Cliff Taylor: Its lose-lose for bank customers as AIB starts to exit State ownership

We all paid to bail out the banks after the 2008 collapse via the €64 billion or so pumped in to fill the hole. We may, in time, recoup not far off half of this. But we are paying for the bank collapse in another way, too. As the financial system crawls back towards some kind of normality, the fattening up of bank profits to allow the State’s shareholdings to be sold off has meant Irish bank customers have been getting a raw deal.

Lending rates here are higher than they should be and deposit rates are lower. The bit in between – the margin – is the main source of profits to the banks. AIB made profits of more than €1.6 billion last year, allowing the planned stockmarket float of the bank to go ahead.

Now we need banks to make profits to be solvent, rebuild their reserves after the crisis and pay dividends to their shareholders. In AIB’s case, remember, the State will still hold 70 -75 per cent after the flotation and will hope to benefit from dividends for many years, as these shares are gradually sold off.

Nor are mortgages the only area where the costs to the customer in Ireland are out of line

However, the problem for consumers is that the banking market here has lapsed back into the old-school duopoly, dominated by AIB and Bank of Ireland, with Ulster Bank in the wings and a few smaller players around the edges. It is back to the future – the way it was before the bubble started to inflate. This all provides a good message to sell to investors being lined up to buy AIB shares – they are buying a dominant bank in a growing economy.

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Dig deeper

But is the Irish public paying too much to keep the banks in the money? The numbers say that we are. The latest Central Bank figures show the average interest rate on new mortgages in Ireland is now 3.44 per cent, compared to a euro zone average of 1.88 per cent. When you dig deeper and look at the gap between borrowing rates for mortgages and the cost to the banks of raising the funds to make these loans, Ireland has the fourth-highest margin among the 28 EU states. Banks make an average margin on mortgage lending here of more than 3.1 per cent, while in the UK it is 1.6 per cent.

Nor are mortgages the only area where the costs to the customer in Ireland are out of line. The latest report from the National Competitiveness Council, published during the week, identified the high cost of credit to business as a key problem. It found that Ireland had the fourth-highest SME interest rates on bank overdrafts and credit lines in the euro zone. In particular, the interest rate in Ireland on loans of up to and including €1 million was almost double the euro area average rate for new business, and rates charged here to business tend to be much more volatile than elsewhere.

All this has helped the two big banks to return to handsome profits, with AIB's intention-to-float document clearly outlining its healthy margins

Savers are also hit. Deposit rates are on the floor all over Europe,but the average interest rate on a deposit account here at 0.1 per cent is below the euro area average of 0.42 per cent. We are getting caught both ways.

All this has helped the two big banks to return to handsome profits, with AIB’s intention-to-float document clearly outlining its healthy margins. With limited signs of additional competition entering the Irish market and the banks’ investors looks for a return, do not expect this to change.

Default rate

A 2015 Central Bank study found a few reasons why mortgage rates here were above the average. One was the higher average risk of default on loans after the crisis, a factor that should now start to become less important as non-performing loans become a smaller proportion of the total. The second was weak competition. The third reason was constraints on bank profits from the legacy of the crash and the need to build up reserves. One key issue, here of course, is the large tracker mortgage books held by the banks on which interest rates remain at rock bottom levels.The higher rates paid by standard variable mortgage borrowers are, in effect, partly subsidising these loans.

This Government and its predecessor have had to face both ways at once on this issue. On one side ministers have given some support to the political pressure on the banks to cut their standard variable mortgage rates. Minister for Finance Michael Noonan even called in the bank chiefs a few times, with some limited results in terms of lower standard variable mortgage rates.

Irish consumers have been squeezed on the road back to bank profitability and the AIB flotation

However on the other side, the Government has wanted to keep bank profits on the up. The State has already cashed in most of its Bank of Ireland shares and has long planned to start selling down AIB.

Slowly repairing

The Government story has been that the banks were slowly repairing and that in time the market would return to normal and new competition would bring down costs to borrowers. But banks have been withdrawing from the Irish market, not arriving and the wait for new players has started to resemble the famous Beckett play.

Meanwhile the new normality looks very like the old banking duopoly. In talks with potential investors the big investment banks advising AIB and the Government will have underlined AIB’s strong position in the market and won’t have been talking up the prospect of any more competition.

At least the proceeds of the AIB float will come back to the State, albeit that there is huge debate on how they should be used. But Irish consumers have been squeezed on the road back to bank profitability and the AIB flotation. And there is no sign of this ending any time soon.