How Irish tracker mortgage scandal costs have topped €1.5bn

Explainer: AIB has to set aside a further €300m for expected compensation claims

I see that AIB has had to set aside a further €300 million for tracker mortgage cases. I thought a line had been drawn under the scandal?

If only. The Central Bank published a final report last July on an industry-wide examination into tracker-mortgage cases that had been going on since last 2015, concluding that 40,100 borrowers had either been wrongly refused their right to a cheap loan linked to the European Central Bank's (ECB) main rate, or put on the wrong rate entirely.

But the regulator said in October that an additional 400 tracker rip-off cases had subsequently been identified.

Officials from the bank told the Oireachtas finance committee at the time that they would expect banks to review how they handled various groups of customers if the Financial Services and Pensions Ombudsman (FSPO), Ger Deering, found against them as he issued decisions on individual complaints.

The FSPO has taken centre stage on the tracker issue in recent months as he deals with contentious cases that have gone through independent appeals panels set up by the banks but where customers were still unhappy.


What group of AIB customers are we talking about here?

When the banks came under immense political and public pressure in late 2017 to finally own up to the scale of the tracker fiasco, AIB identified a group of 5,900 customers who would ordinarily have been entitled to a tracker rate when they came off fixed-rate contracts from late 2008. However, by that stage it had stopped offering tracker products.

The bank only offered this group of customers €1,615 each for what it called a “service failure”, arguing that if they had been put on a “prevailing rate”, which would have reflected volatile market funding conditions at the time, they would have had to pay a prohibitively high annual rate of 7.9 per cent.

AIB revealed on Tuesday morning that the FSPO had made a preliminary decision on one of these cases, finding against the bank.

While the lender said that it is in talks with the Central Bank on “potential appropriate treatment of this group of customers”, the scale of additional money it has set aside to deal with the issue - at €300 million – clearly indicates that it expects a costly bill for refunds and compensation.

What can the impacted customers look forward to?

Brendan Burgess, founder of online consumer forum, who had co-ordinated a campaign around the issue,

It’s estimated that following the deduction of an estimated €60 million of administration costs relating to a redress scheme, customers in this group may be in line for an average of about €40,000 each.

It is likely that the bank will have to put customers who continue to have a mortgage with the bank on a tracker loan at a much lower rate than the 7.9 per cent that it had previously advised was the “prevailing rate”.

AIB was offering tracker rates at 1.25-1.5 per cent above the ECB rate before withdrew this product for new customers in 2008 - so this is highly likely to be a reference point.

In theory, AIB could still appeal the FSPO decision to the High Court, but the fact that the bank's board has decided to take a sizeable provision indicates that it won't go down this route.

What has the tracker scandal cost banks so far?

The latest AIB provision more than doubles what the bank has had to set aside in recent years, to more than €600 million, deal with the debacle.

It’s come as a shock to the stock market, with AIB shares falling by as much as 6 per cent in morning trading in Dublin on Tuesday. Investors are said to be particularly aggrieved, as AIB had insisted when it made the original offer to this group of customers in late 2017 that it was on solid ground and would not have to set aside additional provisions at a later stage.

The total bill for the tracker scandal for the five remaining retail banks in the State is now in excess of €1.5 billion, according to Irish Times calculations, based on public disclosures from the banks.

Could the total cost rise again?

Absolutely – although this group of AIB cases was by far the biggest cohort outstanding. The main group to watch out for is a group of about 200 Bank of Ireland staff who have so far been excluded from the lender’s refunds and compensation scheme.

This staff group claims that the bank reneged on a commitment to move them onto tracker loans after a fixed period in late 2008, at a time when the bank was no longer offering this product for new business. It is understood that the FSPO has not yet made any rulings on individual complaints received from within this group.

Back to AIB. What does the additional provision mean for shareholders, including the State?

First and foremost, Davy analyst Stephen Lyons reckons that the earnings hit that AIB faces from the additional provision will reduce the bank's dividend to 6c for 2019 from 17c for the previous year. That would cut the total payout from €461 million to less than €163 million.

The amount in dividends that the State stands to receive for its 71 per cent AIB stake will fall from about €327 million to €116 million.

More worryingly, AIB was estimated to be sitting on more than €3 billion of excess capital at the time of its initial public offering (IPO) in mid-2017 that would ultimately be returned to shareholders, led by the State.

However, analysts at Barclays had estimated that this had fallen to about €1 billion by the end of last year, as banks deal with higher regulatory capital demands and declining profits as a result of ultra-low central bank rates and lower-than-expected loan book growth.

The additional tracker provisions also erodes the AIB shareholder payback case, though the bank’s comments on Tuesday about maintaining healthy capital reserves levels has suggested to analysts that the bank has otherwise been able to generate higher-than-expected levels of capital last year.