Irish banks could push mortgage rates ‘significantly higher’ if needed – Goodbody

Irish banks would be able to hike mortgage rates much higher if they came under pressure to boost interest on deposits, analysts at Goodbody Stockbrokers said, as they have not fully passed on European Central Bank interest rate increases so far.

AIB, Bank of Ireland and Permanent TSB have barely moved interest rates for savers over the past year even as the European Central Bank has hiked rates by 3.75 percentage points over that same period. While the three Irish banks have passed on much of those increases to borrowers, there is still scope to further boost rates, Goodbody analysts John Cronin and Ronan Dunphy said.

Irish lenders are traditionally seen as being especially vulnerable to interest rate movements, yet “we think the market is not fully appreciating the likelihood that Irish banks ought to be relatively less rates-sensitive in response to declining base rates,” they said in a research note on Monday.

While Goodbody expects Irish lenders to remain slow to pass on rate changes to savers compared to other countries, the broker said it does not see any sign of potential political interference in the issue, as has been the case in other countries. Even if lenders did end up having to push up deposit rates, “there is scope for the Irish banks to push front-book mortgage rates up significantly higher,” Mr Cronin said.

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The Goodbody report comes a month after AIB said it expects its net interest income to exceed €3.3 billion in 2023, compared to its previous forecast of about €3 billion as it continues to benefit from rising central bank rates. Bank of Ireland and Permanent TSB have also seen net interest income increase sharply for the same reason. Ireland’s banks derive most of their profits from interest rates, although they are working to boost earnings from fee-based products such as wealth management, which are seen as less volatile.

[ More pain looms for mortgage holders as interest rate hikes set to continue ]

“We have not seen full pass-through from a fixed and variable rate mortgage pricing perspective, and we therefore see less risk of rate reversals on fixed and variable mortgage stock and flow if base rates start to reduce,” Mr Cronin said. “Demand and term deposit rates remain very low relative to where base rates reside, and any pressures that could emerge to push up deposit pricing materially further... will potentially lessen considerably if base rates start to go into reverse,” he added.

AIB shares fell 0.3 per cent on Monday while Bank of Ireland slid 1.1 per cent. Permanent TSB added 3.7 per cent.

On State ownership, Goodbody sees the Government’s holding in AIB dropping below 50 per cent by autumn compared to just under 53 per cent now. On average, the State has been selling off about one per cent of its holding per month, but that could be increased through share placings, the broker added.

Both AIB and Bank of Ireland could boost shareholder returns next year, with the two banks expected to get the green light to start paying out hundreds of millions of euro worth of excess capital to investors. Mr Cronin and Mr Dunphy calculate AIB could have about €779 million of excess capital by the end of 2023, while Bank of Ireland may have about €603 million. Those returns, though, are more like to be a “multiyear process rather than a ‘big bang’”, they said.