Michael Fingleton: finally stepped down last week

Michael Fingleton officially retired from Irish Nationwide last week, but his legacy lives on in the tottering building society he built.

There now can be no doubt that Irish Nationwide Building Society is a dead bank walking.

The mortgage provider turned commercial lender registered an eye-watering €262m loss on a €10.4bn loan book in 2008, but evidence of a deep, deadly malaise at the mutual only became apparent last week with the publication of its annual report.

The devastation of income at the once-profitable institution was caused primarily by a €446m bad debt provision, with 11.4% impairments in its commercial loan book.

That is bad enough even without considering the €545m in so-called incurred but not reported impairments (INBR), which will almost certainly become real provisions against income this year.

Those two numbers together, which represent eventual writedowns, just about equal Irish Nationwide's net cash position of €1bn. They are also equivalent to 10% of total loans, meaning one in 10 advances to customers are in trouble.

More immediately, the loan losses have already eroded significant capital. In fact, the building society has already dipped below the minimum capital it is required to hold against its assets to protect against losses. This regulatory violation could cost up to €5m per year – an expense the mutual can scarcely afford, despite its proclamation that the penalty is "not material".

This bravado, a hallmark of former chief executive Michael Fingleton, who finally retired last Thursday after 37 years with the institution, extends to the building society's notional business plan and outlook, both contained in the annual report. This is where the board asserts Irish Nationwide is "systemically important" and that its future as a going concern depends on "the continuation of government support".

This 'not waving, but drowning' moment in the report is a stern reminder to government of the commitments it made last September and a desperate cry for help.

But Irish Nationwide looks beyond saving and the directors must know this. The business plan says the building society is going to reduce exposure to the commercial property sector, but this is 80% of its business. What's left without it? The plan also says the business will focus on funding more of its book from retail deposits, but customer account levels declined last year by about €700m. In an effort to shrink its balance sheet, Irish Nationwide cut back drastically on new lending. Advances fell from €4.3bn in 2007 to just €663m last year. That's a wind down, not a new direction.

Moreover, more than half the loans in the Irish Nationwide portfolio – nearly all of them in the troubled commercial sector – are repayable by the end of the year. As of the end of 2008, when the accounts were verified, the biggest group – €3.2bn worth – was actually due within the first quarter of this year. Given the ninefold rise in bad debts for 2008, coupled with €545m in INBR loan impairments, it is fair to assume these debts have not been fully cleared. The near-term logjam is even bigger then while delinquent loans have almost certainly increased as a proportion of the total book. With so few new loans in the pipeline, the overall quality of the portfolio is bound to deteriorate further by the end of 2009 – perhaps terminally.

And all of this is before we even reach the next bond roll-over date. On 18 May Irish Nationwide has to either refinance or replace €1bn in debt securities. It is the first due date of more that €2bn in debt the society will have to roll over this year. With retail customer accounts actually shrinking, Irish Nationwide will need to replace this money to fund its considerable – if shrinking – commitments. Under the guarantee it should – like the other covered banks which have raised new bonds – be able to manage this.

But the guarantee window is closing. Industry sources say the government guarantee will only make a difference for debt issues completed by June. Beyond that the required terms will fall outside the guarantee period. The society has another €1.7bn or so falling due in 2010 which it will have to refinance or replace too.

While finance minister Brian Lenihan has pledged to guarantee specific issues beyond the original guarantee, it is hard to see Irish Nationwide remaining viable long enough to test the government's commitment on that score.