Rate cut will put pressure on profits

First Active, Irish Permanent, TSB and the two remaining building societies, EBS and Irish Nationwide, face savage cuts in profits if they follow the move by AIB and Bank of Ireland and cut their mortgage rates to below 4 per cent.

Mr Oliver O'Shea, analyst with Goodbody Stockbrokers, has estimated that repricing its entire variable rate mortgage book by 1.25 percentage points lower would reduce EBS's pretax profits by 63 per cent to €29 million (£23 million).

EBS, committed to mutuality, has traditionally offered cheaper mortgages and higher deposit rates than the banks. Any erosion of these lower margins would hit EBS proportionately more than a 1.25 percentage point cut in mortgage rates would have on the banks' margins.

EBS has already said it intends to remain the cheapest mortgage lender on the market and maintaining this position would require a rate cut of at least 0.9 percentage points.

But analysts believe that with no outside shareholders to keep happy, EBS will move aggressively to maintain its mortgage rate differential over the other lenders. A cut of 1.25 percentage points would bring EBS's variable rate down to 3.6 per cent.

Irish Nationwide - less committed to mutuality than EBS - faces a potential 25 per cent fall in its profits to €32 million if it matches the mortgage rate cut from AIB and Bank of Ireland.

But the impact on some of the publicly quoted banks will be more significant as the market may now have to rerate the banks to reflect the cut in their margins that a 1.25 percentage cut in mortgage rates will bring.

Goodbody believes the impact on AIB and Bank of Ireland will be negligible given their diversity of earnings and their much lower dependence on mortgage lending, with AIB facing only a 2 per cent fall in profits and Bank of Ireland 3 per cent.

But for First Active and Irish Life & Permanent the impact will be harsher.

Goodbody estimates that First Active faces a 34 per cent fall in its pre-tax profits to €44 million while Irish Life & Permanent faces a fall of 8 per cent, although its Irish Permanent banking division faces a 29 per cent fall in profits to €85 million. So far, the rate cut on margins has not affected First Active and Irish Permanent share prices. But market sources said yesterday First Active in particular might come under pressure as investors price in the impact of the likely mortgage rate cut on profits and earnings.