ALMOST ONE in five business customers of Bank of Ireland face higher repayments on their borrowings after the bank, in a major departure, unilaterally changed how it prices interest on the loans.
The bank will increase interest rates on business loans based on a new calculation linked to its own costs of raising money through customer deposits, the money markets and other funding sources.
The move is a dramatic change from the regular pricing of business loans off the inter-bank rate, the traditional cost of funds on which banks set loan charges.
“The bank very much regrets the need to pass on this increase. However, it is no longer sustainable to continue to absorb these increased costs,” said the lender.
The bank said that it would, at its discretion, extend the term of the loans for customers left in financial difficulty as a result of the change to maintain their loan repayments at existing levels.
“The bank has experienced a significant increase in its funding costs since 2008 driven by market conditions,” said a spokeswoman.
“The new pricing structure will reflect the actual cost of funding to the bank.”
The euribor, or rate at which banks borrow from one another, is “no longer a relevant rate” on the pricing of the loans, she said.
“This is about recovering the costs that the bank is paying for funds and we have been carrying [them] since 2008,” she said.
The new cost of funds rate would be calculated by the bank every day and would be available in branches on a daily basis, the bank said, and the rate would be independently reviewed.
The effect of the change, which will come into effect from November 16th on loans of more than €300,000, means that businesses face an increase of about 0.7 per cent a year on term loans.
Based on a €300,000 loan on a term of seven years, a customer will pay €4,210 a month compared with €4,113 a month previously as the interest rate rises to 4.79 per cent from 4.09 per cent.
The change will apply to customers on the next interest rate “rollover date” on their loans. The bank said the new rate will not apply to business overdrafts.
The bank had no comment on the effect of the rate changes on its net interest margin, which determines the profitability of the bank.
Higher funding costs have squeezed the margin as the bank has been forced to pay up for deposits and wholesale money.
Richie Boucher, chief executive of the bank, warned at the publication of the bank’s half-year results in August that the company could not continue to bear the cost of elevated funding.
The bank raised variable mortgage interest rates two days later.
Bank of Ireland is the only Irish bank to avoid State control after €1.1 billion was raised from North American investors through the Government’s sale of a 34 per cent stake. The State has injected €5.7 billion into the bank and holds a 15 per cent stake.
The former secretary general of the Department of Finance, Tom Considine, and former minister for agriculture Joe Walsh sit on the board of the bank to represent the Minister for Finance and the public interest.
