Merger most foul: BoSI chief executive in Ireland Joe Higgins has ultimately been managing a wind-down

When former UK prime minister Gordon Brown arranged the marriage of Lloyds Banking Group and HBOS amid the meltdown in the global financial markets in 2008, Bank of Scotland Ireland (BoSI) found itself the unwanted stepchild of parents facing difficult times.

Lloyds became the new owner of billions of euro of distressed loans to some of Ireland's biggest and most vulnerable property developers, including Liam Carroll and Bernard McNamara and its Irish operations quickly became a drain on Lloyds's already-under-pressure balance sheet. The UK lender was ultimately forced to use precious resources, including money it received from a British taxpayer bailout, to top up BoSI's dwindling capital by €4.5bn.

As the Sunday Tribune revealed last week, Lloyds has finally pulled the plug on BoSI. The lender will give up its Irish banking licence and place its remaining €30bn or so of loans in run-off. While most of the 840 employees will transfer to the third-party company that will manage the winding down of the bank, it effectively means more than 1,700 BoSI employees will have lost their jobs by the end of this year.

It was clear from the time of the Lloyds-HBOS merger that BoSI was never going to be in the long-term plans of the new Lloyds Banking Group. Lloyds had no standalone businesses here and the BoSI situation was going from bad to worse – about 45% of its total loan book was impaired by the end of June 2010.

"Lloyds were shocked when they came in and looked at the loans," said one former senior employee.

Under Mark Duffy, who headed the operation for more than a decade, BoSI expanded from its core corporate lending model under the Equity Bank brand to a challenger bank that changed the Irish mortgage market by slashing interest rates and taking on the dominance of AIB and Bank of Ireland. His decisions to purchase ESB's retail shops in 2005 for conversion into Halifax branches and to ramp up the bank's exposure to developers, including backing McNamara's €288m takeover of the Burlington Hotel in Dublin, saw the bank's share of the Irish market grow.

As the credit crisis unfolded in 2008 it was clear that BoSI was under severe pressure. The new Lloyds management became increasingly concerned about the operation and its exposure to developers and took an impairment charge of €533m – huge compared to what domestic lenders were reporting at the time.

Impairments continued to rise, jumping to €3.2bn in 2009, resulting in losses for the bank of €2.9bn for the year. The level of impairments has shown no sign of abating with a further €1.5bn set aside for loan losses in the first six months of this year, Lloyds' most recent figures reveal.

As the Sunday Tribune reported extensively in the last year, Lloyds has been preparing an exit for some time. Not long after the Lloyds-HBOS merger in late 2008, Duffy was asked to undertake an extensive strategic review, dubbed "Project Primrose", to determine the future of BoSI.

The outcome of "Project Primrose", which led to the Halifax closure, and the orders coming from the UK, bitterly divided the executive committee which runs BoSI in Dublin, leading to the departures last summer of head of retail banking Antoinette Dunne and head of business banking Paul Cunningham. Sources familiar with the developments at the time said this was a clear signal BoSI had no future in Ireland and that chief executive Joe Higgins was ultimately managing a wind-down.

There was a late summer reprieve in 2009 when a private equity buyer, understood to be Blackstone, was said to be interested in buying at least part of the business, but this ultimately came to nothing.

Sources familiar with the situation said consultants had been asked to review the whole Irish operation with a view towards closing it if a buyer didn't bite.

The 44-strong Halifax branch network finally went this year, with the branches finally shut at the end of June with the loss of 750 jobs.

That left BoSI with its remaining mortgage customers, a deposit book and an unhealthy exposure to the property market.

An astonishing 90% of the bank's €6bn of property development loans were impaired at the end of June, Lloyds told investors earlier this month. Of its remaining exposure to the property sector (excluding residential mortgages), 45% of the portfolio was impaired.

"They've taken the impairments on the chin. It's something you couldn't say about the Irish banks and it's probably an accurate reflection of what is going on," said one banking analyst.

Lloyds will move strategic and management decision-making to Bank of Scotland in the UK, putting its Irish customers at arm's length. These customers will have to continue to repay loans to maturity or until they are cleared; depositors will need to find another bank for their money.

Lloyds said last week customers would see minimal change in how their accounts are managed. However BoSI will stop providing working capital and wealth management services by the end of the year. This immediately puts its business banking customers under pressure to find new creditors.

BoSI has about 8% of the business banking market in Ireland. Both AIB and Bank of Ireland are shrinking their balance sheets and are unlikely to lend in excess of the €3bn commitments they have each given the Department of Finance.

The plan by BoSI to cease operating brings into question the future of other foreign lenders operating in Ireland. Ulster Bank, owned by the Royal Bank of Scotland Group, is seen as secure given its extensive retail footprint across the island of Ireland. But other, smaller, foreign-owned lenders are under extreme pressure. ACC, owned by Dutch lender Rabobank, National Irish Bank, and KBC are all retreating.

"I have huge sympathy for people losing their jobs but it is inevitable and I think we are going to see further contraction of the Irish banking market. We are going to see a zombie banking sector. Banks are going to become like virgins and unicorns; extremely rare," said one senior financial markets commentator.

BoSI in numbers

€13.3bn – commercial and development property exposure

€4.5bn – capital required from Lloyds

€2.9bn – pre-tax loss in 2009

€1.5bn – impairment charge in first half of 2010

€340m – paid by BoSI for ICC Bank in 2000

€272m – record profits made by BoSI in 2007

€120m – amount paid for ESB electrical shops in 2005

€2.75m – paid to departing directors in 2009

12,500 – size of BoSI head office in square metres

840 – people currently employed by BoSI

750 – jobs lost in Halifax closure

44 – Halifax branches closed in June