Irish banks are cashing in on rising interest rates, which help them widen their profit margins. Bank of Ireland has announced strong profits in the first half of the year, following on from AIB last week. But while the lenders are starting to increase deposit rates, they have been slow to do so, profiting from a lack of competition in the market and also the inertia of their customers in seeking better deals.
Both of the main banks have balance sheets weighed down by customer deposits, a costly position during the long period of low interest rates and particularly when the ECB cut its deposit rate into negative territory. This meant the banks were losing money from the deposits they held. But with the ECB deposit rate now at 3.75 per cent, the banks are cashing in, with the return they are paying to depositors well below this level. Add in strong mortgage demand and profits have jumped.
It is important to have a solid banking sector where returns are based on strong foundations. And the tighter regulation of the Irish banks, their obligations in relation to reserves and their limited exposure to the commercial property market – the big cause of trouble in the financial crash – give some cause for confidence. But once Ulster Bank and KBC withdrew from the market, the risk increased that limited competition would hurt customers.
It has not all been bad news. As tracker rates increased, as they do automatically as the ECB moves, the banks have been slow to move their other variable mortgage rates higher. Some non-bank lenders have done so, which is likely to leave certain borrowers in difficulty. The increase in new fixed-rate offers has also lagged behind the ECB rise, though this is largely driven by the desire to attract new borrowers. In this part of the market, competition remains quite strong.
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Nonetheless the results from the two banks show that the gap between the average rate they lend out at and the average they pay to depositors has widened. The returns on their core operations have been expanding fast, with Bank of Ireland reporting net profits of over ¤1 billion in the first half and AIB not far behind at ¤854 million.
With margins expanding and limited returns to savers, the calls from the industry for the removal of the bank levy, which expires at the end of the year, are not likely to be heeded. The levy is not an ideal instrument, but the Irish banking market is now increasingly profitable and lacking in competition in some key areas.
Customers have a role to play, too. Inertia has stopped many from seeking returns on their savings. As with home energy packages, or mortgage costs, shopping around can achieve a better deal. Banks are slow to move in offering decent returns to savers and their customers need to do all they can to put them under pressure.