Ireland’s three remaining big banks face an opportunity to expand “once in a generation” as their two rivals prepare to exit the market, leaving behind €30bn in loan books and 1m customers.
Rising interest rates and the possibility of faster growth are giving optimism for the country’s banking system, which was rebuilt more than a decade ago after a crisis that crashed the entire Irish economy.
“For the first time in many years we are seeing a green shot of new net credit in Ireland – something that is threatening to come and never came,” said Mark Spain, chief financial officer of Bank of Ireland. This was announced by the country’s largest lender to the Financial Times.
But while bankers celebrate, others fear the market has consolidated too quickly, as the exits of Ulster Bank and KBC could result in an unhealthy reduction in the number of options for customers.
In response to a government review of the industry, the Central Bank of Ireland said the country was in a “position where consolidation has raised concerns about market concentration and competition”.
Brian Lucy, professor of international finance at Trinity College Business School, said Ireland is moving “into an almost elite market” in retail banking. He said that while this would increase profits in favor of shareholders, it was “probably not” positive for consumers or the broader Irish economy.
Like many banks in Europe, the remaining three lenders in Ireland have benefited from rising interest rates and are looking upbeat in their half-year results over the past few weeks.
The state-backed AIB reported a 74 percent increase in profits due to higher revenues. The BoI said it expects the state to return as a shareholder this summer. Permanent TSBs, also backed by the government, reported an increase in lending and are expected to return to profitability this year.
But Irish banks could have an edge over their European peers. Brian Hayes, chief executive officer of the Banking and Payments Federation of Ireland, the industry’s main voice, said 80 per cent of its income comes from interest rate movements, while 20 per cent comes from fees. This compares to a 60-40 split in the European Union, he said.
As inflation continues to rise, higher rate hikes are on the horizon. The European Central Bank hiked interest rates by half a percentage point to zero in July, the first hike in 11 years, following in the footsteps of the US Federal Reserve and Bank of England.
The BoI said it expects an additional €435 million in net interest income if rates rise 1 percent, while the AIB pointed to an increase of €369 million based on its forecast model.
“Clearly, as you look ahead to 2023, there is a very substantial and significant increase in interest income,” said DireMed Sheridan, banking analyst at stockbroker Dewey.
“There’s some inflationary impact on costs, but a lot less than what you’re seeing on the revenue side,” he said. “This is an extremely positive story. We have a big advantage [than EU banks] And we’re probably better protected from some of the downsides.”
The balance sheets of retail banks have also been cleaned up since the crisis. Mortgage lending during Ireland’s “Celtic Tiger” boom – what Hayes calls the “mad year” – pushed the banks to the brink of bankruptcy and forced Dublin to accept a €67.5 billion bailout from the EU and the IMF.
Because of their past negligence, Irish banks have now had to enforce strict controls on mortgage lending. According to the Central Bank of Ireland, the average loan-to-deposit ratio has fallen from 102 percent in 2016 to 78 percent in 2020. This is much lower than the EU banks’ average of 107%.
As the market shrinks, PTSB is particularly poised to benefit from the industry’s dramatic restructuring.
PTSB pledges €7 billion from Ulster Bank and its 25 branches and buys around €600,000 worth of assets from its small business and wealth finance divisions. The deal would increase PTSB’s mortgage business by 40 percent, its small business book by 200 percent and its branch network by almost a third.
“The transformation of the Ulster Bank deal is far more important to us than AIB or the bank [of Ireland]PTSB boss Eamon Crowley told the FT. “It’s more incremental for them. For us it is a significant shift in both our balance sheet, our profitability and our ability to be truly competitive.
BoI is buying residential mortgages from KBC for 9 billion euros and over 4 billion euros in deposits, which it says would increase mortgage lending by 40 per cent. AIB buys 5.7 billion euros of Ulster Bank mortgages and 3.7 billion euros of commercial loans.
Despite growth opportunities, political risk remains a headwind. Sinn Féin, the nationalist party in pole position to win the next election in 2025, has indicated it does not want the state to be completely cut out of the banking sector. It has sparked public policy panics in some parts of the financial sector when a populist party comes to power.
Sinn Féin finance spokesman Piers Doherty criticized AIB’s overturned decision to halt cash services at 70 of its branches, saying if the state allows full privatization “there will be no impact that we could have”. . to other decisions they may make in the future”.
With the exit of state-owned banks, they are also demanding the lifting of wage restraints – one of the last remnants of the financial crisis.
The BoI is preparing to crack down on the ban on executive salary caps and bonuses as the state sells its remaining holdings, which have fallen to less than 3 percent.
Critics of the pay policy argue that it has produced higher levels of management at Irish banks, while lenders in other countries, such as the US, have been able to offer more competitive pay packages. BoI chief Francesca McDonagh will be the latest in a line of senior bankers to leave Ireland when she steps down next month.
More than a decade after Irish banks paid their fees and prospects for big profits improved, Spain’s BoI said it was time to lift wage caps, at least when their bank was fully returned to private hands.
“BoI restrictions should be lifted,” he said. “I think we should be rewarded.”