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Brexit & The Future Of The Financial Sector in Ireland

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On the surface, the Irish banking and financial sectors appear to be booming. With large deals being executed and countless banks and finance companies moving to Ireland in the wake of Brexit. Dublin has become a front-runner in this regard, as “Dublin welcomed 135 new financial companies between mid-2016 and early 2021, equating to one-quarter of all Brexit-related moves.” However, the dynamic of the financial sector in Ireland is more complex than at first it might seem.

The local banking industry in Ireland is actually very small. The vast majority are foreign banks, with 17 of the top 20 global banks being based in Ireland. This makes Ireland very reliant on international corporations. This is because foreign banks can displace local lending, which can narrow firms’ access to credit. On the other hand, large foreign banks can facilitate the advancement of financial services through healthy competition with smaller domestic banks – so long as the domestic banks stay in the market.

To make matters more complicated for Ireland, when Meta started making layoffs, 350 employees of the tech giant were laid off in Ireland too. Not to mention Twitter. This just highlights how much foreign corporations can affect the business landscape in Ireland today. 

Large investment banks tend to provide advice and guidance to the smaller local Irish banks. That being said, a few elite banks close deals in Ireland, including Rothschild, who also advised the Irish Government on the post-crisis restructuring of Ireland’s banking sector in 2009.

Focus on Davy Corporate

A notable local Irish bank is Davy Corporate- known as the “Goldman Sachs of Ireland”. The bank handles 10-20 deals annually, with their average size falling between 50 million and 500 million. Ireland is the 4th largest exporter of Financial Services in the EU, so the banks are well placed to take a piece of the pie from multiple markets and not just Ireland.  

Ireland’s banks offer asset management, IPOs and Capital Markets, Mergers and Acquisitions, private company fundraising, and debt advisory and restructuring. Irish investment banks can sometimes offer strategic advice to clients too – Davy Corporate being one of these. 

Davy Corperate has recently advised on the sale of EDPAC, maker of data centre cooling equipment and air handling systems, to Swedish air treatment company Munters. EDPAC was sold for 29 million euros. Michael Hussey, Director of Davy Corporate Finance, pointed out that, due to the small population and market of Ireland, businesses tend to internationalise early on to survive and thrive. What he meant is that foreign investors are essential to the Irish financial sector. 

Goodbody, which has a base in Dublin, has also closed on significant deals. For example, a 200 million Euro deal with Aer Lingus, involving financial advice on debt fundraising, and a 75 billion Euro deal with Finance Ireland. The deals are not limited to Ireland, as they act as co-manager and advisor to IPL on its IPO on the Toronto Stock Exchange (a $178 million deal). 

KPMG Ireland closed the most deals in 2020. These included: the sale of Hickeys Pharmacy Group to Uniphar Group Plc, the sale of Cnoc Windfarm to Greencoat Renewables Plc, and the investment in Harmony Solar Ireland by the ESB.

In particular, mergers and acquisitions have been a huge contributor to the volumes represented by these deals in recent years. To highlight this, “inbound M&A deals were valued at €19.2 billion last year, with a particular interest from US-based buyers at the top end of the value spectrum who accounted for €13.2 billion (more than half) of last year’s deal values”. This means numerous foreign companies are either merging with or acquiring Irish companies. 

The domestic story

Irish banking at present is in a situation that is particularly unique. Consider Ulster Bank and KBC’s recent decisions to exit the Irish market. DBRS Morningstar, a debt ratings firm, has said this was possibly due to increasingly stringent capital requirements. These two banks were amongst the five main Irish banks. So naturally, this has caused significant disruption. AIB has entered an MOU with Ulster Bank for their commercial loan book (worth 4 billion Euro) and KBC has reached a similar stage with Bank of Ireland for their 9 billion Euro loan book.

This only makes the small scale of the Irish banking market even more pronounced. In the domestic market, the exit of two of the main banks has meant that 13% of the total adult population is looking for another provider. This means there is a significant opportunity, but also calls into question why two large banks would totally withdraw from the Irish market.

An often-cited reason is the rise of fintech and digital banking in Ireland, with Revolut having approximately 1.3 million users in Ireland alone. 

The Bank of Ireland is not immune to the threat that fintechs pose. So far 103 branches have been shut across Ireland. The reason being given, is that of the rise of online banking services. Fintech firm Wayflyer’s $76 million venture capital raise was one of Ireland’s most high-profile fintech investments of 2021. There was also a record-beating 1.3 billion Euro investment in Irish tech start-ups in the same year. 

Brexit 

Davy Corporate’s Micheal Hussey highlights the role that Brexit played in prompting many private equity firms to relocate their operations to Ireland. He stated: “What they discovered was a landscape of potential investment opportunity – and a realisation that they should have been there anyway,”.

In particular, Ireland’s international banking sector has been boosted by “€200 billion to their balance sheets between 2015 and July 2021”.

Fiona Gallagher, FIBI chair and chief executive of Wells Fargo Bank International, has stated that: “While Ireland’s international financial services sector has steadily grown over the decades, the UK’s exit from the EU has accelerated this trend, with Ireland now one of the key EU hubs for international banking and capital markets activity,” 

Despite the exit of overseas-owned Ulster Bank and KBC Bank Ireland, multiple UK and global banking groups established new Irish entities for their EU clientele. Notably so in the wake of Brexit. For Ireland, this has meant a sharp increase in investment services activities. Indeed, Dublin is the city where the majority of London’s financial services firms relocated to post-Brexit, as DisruptionBanking wrote about last year. A significant proportion of these companies are asset management firms- Frankfurt, on the other hand, has attracted a significant number of investment banks. A few significant examples of international banks that have relocated part of their businesses to Dublin are Bank of America and Barclays, with Goldman Sachs moving its asset management business to Dublin too. 

Can Ireland’s growth be scaled?

Gerard Brady, head of national policy and chief economist at Ibec, highlighted to Bloomberg that “as a small open economy, shifts in the flow of capital through the global economy and slowdowns in our major trading partners can have an outsized impact on our growth model. Our members are already experiencing this through tighter capital markets and a greater focus on costs.”

This means that the Irish economy may begin to slow down in terms of its growth. 

However, sustainable finance could potentially help mitigate this. For example, AIB has committed to being NET Zero by 2030, and pledged that sustainable products will account for 70 per cent of all AIB’s new lending by 2030. AIB has also partnered with the Foresight Group as a cornerstone investor in the AIB Foresight SME Impact Fund. This fund is designed to invest in Irish SMEs, supporting the transition to a more sustainable economy, which will in turn attract ESG investment. 

Ireland’s Financial Minister has asserted that despite being reliant on international corporations, there is a diverse domestic economy that has developed and therefore he is confident that the Irish economy will grow. Meanwhile, the IMF have flagged Irish economic growth as being likely to take a downturn in the wake of higher inflation. To be precise, the IMF predicts global GDP growth of 3.2pc this year and 2.7pc in 2023, down from 6pc in 2021. This would be the bleakest forecast since the height of the pandemic.

In short, Ireland is in a state of total flux. One thing that can be gleaned however, is that Ireland is less overlooked in terms of its appeal to foreign investors than ever- and is a region with ample opportunity. 

Author: Charlotte Head

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