IRISH MORTGAGE borrowers have not had it nearly as bad as their counterparts in the UK when it comes to shouldering rising mortgage costs, according to the chief executive of Bank of Ireland.
UK banks had passed on the full rise in the “raw material” cost of money to their customers, but Irish banks had not done so, Brian Goggin claimed at the presentation of the bank’s full-year results.
The cost of borrowing money over three months in euro – the benchmark for mortgage lending – has mushroomed from a 0.1 per cent margin above the European Central Bank base rate of 4 per cent to its current level of about 0.8 per cent over the rate.
Mr Goggin said Irish banks had passed on about half of this increase (0.35-0.4 per cent) to customers and that banks were likely to pass on “half that again” (0.17-0.2 per cent).
Chief financial officer John O’Donovan said it was “a reasonable expectation” that the cost margin over base rate could fall to 0.4 per cent by March of next year, based on forecasts he said had proven reliable in the past.
However, with no end in sight to the credit crisis, the bank said it would be “tempering” its costs but would not attempt to reach its cost-income target of 50 per cent by March 2009 as planned.
The bank has reduced its cost-income ratio to 51 per cent from 60 per cent since its cost-cutting programme began in 2005. This has brought annualised savings of €145 million and a reduction in employee numbers a year ahead of schedule, but the bank has said reaching its ratio target of a percentage in the mid-40s “may take longer than previously indicated”.
Mr Goggin said this was due to increased investment in areas where the bank has reaped rewards, such as its joint venture with the UK Post Office, which enjoyed a 92 per cent rise in profit last year. “We would be nuts not to continue to invest in that kind of growth just to meet a cost-income target,” said Mr Goggin.
The bank has been criticised for cutting costs in another area, however – staff benefits. Staff and the Irish Bank Officials’ Association reacted angrily yesterday to the bank’s decision to cut the staff share issue from 6 per cent of an employee’s salary to 3 per cent this year. Members of trade union Unite are considering balloting for industrial action over the issue.
Mr Goggin said the share issue to staff was “fair and equitable”.
Analysts tended to agree with Mr Goggin’s view of the bank’s full-year results as “a good outcome in what was a challenging year”.
The bank also managed to dispel any concerns that it would be approaching shareholders to raise more capital in a rights issue.
“That issue has been knocked on the head in a major way,” said Davy analyst Scott Rankin.
The bank has raised its equity tier-one capital ratio – the key indicator of a bank’s ability to absorb unforeseen losses – to 6 per cent, if UK measurements are used.
“Six is the magic number,” said Mr Rankin. “Ratings agencies would want a cushion over the benchmark of 5 per cent.”
The bank has not seen any material rise in impaired loans. Its bad debt charge rose to 0.14 per cent of loans (excluding debts linked to subprime-affected assets), from 0.09 per cent. The bank expects this to increase to 0.25 per cent.
New lending rose 21 per cent on a constant-currency basis and the bank expects low double-digit percentage loan growth this year.
Despite falling property prices at home, the bank said negative equity was “absolutely minuscule” among its borrowers, with 100 per cent loans slowing dramatically in its 2008 fiscal year. These mortgages account for €980 million of its €27 billion Irish mortgage book. The bank had “zero loan losses” on Irish mortgages and did not expect this to rise significantly, even if banks do decide to pass on more costs to their borrowers.
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