Davy's forecast is good news for mortgage lenders

THE outlook for Irish providers of residential mortgages is promising, according to an assessment of the market by Davy stockbrokers.A buoyant economy, low interest rates and favourable demographic factors provide "a recipe for steady demand for mortgages and related products, at least over the balance of the decade", according to analyst Ms Emer Lang.Demand for residential mortgages was almost insatiable in 1996 and remains so in 1997, boosted by low interest rates and a strong economy. Interest rates should continue to be a benign influence on the market over the next 12 to 18 months, she forecast. Low interest rates have traditionally been a key driver of consumer confidence.Davy is forecasting that interest rates will remain at current levels over the rest of 1997 and will fall in 1998. Housing completions are expected top exceed 36,000 this year, up from

33,750 in 1996.After 1997, the pace of growth in the housing market will moderate, according to Ms Lang who has made an initial forecast of a 4 per cent rise in housing growth in 1998.Residential mortgage lending has consistently outpaced growth in private sector credit over the last three years. Residential mortgage lending rose by 13.8 per cent in 1994, 13.3 per cent in 1995, and 16.2

per cent in 1996 with year on year underlying growth of 16.6 per cent for the five months to end May. Within the market, the building societies and Irish

Permanent have increased their market shares from 40 per cent to 49 per cent in

1996. But their underlying profit growth, at 13.5 per cent, was below the underlying rate of volume growth because of continuing contraction is largely explained by the movement of deposits form low interest demand accounts to higher interest term accounts, increasing the cost of funds for lenders, while lending rates were held down because of intense competition between lenders.Demutualisation in the British markets has not spread into the Irish market with Irish Permanent the only mutual to convert into a public company, through there has been speculation that First National will take this route. As the smallest building society, Irish Nationwide is the most likely to be involved "in some shape or form in any sector consolidation".But the report points out that current Irish legislation which protects converting mutuals from takeover by a plc for five years if restrictive.Based on profits forecasts,

First National could be valued at between £309 million and £384

million in a flotation, according to the report while the value of Irish

Nationwide could range from £202 million, to £251 million, according to Davy.The report forecast that the four building societies - First

National, ESB, Irish Nationwide and ICS - and Irish Permanent should product average pre-tax profits growth of 10.6 per cent this year with growth of 13.3

per cent in loans and 10.6 per cent in total assets.Margins are expected to fall to 2.35 per cent in 1996, while bad debts are expected to remain around 1996

levels. Returns on equity should improve from 14.56 per cent to 15 per cent, while return on assets is expected to fall from 0.86 per cent to 0.79 per cent.Pre-tax profits at Irish Nationwide are expected to be 6.9 per cent higher at £26 million, while ICS is expected to report a 7.6 per cent increase to £31.9 million. Passing on the benefits of mutuality to members will mean profit growth will be held to 6.4 per cent at EBS with pre-tax profits of

£19.5 million forecast.