Irish banks among winners from ‘expected 1.5%’ ECB rate hikes, Deutsche Bank says

Institutions’ earnings are more dependent on interest from loans than most of their European counterparts

Irish banks are among the best placed lenders in Europe to benefit from the 1.5 percentage points in rate hikes likely to be delivered by the European Central Bank (ECB) over the next three years, according to analysts at Deutsche Bank.

That is because Irish banks’ earnings are more dependent on interest from loans than most of their European counterparts, who generate large amounts of their income from fees and commissions.


While AIB's shares have jumped more than 25 per cent so far this year and Bank of Ireland's stock has soared over 37 per cent amid mounting speculation that the ECB will be forced to start raising interest rates later this year, the Deutsche Bank analysts, led by Robert Nobel, said in a report on Friday that the companies' shares could rise by a further 30 per cent over the next 12 months.

“If the ECB raises rates by [1.5 percentage points] as expected, this is only the beginning of Irish bank share price outperformance,” the Deutsche Bank analysts said. “Irish banks are among the most interest rate sensitive banks in the euro area.”


The ECB’s main interest rate has languished at a record low of zero for the past five years, while it currently charges a negative rate of minus 0.5 per cent for excess deposits placed by lenders with it. Irish banks are currently struggling with large amounts of excess deposits.

A Banking & Payments Federation Ireland (BPFI) report published last September highlighted that net interest income accounted for 80 per cent of Irish retail banks' income in 2020, compared to 54 per cent for the wider EU banking sector.


An increase in the ECB’s main rate would automatically boost the income from the Irish banks’ remaining tracker-mortgage books and put upward pressure on standard variable rates.

While the Deutsche Bank analysts estimate that 35 per cent of AIB’s mortgages and 57 per cent of Bank of Ireland’s Irish portfolio are on fixed rates, both banks have entered into contracts with international investment banks to swap much of the fixed interest for variable interest.

Bank of Ireland, which has a larger UK loan book than AIB, has benefited more than its rival from the Bank of England's two rate hikes since early December, bringing its main rate from 0.1 per cent to 0.5 per cent.

While rising interest rates may help the interest income line in banks’ financial accounts, they may also push some borrowers into trouble – leading to lenders having to set aside loan-loss provisions and dent their profits.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times