ECB Rate Cut May Cost Irish Banks $203 Million in Revenue

Ireland’s three biggest mortgage lenders face a 151 million-euro ($203 million) cut in annual revenue following the European Central Bank’s decision to cut its benchmark interest rate to a record low.

Bank of Ireland, Allied Irish Banks Plc and Permanent TSB Group Holdings Plc have extended 50 billion euros of mortgages with repayment rates linked to the rate, an analyst at Merrion Capital in Dublin, said by e-mail today. The ECB yesterday cut the benchmark to 0.25 percent, down from 4.5 percent in 2008.

“The latest ECB rate reduction represents another earnings headwind for the Irish banking sector, especially given their exposure to low-yielding tracker mortgages,” said Callaghan.

The hit comes as Irish banks try to widen their lending margins and return to profitability after they almost collapsed during the financial crisis, prompting the state to take an international bailout. Taxpayers hold a 15.1 percent stake in Bank of Ireland and control Allied Irish Banks as well as Permanent TSB.

Bank of Ireland fell 2 percent to 26 euro cents as of 10:40 a.m. in Dublin trading.

The three lenders introduced the mortgages, known as trackers, before Ireland’s property market collapsed in 2008 and their borrowing costs soared. They lose money on the loans because the cost of funding them exceeds borrowers’ repayments.

The mortgages cost the three banks 708 million euros more to fund than they received from borrowers last year, Merrion estimated in July. That’s equivalent to 23 percent of the three lender’s net interest income last year, according to data compiled by Bloomberg.

‘Key Challenge’

The mortgages are a “key challenge” facing the banks, the International Monetary Fund has said, and the Irish government has been trying to reduce the cost of the mortgages to the banks for the past three years.

Options include guarantees “and all sorts of financial engineering,” Craig Beaumont, head of the IMF’s Irish mission, said July 18. Ireland could seek a guarantee for the mortgages from the European Stability Mechanism, the euro-area’s bailout fund. Irish Junior Finance Minister Brian Hayes said yesterday that the issue has yet to be resolved.

Lending margins at both Bank of Ireland and Allied Irish have widened since last year’s low point. Bank of Ireland said Nov. 1 that its net interest margin, the difference between the rate at which it borrows and lends to customers, widened to more than 1.9 percent in the third quarter. This compares with a low of 1.2 percent in the first half of 2012.

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