The three remaining Irish retail banks saw their combined net profits soar 18 per cent in the first half of the year to €2.05 billion, helped by elevated interest rates as central banks continued their fight against the scourge of inflation, according to results released by each in recent days.
The surge over a five-year period is even more stark, with profits up almost 240 per cent from a total €608 million posted by AIB, Bank of Ireland and PTSB for the same period in 2019. That was at a time when banks were dogged by seemingly interminable low rates and muted demand for loans.
The total assets of the banks have only grown by a third over the five years, to €325.5 billion, helped by the trio carving up most of the loans of Ulster Bank and KBC Bank Ireland as those rivals quit the market – even as households and small businesses continued a post-crash trend of repaying loans at a great pace than taking on fresh debt.
But a huge part of the growth has been down to savers wheelbarrowing cash into banks and the lenders, in turn, turning those liabilities into assets largely by depositing the otherwise idle money with the Central Bank. And what assets the deposits have turned out to be.
Just over two years ago, banks were being charged 0.5 per cent for these deposits as the European Central Bank (ECB) pursued a negative rate policy to try to reboot then-low inflation. Virtually all of the deposits are now earning the current 3.75 per cent ECB rate – albeit it is down from a peak of 4 per cent, before the ECB cut headline rates in June.
Bank of Ireland had €28 billion on deposit with the Central Bank at the end of the first half. AIB had almost €31 billion. PTSB didn’t offer a breakdown in its interim report this week, because its surplus cash is much lower than its rivals. But the Central Bank would account for the vast majority of the €2.81 billion of “loans and advances” it had with AAA-rated banks. Between the three, you’re talking about over €60 billion.
The problem is that 88 per cent – or about €120 billion – of the €138 billion of cash households have with banks in Ireland are lying in current and on-demand deposit accounts as of May, according to Central Bank data. The average rate these earning is 0.13 per cent – among the lowest on the euro zone.
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The three banks each raised its headline rate for certain deposit products last autumn to 3 per cent. But the level of inertia among customers has even surprised the banks.
“There’s a lot of funds sitting in current accounts that would be higher than you’d see in other jurisdictions,” Bank of Ireland chief executive Myles O’Grady said on Wednesday, after his bank reported results.
AIB executives were saying this time last year they expected that a deluge of customers flooding into higher higher-rate fixed-term deposits would result in the bank paying out the equivalent of about 30 per cent of heightened ECB rates to depositors by the end of 2023.
On Friday, its chief executive, Colin Hunt, said it would likely be only about 15 per cent by end of this year, which stands as one of the lowest such ratios – known in banking jargon as deposit betas – in Europe.
He offered his own view for the lethargy to The Irish Times even as AIB, he insists, markets its higher-rate products “very heavily” to customers.
“I think there’s still a bit of an overhang from the great financial crisis in that there seems to be quite a significant liquidity preference in Ireland,” he said. In other words, the Irish like to have their savings where they can get hold of them quickly. “That goes somewhat to account for the lower-than-expected flow to fixed rates.”
Why would banks bother to hike on-demand account rates when the vast majority of customers seem happy to just accept them?
Whatever the reason for customer inaction, it has helped AIB and Bank of Ireland to raise their net interest income forecasts for this year. (The slower-than-expected pace of ECB rate cuts this year has also propped up the bank’s forecasts.)
If you are bothered by the bumper profits the banks are making and still have a sizeable amount of cash in low-yielding accounts, then it’s on you.
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Analysts do expect that households will continue to slowly shift money into term accounts over the coming years – even though the headline rights are likely to go down as the ECB lowers official rates.
AIB’s Hunt said on Friday he expects that his group’s loan-to-deposit ratio, which stood at 63 per cent in June, will also rise gradually.
He reckons that households and businesses, which have been lowering their aggregate debt burden for the past decade and a half, seem to have reached an “inflection point” somewhere between the third quarter of least year and the first quarter of 2024 and are now borrowing more than they’re repaying.
“I think the multiyear deleveraging of the Irish economy,” he said, “may well be over”.
But there have been a few false dawns on that front in the past, too.
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