Planned departures from Ulster Bank and KBC Bank Ireland the Irish market has been widely considered poor to compete given that it accounts for about 25% of home loans. Especially at a time when the average new Irish mortgage rate remains well above the eurozone norm.
Irish banks have long been bleating about the impact on rates of having to hold much higher levels of high value capital against mortgages as a standard European bank, a legacy of losses incurred by lenders after property collapse.
In an interesting analysis Eamonn Hughes, a banking analyst at Goodbody Stockbrokers, which is being acquired by AIB, has been busy with his calculator piecing together the building blocks of mortgage rates.
Hughes estimates that the average mortgage rate in Ireland is 2.63% among the three listed banks, compared to 1.31% in the EU. If you add the commission that is usually applied to European loans, the average rate in the EU rises to 1.58%.
The amount of capital in the republic is equal to 0.5 percentage points of the mortgage rate, which is 2.6 times higher than the EU indicator. The cost of funding in Ireland is 0.4 points, almost a third higher, while the cost of loan impairment is 0.2 points at the local level, compared to 0.12 points in the EU.
But the real difference lies in running costs, including personnel, IT, fees, and other general overhead costs. Operating expenses are 1.05 points of the average Irish mortgage rate, Hughes estimates, compared to 0.65 points for the EU.
The analyst believes that Irish banks receive 0.47% of the profit from mortgages. Although this is above the EU norm of 0.32%, the profit margin in Ireland is lower at 18%. European banks generate a margin of 24% at their average total interest rate. “Irish mortgages do not bring super profits,” he insists.
If a Permanent TSB as well as Bank of Ireland scale up by taking on most of the mortgages of Ulster Bank and KBC Bank Ireland, at a time when the housing market is dysfunctional, they can cut operating costs and pass on some of the savings to borrowers. At least that’s a theory.