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Inside The World Of Business

Rate hike shows capital is only half banks’ problems

THE NATIONAL Asset Management Agency (Nama) may have passed an important milestone this week, but moves this week by Bank of Ireland to increase various retail rates highlights the fact that capital is only half the problem for the Irish banks. The other pressing issue is the cost of their liabilities or, to be specific, the rates they must offer in order to attract the deposits that underpin lending.

Irish banks are now offering rates of 3 or even 4 per cent – on top of a Government guarantee – in order to get in deposits. When and if the guarantee ends next September, they may well have to offer an additional risk premium.

As things stand, the price of deposits means that much of their lending is loss-making and nearly all of their mortgage books are a mess.

The short-term solution has been to increase lending margins everywhere they can. In the case of AIB and Bank of Ireland, this is pretty much everywhere apart from mortgages, where the negative publicity would outweigh the gain given the dominance of their mortgage books by tracker mortgages.

AIB and the other banks can be expected to follow Bank of Ireland’s lead on retail rates and have already pushed through changes in business and other rates. The net result is an increase in the price of credit – which is in short supply anyway – at exactly the wrong time in the economic cycle.

It remains to be seen if the the influx of cheap ECB funds into the banks that will come about as part of the Nama exercise offers any relief. Most doubt that it will.

The only realistic solution according to the banks is to reduce permanently the premium demanded by depositors for putting their money into an Irish bank. And this in effect means de-risking the banks. Economic recovery will do this but, given the influence of the price of credit on recovery, there is more than a little of the chicken and the egg about it.

An alternative, and one that is viewed favourably by the board of at least one big bank, is to sell a significant stake in the bank to a larger group and avail of their cheaper cost of funds.

Credit love affair cools

Austerity Ireland kicked in for the credit-reliant in January, according to the latest figures from the Central Bank. New spending on personal credit cards came to just €732 million during the month – the lowest amount spent by consumers on credit cards since April 2005.

Repayments exceeded new spending by €83 million, taking the annual rate of decline in outstanding indebtedness to 1.2 per cent. Growth in credit card indebtedness only turned negative in November, but it is plummeting fast. “More rapid”, was how the Central Bank described the pace of decline last month.

As recently as one year ago, in January 2009, credit card debt was growing at the rate of 4.4 per cent. For obvious reasons connected to pre-Christmas gorging on credit and post-Christmas guilt, new spending on credit cards in January typically falls back, while repayments tend to nudge upwards. In this context, the Central Bank data for the months ahead will prove interesting reading. Will consumers put their fingers in their ears to talk of Government “turning points” and continue to act cautiously? Or have the past few months simply represented a temporary cooling in the love affair between Irish consumers and credit card debt? In January 2009, the number of personal credit cards in issue was 2,224,000. This now appears to have been the peak. In January 2010, the number of cards stood at 2,170,000.

So even if income-hit households struggle to pay off existing debts, keeping the pace of decline in indebtedness steady rather than spectacular, the declining number of cards in issue indicates that their use is on the wane.

A slot for William Hill?

In 2007, when some independent bookmakers flirted with the idea of introducing casino gaming machines, known as fixed-odds betting terminals, or FOBTs, into their shops, the then minister for justice Michael McDowell warned that the equipment was illegal and would be seized if they went ahead.

To be fair to the bookies, the law dates back to long before FOBTs were even thought of, and was not as clear as McDowell stated. However, the bookies thought better of the plan and instead asked in a pre-budget submission for the machines to be legalised.

Three years on, Irish bookies say they have other priorities. And they do. They are lobbying the Government not to subject their online and telephone businesses to the 1 per cent levy that applies to wagers placed in traditional betting shops. Lobbying for FOBTs at the same time would not be the shrewdest move in the world, particularly given the risk that they might not even catch on in this market.

However, the dream has not died for some players. William Hill, whose results yesterday showed that its punters lose an average of £678 a week in the 8,772 FOBTs that it has in its British shops – where the machines are legal – is quietly hoping new provisions will allow it introduce the equipment.

This is unlikely to happen. The department signalled as much last week, and Opposition politicians, who went to town on the FOBT “threat” two and a half years ago, would have a field day if they were introduced.

Given that William Hill has already closed 14 shops in the Republic, and yesterday described the performance of the other 36 as weak, you’d have to say it was “odds on” that the firm will exit the market shortly, unless the department comes up with something that will make it stay.

NEXT WEEK

The Irish reporting season begins in earnest next week with most attention focusing on the banks. Both AIB and Irish Life & Permanent report their full year figures, along with a number of the biggest businesses on the Irish Stock Exchange, such as CRH, Paddy Power, Kingspan and Grafton.

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