Irish banks’ decision to raise mortgage rates far more slowly than their European peers as the European Central Bank (ECB) ratcheted up rates over the past year was cited by Dutch merchant bank NIBC as a source of frustration before it pulled the plug on its funding of a planned new entrant to the Irish home loan market.
NIBC’s decision left a host of high flyers in Irish business circles nursing the loss of significant investment in MoCo, which had been talking to An Post about offering mortgages here. In an email to those investors, the Dutch lender complained about the “persistence of irrational pricing” at Irish banks.
The problem for NIBC is that while Irish banks were funding mortgage lending largely through their significant deposit basis on which they were raising rates even more slowly than on the lending side, if at all, NIBC did not have access to such cheap money.
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In that sense, the Irish lenders’ caution in raising mortgage interest rates here could be seen as a defensive move to keep competitors out of the market.
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A report from Standard & Poor’s (S&P), published on Friday, shows why that might be. It predicts that AIB and Bank of Ireland will be two of only four banks among Europe’s 50 largest lenders likely to report a net interest margin above 3 per cent this year, up strongly on the 2022 figures.
A key part of the reason for this is the difference in how Irish banks have passed on higher ECB rates to borrowers and savers. While the average across the euro zone has been for 20 per cent of ECB rate increases being passed on for the benefit of depositors, in the Republic the figure is just 5 per cent. Only Cypriot banks have been more stingy with their savers.
Cheap money
The State for some reason has also seen among the lowest movement of deposits from demand deposit accounts to fixed-term savings which offer better, albeit still low, rates. Consequently, the State is expected to move from third across Europe’s largest banks in terms of net interest margins in 2022 to a clear position at the top of the table this year and next.
S&P says net interest income at Irish banks will surge by close to 40 per cent this year — again ranking it first by that measure in the euro zone — compared to growth last year in line with the average of 17 per cent across Europe’s top 50 lenders, although it cautions that the figure will stagnate in 2024.
All this means that, for now, Irish banks have ready access to cheap money from their depositors, leaving them well placed to frustrate the likes of NIBC.
