Abandoned tracker rate of 4.5% had served as a type of loss-leader to woo new customers, writes Simon Carswell

NATIONAL IRISH Bank chief executive Andrew Healy said you did not need to be a mathematician to realise that the bank had not been making money on its low loan-to-value mortgages given the high cost of funding.

The bank has run a prominent advertising campaign to lure customers who have small mortgages by offering low rates.

NIB had until the start of this month been offering borrowers a market-beating tracker rate of 4.5 per cent for customers seeking a mortgage worth 50 per cent or less than the value of the property.

Given that the bank was paying 4.8-4.9 per cent for its money, NIB was losing money on a mortgage product in a bid to maintain a competitive edge over its rivals.

Mr Healy saw it as "a sensible strategy" to attract new customers so they could see the range of other products offered. He used a sales analogy from another industry to explain. "We hope that they will buy our plasma-screen television at a discount so they will buy our surround sound system as well."

The credit crunch has driven up the raw material cost of money to the banks. NIB became the last Irish lender to raise its rates last month, increasing its tracker rates by 0.4 of a percentage point.

The bank revealed in its half-year results yesterday that it had attracted 7,000 new customers in the first six months of the year.

Mr Healy said the bank had one of the lowest risk mortgage books around and that its mortgages had increased 22 per cent. He said the bank was attracting a large share of switcher mortgages.

Much like AIB and Bank of Scotland (Ireland), NIB's profits have been hit by the economic downturn and rising bad debts. Loan loss provisions rose sixfold mostly on increased bad debts to housebuilders. The bank expects losses to rise further. Selling low-cost mortgages at a time of high bank costs might seem enough of a challenge. However, NIB is entering another tough sector - it will launch its life and pensions business, Danica Life, next month, when life and pensions are down 22 per cent.

Would NIB's owner, Danish bank Danske, be interested in buying another Irish bank given their current low valuations? "Acquisitions are not on the table right now," he said.