This year was something of a mixed bag for investors in Irish banking stocks.
While earnings across the sector continued to benefit from elevated interest rates, analysts started to take red pens to forecasts for the next few years as central banks started to ease official interest rates as they gained the upper hand against inflation.
They’re not done yet. Some observers reckon that consensus forecasts for 2025 need to come down further as the European Central Bank (ECB) is currently seen to be on track to accelerate rate cuts over the course of the year.
The mainstream banks also face headwinds from fresh competition from overseas players and a potential economic hit as the incoming Trump administration in Washington weighs tariffs and tax changes that could affect US multinationals in the State. The largest retail bank in the country, Bank of Ireland, also faces the prospect of large costs as UK regulators mull imposing a compensation scheme on car finance providers.
Taxpayer stakes
AIB stood out as a bright spot this year – with its shares advancing 38 per cent – as the Government continued to reduce its stake in the lender, falling below the 19 per cent threshold. Still, Minister for Finance Jack Chambers held off on pressing the button on what, in recent years, had become a routine November sale of a 5 per cent block sale of stock, as voters headed to the ballot boxes.
Will the incoming government revisit a block trade soon after it is formed? After all, the €3 billion or so raised from selling down AIB shares in 2024 was earmarked in the October budget for infrastructure and development. These areas were marked priorities in the manifestos of the main parties.
AIB chief executive Colin Hunt said in October that it is “within the bounds of possibility” that the State will sell its final shares in the bank during the course of 2025.
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But as things stand taxpayers are not currently on track to recoup all of the €20.8 billion crisis-era bailout of the bank. So far, the Government has recovered close to €17 billion – including money raised from the sale of shares, dividends, interest from bailout bonds and bank guarantee fees. Its remaining stake is currently worth about €2.3 billion, leaving it about €1.5 billion underwater on its investment in pure cash-in, cash-out terms.
Denis McGoldrick, an analyst with AIB’s Goodbody Stockbrokers unit, reckons the bank will distribute the equivalent of 100 per cent of its 2024 net profits (estimated at €2 billion) by way of dividends and share buy-backs as it continues to sit on a large pot of surplus capital. AIB’s stock buy-backs in the past two years focused on repurchasing and cancelling shares held by the Government.
McGoldrick sees AIB’s net interest income falling close to 11 per cent next year from a peak of more than €4 billion in 2024, as the ECB, which has cut its key deposit rate by 1 percentage point this year to 3 per cent, continues to down the path of easing rates in 2025. Still, the impact will be somewhat offset as banks’ loan books grow in what remains – for now, at least – a strong economy.
Cost cutting
Shares in PTSB, which continues to be 57 per cent State owned, were under the cosh this year as investors fretted about the bank’s bloated costs, relative to income. The lender set out in October to tackle its running expenses by opening a redundancy programme for senior managers, aimed at cutting about 20 roles, before opening it up more widely to staff in December.
The Financial Services Union estimates that up to 500 jobs could be erased as a result, even if the bank has insisted that these figures are “without foundation”.
Investors say that PTSB’s shares are likely to continue to underperform in 2025 until there is clarity on how much the bank can shave off its cost base.
Still, there is another potential catalyst. PTSB has been working on a project in recent times on trying to convince regulators to reduce the implied riskiness of its mortgage book.
Every €100 of mortgages the bank issues has a so-called risk weighting of more than 40 per cent, against which it must hold expensive capital. The high risk-weighted assets (RWA) density is a result of the bank’s experience of the arrears crisis following the financial crash, when as much as 28 per cent of its mortgages were non-performing.
The risk weighting on new Bank of Ireland and AIB mortgages is in the 20s. Reducing the RWA density of new PTSB mortgages will allow it to write business more competitively. Analysts at Bank of America estimate that PTSB could also free up as much as €270 million of capital under the project – the equivalent of a third of its current market value.
The hope in some quarters is that PTSB could use some of the money to buy back part of the State’s stake, reducing it to a minority holding.
Non-banks and fintechs
In the meantime, however, PTSB is the most exposed domestic player as two foreign-owned banks plan to up the ante on competition in the Irish market.
Spanish lender Bankinter, whose Avant Money unit was responsible for 8 per cent of mortgages issued in the Republic in the first nine months of this year, plans to turn the Irish business into a fully-fledged banking branch of the Madrid group by the middle of 2025 in order to be able to expand services offered, including deposits.
PTSB has, by far, the lowest level of deposits of the three Irish banks, relative to loans, and has had to pay proportionately more to lure customers’ money – compressing its net interest margin.
Meanwhile, Revolut is eyeing a long-anticipated launch of mortgages in the Irish market in the first half of next year, after it launches home loans in Lithuania, where its euro zone banking licence is based. Revolut has more than three million Irish customers, spanning from people who simply use its mobile app to transfer money to holders of personal loans and credit cards from the company.
[ Revolut’s Irish mortgages are a game changer, and the banks know itOpens in new window ]
This year saw the tentative return of nonbank lenders to the mortgage market, after they were squeezed between 2022 and 2023 as a spike in wholesale and bond market borrowing costs put them at a disadvantage to banks, which secure much of their funding from cheap deposits.
ICS Mortgages, which ventured into the owner occupier market under current owner Dilosk in 2019, eased lending restrictions and lowered borrowing rates over the course of the year. Mortgages start-up, MoCo, owned by Austrian bank Bawag, advanced its rollout in the market this year, while Nua Money, a new nonbank lender backed by the Allen beef barons of Wexford, started offering home loans during the summer.
Still, Finance Ireland, which drastically reduced its home loans offering two years ago as interest costs soared, ruled out a return to the mortgage market until “2025 at the earliest” as mainstream banks continue to enjoy a significant funding advantage.
Non-bank lenders are currently competing mainly on ease of service and offering niche products, such as allowing repayment periods for borrows up to the age of 80 and bridging finance. However, they may become more of a force on the pricing front in 2025 as central banks continue to lower official rates, driving down market borrowing costs.
UK car finance controversy
Bank of Ireland’s shares significantly underperformed those of rival AIB this year. They rose only 5 per cent. That was mainly on the back of fears about the ultimate outcome a UK Financial Conduct Authority (FCA) review into potential overcharging across the motor finance industry. Bank of Ireland’s Northridge Finance unit has a 2 per cent share of that market.
The review centres around the historical use of discretionary commission arrangements (DCAs) between car dealers and lenders. DCAs involved lenders setting a minimum rate for car finance but giving brokers, typically forecourt salespeople, the discretion to set higher rates. Commission paid by the lender was linked to rates charged – meaning the higher the rate the car buyer pays, the more the broker gets.
A landmark court of appeals ruling in London in October on three test cases – involving Lloyds Banking Group’s Black Horse motor finance arm; merchant bank Close Brothers; and a unit of South Africa’s FirstRand Bank – set the sector spinning.
[ Bank of Ireland investors fear UK car finance cost will dwarf tracker scandalOpens in new window ]
The court said it was unlawful for a car dealer to receive a commission from a lender, if the customer had not given informed consent. This set a bar higher than required by the FCA. The UK supreme court will hear an appeal against the court of appeals ruling early next year. The FCA currently plans to set out the next steps in its review in May – though that timeline could drift.
Analysts at RBC Capital Markets and Autonomous Research estimate Bank of Ireland now faces between €950 million and €1 billion of total costs over the coming years stemming from the industry-wide investigation. That includes fines, redress and administration expenses.
To put it into context: Bank of Ireland absorbed €340 million of costs for its role in the tracker mortgage scandal, the biggest overcharging affair in Irish banking history.
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