Irish banks are at a disadvantage to European peers amid an ongoing bonus ban, cumbersome repossession regime and high capital demands, according to a new wide-ranging report by industry lobby group Banking & Payments Federation Ireland (BPFI).
It comes at a time when the wider sector is grappling with ultra-low interest rates and an influx of fintechs and non-banks vying for parts of their business.
The BPFI report on the future of Irish retail banking, at a time when Ulster Bank and KBC Bank Ireland – the final two overseas-owned banks – are exiting the market, said the sector is at an "inflection point".
Written with the support of EY, the report said that rapid technological advances, customers moving more online, banks having to reduce high fixed costs, and increasing competition from non-traditional banks for certain parts of their business, “contribute to a highly complex sector and the disruption of the traditional retail banking model”. Covid-19 has accelerated the pace of change, it said.
The picture painted in the 64-page document of challenges and opportunities facing the banks comes as Minister for Finance Paschal Donohoe is preparing to oversee "a broad-ranging review" of the banking sector, as announced in the Dáil in July.
While the Minister said at the time that the banking system “should serve as the means to help households and firms achieve their financial, economic and social needs”, he is also charged with trying to recover the industry’s crisis-era rescue bill.
The State has recovered two-thirds of the €29 billion combined bailout of the three surviving banks – Bank of Ireland, AIB and Permanent TSB. Even including the €5.3 billion market value of taxpayers' remaining holdings in the three as of the end of July leaves a €4.5 billion shortfall.
Pay issue
The BPFI report said the ongoing ban on variable pay among domestic banks is putting them at a “considerable and growing disadvantage” to other banks, IT companies and corporates. At least 20 per cent of sector recruitment in the past three years was in the areas of technology and digitalisation, it said.
“A normalisation of pay and employment conditions at Ireland’s retail banks - to allow the banks compete for people on a level playing field with other corporates – is needed if they are to attract the skills and employees that are necessary for their future and for the provision of services expected by Irish consumers,” it said.
Bank of Ireland chief executive, Francesca McDonagh, blamed pay restrictions on Monday as a second group finance chief quit in a little over two years.
BPFI also said that the fact that Irish banks have to hold almost three times as much expensive capital against mortgages as the EU average – imposing an additional capital requirement of about €2.5 billion on the sector – is partly down to the State’s “extremely costly” and lengthy repossession regime for borrowers in long-term arrears.
"This ultimately drives up the cost of Irish mortgages for both the banks who supply mortgages and the borrowers," it argued. The average interest rate on a new home loan in Ireland was 2.73 per cent in July, compared to 1.28 per cent for the wider euro zone, according to the Central Bank.
Negative rates on deposits
The report notes that Irish banks are disproportionately affected by the European Central Bank (ECB) charging negatives on surplus deposits lodged with it.
Irish banks had only €78 out on loan for every €100 of customer deposits at the end of December, compared to a ratio of 107 per cent across Europe, according to ECB data.
Irish banks are also more reliant on interest income than average EU peers. Still, they are taking steps to increase income from commissions and fees. AIB bought Goodbody Stockbrokers earlier this months and is seeking to set up a life and pensions joint venture with Canada Life, while Bank of Ireland has agreed to buy Davy.
The report also said that banks also have opportunities to play a major role in funding the State’s transition towards net-zero carbon emissions and to pursue strategic partnerships with non-banking companies to help grow income.
