Increased competition has tightened profit margins for Irish banks selling mortgages, but a new report confirms that it continues to be a highly lucrative business for the sector.
Davy Stockbrokers states that while margins earned by the banks from the interest rates charged on mortgages have been significantly eroded over the past year, the sector has very much taken this in its stride.
According to analysts Emer Lang and Scott Rankin, positive trading statements from the banks in recent months continue to signal very strong growth in mortgage lending and good earnings growth.
Mortgage debt in the Republic reached more than €108 billion at the end of May, which is a 28 per cent increase year on year.
Bank of Ireland is the biggest mortgage lender with 20 per cent of the market and a loan book of €19.3 billion. Irish Life & Permanent is the second biggest at 18 per cent, followed by AIB at 17 per cent.
Davy estimated that these banks would earn an average yield of about 1 per cent this year, which is down from levels of about 1.2 per cent.
However, it pointed out that apart from the income earned from the mortgage books, it was cross-selling, through which the financial institutions can generate revenue from mortgage customers, that also impacted on the overall profitability of residential mortgage lending.
The report said that notwithstanding the upbeat noises from the sector, investors were concerned about the potential impact of a slowdown in mortgage lending volumes on bank profits.
They are also worried about the impact of intensive competition on mortgage lending margins, while there are concerns about a risk of mortgage holders getting into repayment difficulties against the background of rising interest rates.
Looking forward to 2008, Davy said it was reasonable to assume that gross domestic product (GDP) growth would slow from about 5 per cent in 2007 and that the sector earnings would also slow from the 11.6 per cent it is forecasting.
Consensus forecasts suggest that earnings growth from the European retail bank sector will average at below 8 per cent in 2008. "Barring an impairment shock, we think the Irish sector can readily deliver something similar," the report said.
