SME Lending

A couple of charts and commentary from recent Macro Financial Reviews published by the Central Bank on non-property SME/corporate lending in Ireland.

Macro Financial Review 2013:1

Irish SMEs and non-financial firms are operating under considerable macro-financial headwinds.  Overall, the sector accounts for 19 per cent of the domestic banks’ aggregate loan book. The value of impaired loans stood at €10.8 billion in December 2012, representing 25 per cent of the SME/corporate loan book, up from 21 per cent of the book at the end of 2011.

Macro Financial Review 2013:2

The exposure of the domestic banks to SME/corporate and CRE portfolios is also substantial, representing 19 per cent and 18 per cent of the domestic banks’ aggregate loan book, respectively. Impairment rates are noticeably higher than residential mortgage portfolios. The latest data indicate that impaired SME/corporate loans have risen from 24 per cent in 2012 Q2 to 27 per cent in 2013 Q3 while CRE NPLs went from 51 per cent to 61 per cent over the same period.

If loans, classified as “watch upper” and “watch lower” by domestic banks are included with impaired loans, the percentage of “vulnerable” SME/Corporate loans in 2013 Q3 rises to 45 per cent while the equivalent figure for CRE is 78 per cent.

27 replies on “SME Lending”

21st February 2011

Dear Mr Corcoran

I am very aware of the strength of feeling on the subject of commercial rents and Fine Gael has addressed this subject in our manifesto as part of a drive to cut business costs by strengthing competition in sheltered sectors.

Specifically, in our manifesto we have committed to pass legislation to give all tenants the right to have their commercial rents reviewed in 2011 irrespective of any upward-only or other review clause.
Please do not not hesitate to contact me if you have any queries in this regard.

Best wishes
Yours sincerely

Sean Barrett TD


‘The Governor of the Central Bank, Patrick Honohan, has said there is no mechanism whereby the stress-testing of Ireland’s banks could lead to increased pressure on Small and Medium-sized businesses.

Minister Noonan says Morgan Kelly warning will be taken seriously
Economist said clean up of Irish banks may lead to section of economy being ‘wiped out’. Neat ‘hospital pass’ to the Guv’nor.

In terms of future GNP [THE ‘real’ metric] one would like to see much more activity in this sector – the crux, and achilles’ heel of industrial policy for the past half century or so.

10th March 2014

Dear Sean

Sorry for the delay in replying to your letter of 21st February 2011.
I understand there is a gang of 17 masquerading as “Ireland First”,which includes two tax exiles, a former Fine Gael Taoiseach and two senior executives of Rehab called Frank Flannery and Angela Kerins would like to meet and discuss this excellent manifesto policy with you.

Best wishes
Yours sincerely

John Corcoran
M.Sc. Economics
London School of Economics and Political Science*


Chart 30 (not displayed n post) of the review linked to above gives the total provision cover ratio, on impaired loans, for domestic banks.
That is the kind of data that is needed by loan category in order to make sense of adequacy or otherwise of bank provisions. But the portents are not good.

Impaired CRE loans, under the veil of limited liability, are likely to return very low recovery ratios. In some part of the country, CRE buildings are now selling for as low as 10% of the cost of rebuilding the units!

Impaired SME loans (non CRE) will have little recovery value. Again the limited liability structure, the examinership laws, and the contingent liabilities for redundancy pay will severely limit any payback on foreclosure.
Both of these sectors stand in contrast to PDH, where a recovery ratio of at least 50% could be expected.

I cannot understand why debt to equity is not government policy in the case of State owned banks, where debt relief is given. The State shareholdings could be managed by Enterprise Ireland, where the raison d’etre for debt relief is job retention.

@ John Corcoran

Good man John, keep it up, at least you have run your shops and employed people, you are dealing with those who never ran anything who only employ family,friends and canvassers to jobs paid for by tax payers. Nothing like a bit of sarcasm to show these people up for what they are and mind you Séan is not the worst!

Ireland still has a criminal Dick Turpin, government enabled attitude, to renting to commercial tenants and that does not even include the UORF “upward only rent fantasies”. They should be made to read “This Time is Different” ‘seven hundred years of booms and busts’! And, they should have to write that sentence out a hundred times or more until it sinks in.

NAMA convinced the government (not hard) that their rent roll would be in danger and then pension funds told them things would get dramatically worse if they brought rents down to market levels. So, it was NAMA returns and pensions pots versus jobs and reality and no need to say what was the outcome other than same old, same old. i don’t even believe that they have abolished UORR for some. What was required was rents to go on a downward trajectory so that SME’s and others could pay down loans instead of being bled white as they still are.

Of course in Tír na Nóg Ireland the narrative supported by all and sundry is all about the gravity defying “recovery” of the Irish economy. We have escaped the gravitational pull of debt sevitude, unemployment, mortgage defaults and SME bad loans and we are now floating away happily in outer space until we are brought back down to earth with a mighty thump or are just ignored and left to burn out in the atmosphere. Let’s hope Morgan Kelly is wrong but as we know, he has this uncanny knack of being prescient.

Property Week 20th May 2011
Minister claims change of law is vital solution to Irish debt crisis

Retrospective rent reviews must be put in place to deal with Ireland’s “economic emergency”, says justice and law reform minister Alan Shatter. Shatter argues that changing the law is fundamental to Ireland’s recovery, despite claims in the property industry that the policy is illegal, will suppress property values and has brought the investment market to a halt.

”We only [retrospectively change the law] when there are serious public policy reasons for doing so. We’re talking about the continued economic viability of this state, which has almost 15% unemployment,” he tells Property Week.

”We are receiving substantial financial assistance from the European Central Bank and International Monetary Fund, have a budget deficit of €18bn that has to be addressed and are essentially in the middle of an economic emergency.”

Fine Gael and Labour made the election pledge, which would result in rents being reviewed downwards, before their formation of the coalition government in March to help retailers and tackle unemployment.

@ John Corcoran

This is the same minister that has just put in place, after a time lapse of six years, a body of written law for personal insolvency which insolvency practitioners Grant Thortnton say only 1 person out of every 7 that needs to will be able to access the process. Blackhall place are even more pessimistic they say only 1:10 will benefit from the legislation. It sounds however as if Shatter has woken up from a deep sleep and is reading a different script entirely from Noonan, Kenny, Gilmore.

I am glad to hear the minister for justice say that laws can be brought in that change the nature of contracts because many such laws are going to be required. Presently we are heading back to a feudal type society where the family is being used as the main widget in a game being played by revenue commissioners that will culminate in huge political change in this country.

@ John Corcoran

Oh wait! jaysus I just see the date was May 2011!!!! Scratch most of what I have said above and replace with “minister reverts to type!”.

Italy has a big SME owner suicide rate. Especially in the North. In 2013 5000 Italian SMEs declared bankruptcy.

Massimo Mazzucchelli runs a group for businesspeople in debt trouble

It’s the same thing as in Ireland- interlocking debt- say A owes B money, B owes similar amount to C who needs the money to repay D .

There was a programme about this in Meath a while ago on RTE.
“Small fry” so not modelled anywhere. You end up with sexy bond yields but zero growth. Again, an incentives issues. Incentives and modelling, the Achilles heels of modern economics.

Draghi has to start buying up these loans because the damage is appalling. A lot of decent businesses are going under.

So when it was reported Fiona Muldoon said 50% of SME loans are impaired, it is actually 50% are vunerable?

@rob s

That is correct.


Can anyone cast any light on Morgan’s apparent claim that the ECB intends to embark on an experiment on Ireland which will result in SME decimation via the “calling in” of SME loans categorised as impaired?

One of the points made by Morgan Kelly was the fact that the detail of SME indebtedness is a “known unknown”. The picture seems, however, to be getting a bit clearer.

It is also curious how little attention is being paid to the tax mechanisms which gave rise to the problem in the first place.—Tax-on-Rental-Income-Special-Tax-Reliefs-For-Property-Investment

“Self employed individuals or those who run their business through a limited company and who own their own business premises could charge a rent for the property to the business. Then they could purchase a Section 23 Property and use the special tax allowance on the Section 23 Property to reduce/eliminate tax on their rent from their business property.”

They could and many did! (One wonders if the leases they negotiated with themselves might not have included UORRs but that is probably an unkind thought).

Since the comment gremlin has snatched the original, can anyone explain the “ECB experiment” with “calling in” Irish SME loans which MK referred to?

Not sure I follow.


He didn’t provide huge detail but the according to Stephen Kinsella’s interpretation in the Indo today:

“Prof Kelly’s argument runs like this: following a serious asset quality review, which Europe’s banks haven’t really had so far, the ECB might push for faster, harder and more transparent winding-up arrangements for Irish small and medium-sized enterprises (SMEs). This would be catastrophic for the Irish economy, because most private sector workers are actually SME workers.”

No clearer as to why the ECB would think this would be a good idea – throwing Ireland on front of a bus to make other larger countries deal with their own loan books more effectively? – I don’t know.

The bigger issue for me is still the fact 50% of our SME loans are in arrears – does the CBI have figures on this? I can only find figures on total amounts outstanding with no details on arrears.

MK has had some great insight before notably on the bank exposure to property and Geitner’s reluctance to allow Bondholders burning. If he says that there is a risk that the ECB will force an aggressive clean up of the banking system and a raft of SME liquidation to repay debts then his concern need to be addressed.
Over to you St. Patrick in the downtown office of the ECB.


I looked at that lecture and it seemed an entertaining, low key address with some decent, pithy stuff, aimed at a student audience. Not exactly a chat down the pub, but…

Surely we all know, and it is not news, that:

(i) if the ECB AQR & ST were done properly there would likely be further capital requirements (but consensus is they may wimp out)

(ii) if they did do them properly, a separate decision to stop extending and pretending would be needed before “calling in” loans and crystallizing losses. The effect on SMEs is obvious.

To make this newsworthy, presumably MK believes that (ii) is actually quite likely, not just possible. If so, what is the reason for thinking this?

If (i) were to result in recap requirements, why would a decision be taken to withdraw funding, given that the recaps would be based on provisioning?

Is there some new and particular reason to think provisioning would lead to withdrawal of credit as opposed to write-downs?

Is it not possible in some sectors that companies broken up, property assets sold, business units sold to other operators and cash released to repay borrowings. Is that what MK is driving at? That is a legit question to pose to the CB.

@ seafóid

I have made the point before and I will make it again; unless one is watching what is going on on the pitch, I do not see how one can comment sensibly on the game.

Here is another example!

This has been the German approach from the outset i.e. when it comes to financing arrangements, this must be done by way of inter-governmental agreement, ostensibly for internal constitutional reasons but in reality to ensure an absolute limitation on the level of German financial commitment. Certain observers in the stands (i.e. the UK and Sweden), but without teams in the competition, do not like it and neither, it seems, does the Finance Committee – under the chairmanship of a UK MEP – of the European Parliament.

A suivre..


I saw this story this morning. Once again there is no transparency behind what is going on. It appears that mortgage debt is no rated junior to credit card debt. There is a surprise.
There is so much about this relationship between IMHO and the banks that is interesting? Am I entitled to a refund too?

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