staff numbers as heavily as the first option.

Why would private equity be interested? Most of the distribution in EBS is via an agency network which is basically like having a lot of tied brokers?

The agency network does something brokerage in other institutions fail to do, namely raising funding. EBS have made good headway in that respect, bringing in €750m in 2008, €670m in 2009 and on target to do the same in 2010, but the real attraction is a relatively robust loan book with pricing opportunity.

The big banks have a loan book that roughly looks like this

Fixed Rates 20% (much of which may revert to tracker)
SVR’s           20%
Trackers      60%

EBS on the other hand has the inverse

Fixed Rates 20% (most of which revert to SVR)
SVR’s           60%
Trackers      20%

Which quickly explains the fascination, whoever takes over EBS has the ability to increase rates across the loan book in a manner which will have magnified results, much of the mature loan book will shoulder this quite well and ultimately create a profitable organization.

The three key factors will be to reprice the loan book, to lower deposit rates, and to find operational efficiency via staff numbers. A new owner will find it relatively easy to perform all three and to go on and sell the bank in a few years, that is the reason for the level of interest in EBS, they had low profits in the past because they were a mutual, but take the membership agenda out of the equation and you have a bank that is primed for making profit.

The EBS distribute through brokers via their subsidiary ‘Haven Mortgages’, the EBS have thoroughly debunked the idea that mutuality means anything by charging their existing clients different rates than new clients. They have also failed to be in the driving seat for a ‘third force’, going it alone has not happened, remaining an independent entity has failed, and the likelihood of private equity getting involved will most likely hinge upon state support being part of the package, thus it seems that institutional buyers will be the only serious suitors.

It is in an environment such as this that costs should be most seriously addressed, they have done this with Haven, slashing commissions and workforce, getting the organisation lean, but thus far EBS have failed to pursue efficiency with the same zeal within their own camp, and this zombie-like bank/mutual/whatever, is now reducing LTV’s for the only efficient part of the operation, Haven will now only offer a maximum of 80% LTV to potential clients, leaving 90% loans with the least effective arm of the organisation, the agent network.

It is important to remember that EBS obtain much of their distribution via their ‘agency network’ which is effectively a network of tied brokers, there are actually very few EBS branches that are owned and operated solely by the parent company, rather it is like branded tied brokers. As non-tied independent brokers we are saddened by the EBS move to force Haven to lower their maximum LTV, the move certainly wasn’t sought by Haven, and it is funnelling resources instead toward the inefficient mother-ship when the sensible thing to do would be to cut costs there and get cheap distribution via intermediaries, but it seems they are opting instead for intermediary distribution but only via tied agents who have different sets of underwriting rules etc. This is typical of Irish banking, punish those who do right and reward those who don’t.