The Competition Authority could force Irish banks to pay interest on current accounts and to offer cheaper rates of interest on overdrafts and personal loans, according to a new report.
Davy Stockbrokers suggests that the Competition Authority's study of the Irish banking sector is most likely to focus on these type of services, which are primarily provided by AIB and Bank of Ireland. The study - which was instigated last September - is expected to take up to a year.
The Republic's two biggest banks control 80 per cent of all current accounts and, despite claims that this is largely a loss-making undertaking, Davy suggests AIB and Bank of Ireland could earn more than €150 million this year from these accounts.
These banks only pay interest on current accounts held by students and on accounts operated by businesses which use their internet banking service. Davy states that at Bank of Ireland alone, the average balance held in these accounts was €643 million on which the bank paid just €13 million in interest to customers.
The report, compiled by analysts Mr Scott Rankin and Ms Emer Lang, estimates the cost of running the Irish money transmission system at €380 million with the banks recovering just 50 per cent of this outlay through bank charges.
By operating these accounts, the dominant banks yield much greater benefits because they have more opportunity to cross-sell products and can also more than cover their costs through the high interest rates charged on overdrafts and by not paying interest to current account customers.
"In our view, competition is least intense in current accounts and unsecured lending to small and medium enterprises and personal retail customers. The real problem appears to be the difficulties associated with competing against two entrenched players with economies of scale and scope while customer inertia and switching costs are also major hurdles," according to the report.
Davy states that its core contention is that the current account relationship, whether corporate or personal, is very profitable for AIB and Bank of Ireland, particularly when the broader spin-off benefits are taken into account. It estimates that if AIB and Bank of Ireland were both to pay a rate of interest of between 1.25-1.5 per cent on all current accounts, this would cost Bank of Ireland €93 million and AIB €84 million.
Davy suggests that other segments of the banking market such as providing services for larger corporates, savings and residential mortgages look competitive. The mortgage market in particular is very competitive compared with other European states.
But Irish banks are among the most expensive for personal loans and credit cards. "The key issue is whether any recommendations from the Competition Authority study will constitute hard or soft remedies and whether the Government will have the conviction to implement them, particularly as it has already introduced a €300 million levy on the sector," according to Davy.
