Ireland’s three remaining high street banks are facing a “once in a generation” chance to expand as two of their rivals prepare to exit the market, leaving €30bn in loan books and 1mn customers behind.
Rising interest rates and the opportunity to grow at a rapid pace are providing optimism for the country’s banking system, which has been rehabilitated after an crisis more than a decade ago that crashed the entire Irish economy.
“For the first time in a number of years, we’re seeing the green shoots of new net lending in Ireland — something that has threatened to arrive and never has quite arrived,” Mark Spain, chief financial officer at the Bank of Ireland, the country’s biggest lender, told the Financial Times.
But while bankers celebrate, others are increasingly concerned that the market has consolidated too quickly, as the exit of Ulster Bank and KBC will potentially create 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 led to growing concerns regarding market concentration and competition”.
Brian Lucey, professor of international finance at Trinity College’s business school, said Ireland was in effect “moving into an almost oligopolistic market” in retail banking. He said that although this would boost profits to the benefit of shareholders, it was “probably not” positive for consumers or the broader Irish economy.
Like many banks in Europe, the three remaining lenders in Ireland have benefited from rising interest rates and sounded optimistic in their half-year results over the past few weeks.
State-backed AIB reported a 74 per cent jump in profits on the back of higher income. BoI said it expects the state to withdraw as a shareholder this summer. Permanent TSB, which is also government-backed, reported an increase in lending and expects to return to profit this year.
But Irish banks could have an advantage over their European rivals. Brian Hayes, chief executive of the Banking and Payments Federation of Ireland, the main voice of the industry, said 80 per cent of their income was generated from interest rate moves, while 20 per cent comes from fees. This compares with a 60-40 split in the EU, he said.
As inflation continues to soar, more rate rises are on the cards. The European Central Bank raised rates in July by half a percentage point to zero, the first increase in 11 years, following in the footsteps of the US Federal Reserve and the Bank of England.
The BoI said it expects €435mn in additional net interest income if rates rise by 1 percentage point, while AIB has pointed to a €369mn uplift, based on their forecasting models.
“As you look into 2023, there is clearly a very material and significant upside to interest income,” said Diarmaid Sheridan, banking analyst at stockbrokers Davy.
“There are some inflationary impacts on costs, but much less than you’re seeing on the revenue side,” he said. “It’s a hugely positive story. We have some greater upside [than EU banks] and we’re probably better insulated from some of the downside.”
Retail banks’ balance sheets have also been cleaned up since the crisis. A mortgage lending spree during Ireland’s “Celtic Tiger” boom — what Hayes calls the “madness years” — brought the banks to the brink of insolvency and forced Dublin to accept a €67.5bn bailout from the EU and IMF.
As a result of their recklessness in the past, Irish banks now have to apply stringent checks to mortgage lending. The average loan-to-deposit ratio is down to 78 per cent in 2020 from 102 per cent in 2016, according to the Central Bank of Ireland. This is significantly lower than the EU bank average of 107 per cent.
As the market contracts, PTSB in particular is poised to benefit from the industry’s dramatic restructuring.
PTSB is buying €7bn of mortgages from Ulster Bank, 25 of its branches and about €600,000 in assets from its small business and asset finance divisions. The deal will boost PTSB’s mortgage business by 40 per cent, its small business book by 200 per cent and its branch network by nearly a third.
“The transformation of the Ulster Bank deal for us is much more substantial than, say, AIB or Bank [of Ireland],” PTSB chief executive Eamonn Crowley told the FT. “It’s more incremental for them. For us, it’s a substantial change in both our balance sheet and in our profitability and indeed our ability to compete.”
BoI is buying €9bn of residential mortgages from KBC and more than €4bn of deposits, which it said would also boost its mortgage lending by 40 per cent. AIB is purchasing €5.7bn of Ulster Bank mortgages and €3.7bn of commercial loans.
Despite the growth opportunities, political risk remains a headwind. Sinn Féin, the nationalist party in pole position to win the next elections due in 2025, has suggested that it does not want to see the state exit the banking sector entirely. This has fuelled nervousness in parts of the financial sector about public policy if the populist party takes power.
Pearse Doherty, Sinn Féin’s finance spokesperson, criticised an aborted AIB decision to withdraw cash services at 70 of its branches, saying that if the state allowed a full privatisation “there will be no influence that we can have . . . over other decisions that they may have in the future”.
As the banks emerge from state ownership, they are also seeking to remove restrictions on pay — one of the last remnants of the financial crisis.
BoI is preparing to push back against executive pay caps and a ban on bonuses as the state sells down its remaining holding, which has fallen to less than 3 per cent.
Critics of the pay policy argue that it has led to churn at senior executive levels of Irish banks, while lenders in other countries, such as the US, are able to offer more competitive remuneration packages. BoI’s chief executive Francesca McDonagh will be the latest in a string of senior banker departures from Ireland when she stands down next month.
After more than a decade of Irish banks paying their dues and as prospects for higher profits improve, the BoI’s Spain said now was the time to drop limits on pay, at least when his bank returns fully to private hands.
“The restrictions should be removed for BoI,” he said. “I think we should be rewarded.”