Photographer: Aidan Crawley/Bloomberg

Irish Banks Face Consumers Who Don’t Want Their Biggest Product

  • Mortgage growth stalls as more consumers buy homes with cash
  • Bank of Ireland, AIB make most of their revenue from interest

Ireland’s banks are facing an unusual problem: hardly anyone seems to want a mortgage from them.

Allied Irish Banks Plc said home loans were the slowest growing part of its Irish lending in the first half, while Bank of Ireland issued more than double the amount of new mortgages in the U.K. than in its home market. About 60 percent of homes in Ireland are being bought without a mortgage in recent years, up from 25 percent a decade ago, the central bank said in July, indicating a sharper drop in the market for home loans than analysts expected.

While the nation’s economy has improved, consumers are still focused on paying down debt from the last crisis, as Irish households remain the fourth-most indebted in the European Union. That’s left the mortgage business at about half what analysts estimate should be normal and crimped banks’ ability to show revenue growth ahead of 2017, when the Irish government wants to sell part of its 99 percent stake in AIB and Bank of Ireland aims to reinstate its dividend.

“To a large extent, the banks’ ability to grow their business is out of their hands,” Diarmaid Sheridan, an analyst at Davy, Ireland’s largest securities firm, said in an interview.

Shrinking Books

Both banks have returned to profitability, but their continued issues were highlighted last month, when the two lenders were among the worst performers in the EBA stress tests. Bank of Ireland’s shares have dropped 47 percent this year.

AIB issued 770 million euros ($870 million) of new Irish mortgages in the first half, up 2 percent from a year earlier. Bank of Ireland lent about 600 million euros. The slow growth hasn’t kept pace with loans rolling off their books as they try to shrink troubled assets from last decade. AIB’s total loans fell 9 percent in the period, while Bank of Ireland’s dropped by 7 percent.

At the height of the credit boom in 2006, Irish lenders wrote almost 40 billion euros ($45 billion) in new mortgages. Last year, that figure was 4.9 billion euros, according to industry group Banking & Payments Federation Ireland. A normal mortgage market would be 8 billion to 10 billion euros per year, estimates Philip O’Sullivan, an analyst at Investec Plc in Dublin.

Rate Squeeze

Mortgages accounted for 53 percent of AIB’s total loans, and 58 percent at Bank of Ireland at the end June. Interest income makes up almost three-quarters of AIB’s revenue, and two-thirds of Bank of Ireland’s. Net interest margin, a measure of lending profitability, was 2.1 percent at both firms in the first half, squeezed by the European Central Bank’s negative interest rate policies.

A greater portion of home purchases in Ireland are being made by cash buyers than in the U.K., where they made up 38 percent of the market in the year ended in March 2015.  

“You get a certain proportion of people trading down from a large family home to something smaller, and you also get a large number of investors,” said John McCartney, head of research at the Irish division of property firm Savills Plc. “Given the low interest rate environment, the possibility of securing a 5 percent to 6 percent yield on residential property in Dublin makes for a compelling investment case.”

New home completions are running at barely half the government target of 25,000 per year. That means that there are few houses available to buy, which in turn slows the mortgage market.

The banks’ bonds haven’t been hit by profitability concerns as the lenders bolstered their capital levels. The yield on Bank of Ireland Plc’s April 2020 senior unsecured bonds has dropped to 0.47 percent from 1.34 percent a year ago. The yield on AIB’s March 2020 senior unsecured bonds has fallen to 0.76 percent from 1.6 percent two years ago.

Bank of Ireland declined to comment. A spokesman for AIB referred to comments Chief Financial Officer Mark Bourke made last month. Bourke said the firm is looking at ways to boost non-interest income, including wealth management.

Given weak lending margins and slow growth, banks must find new ways to increase revenue. Bank of Ireland plans to charge some corporate customers 0.1 percent to hold their deposits, a person with knowledge of the matter said last week. While banks normally turn to fee-based businesses to boost income, regulation makes that difficult in Ireland.

“Ireland is one of very few developed countries where the fees the banks are allowed to charge for those products are regulated,” says Davy’s Sheridan. “Every time they want to bring in a new product, it has to be approved by the regulator. Therefore their ability to levy charges for services is quite difficult.”

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