The recent surge in the profit of Irish banks amid heightened interest rates globally may mask some of the challenges that lenders faced before the sector’s turn in fortunes, according to Central Bank of Ireland deputy governor Sharon Donnery.
“For the last 10 years, regulators had concerns about low profitability in the banking sector and the sustainability of its business models. And while the changed interest rate environment has led to high profitability in recent years, it has not necessarily made bank business models any more sustainable,” Ms Donnery said at an event hosted by Banking and Payments Federation Ireland (BPFI) on Wednesday. “Nor can higher rates be relied on to indefinitely last into the future.”
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The comments came hours after Bank of Ireland reported that its pretax profit rose 5 per cent in the first half of the year to €1.1 billion and the largest lender in the State by assets raised its full-year earnings forecasts.
Bank of Ireland pulled back expectations on the pace at which the European Central Bank (ECB) will cut interest rates this year and as the lender’s own deposit customers continue to be slow at moving cash into higher-rate products.
PTSB and AIB are also set to report interim financial results by the end the week.
Ms Donnery, who is set to leave the Central Bank to take up a senior position at the European Central Bank’s banking supervision unit later this year, said it “remains to be seen” whether banks are adequately investing in their future. While banks have poured billions into updating their technology systems over the past decade, the Central Bank deputy governor said that “digitalisation of retail banking has lagged behind other aspects of our daily lives”.
“And if banks are to continue to perform their important function in a changing and increasingly digital society – they must change too,” she said. “This requires you to transform your strategies, systems and digital infrastructure – to keep pace with the digitalisation of the sector, to ensure banks remain operationally resilient within this environment, and to meet increasing consumer demand and expectations for digital financial services.”
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Still, Ms Donnery said that “it would be remiss not to recognise how much goes right” as the sector deals with millions of transactions a day, even though “it is natural for observers to notice when the system doesn’t work well”.
Challenges posed by structural changes such as climate change and an ageing population to the economy and banks’ balance sheets are also likely to accelerate in the coming years, she said.
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