Banks in Ireland are coining it, as competition evaporates and rates rise

In the past week, Ireland’s two largest lenders reported earnings for the first six months of the year, and it is clear from the numbers that both of the institutions are doing very well these days.

Allied Irish Bank and Bank of Ireland both reported profits before tax of €1bn for the first six months of the year.

Needless to say, the leaders at the lenders were pleased with the result.

AIB CEO Colin Hunt said: “The Group delivered a very strong financial and operational performance in the first half of the year.”

Over at Bank of Ireland, CEO Myles O’Grady said the “performance reflects our strategic decisions and execution over recent years, and commercial delivery across all business lines, supported by a more favourable interest rate environment”.

That last point from O’Grady is key. There were two major changes to banking in Ireland over the past 12 months and one of them has been the significant rise in interest rates from the European Central Bank.

Interest rates

Those interest rate rises have allowed Irish banks to increase the amount they charge on loans to Irish customers and – in some cases – increase the amount they pay for deposits.

Looking at Bank of Ireland’s numbers, the difference it has made is clear. The average interest rate it charged for “loans and advances to customers” in the six months to the end of June was 4.2%, up from 3.2% in the same period the previous year.

On the deposit side, the bank paid customers 0.49%, up from 0.3%. That, however, is not the full story. Deposit interest is only paid on deposit accounts. Current accounts attract no interest at all.

In Bank of Ireland’s case, loans to customers totalled €78.8bn. The 4.2% interest over the six months earned it €1.645bn.

On the other side of the balance sheet, the almost €101bn in customer deposit and current accounts cost the bank €100m in interest payments.

The numbers for Allied Irish Bank show average lower interest on deposits at 0.25% and lower average interest costs on loans in the period of 3.68%.

However, the trend is very similar – the price charged for loans has gone up faster than the amount paid for deposits.

Competition loss

The other big change in the banking market in the past 12 months is the almost complete evaporation of what little competition there was left in the sector.

Both AIB and BOI reported expanding balance sheets (as well as expanding profits) as Ulster Bank and KBC exited their business in the Republic of Ireland, meaning that customer base had to move to one of the (very few) remaining banks.

The loss of Ulster Bank and KBC comes after Bank of Scotland, Rabobank and National Irish Bank also closed their doors here in recent years. That leaves Ireland with only three traditional retail banks – the two above plus Permanent TSB.

There are online “challenger” banks, such as Revolut and N26, but they are far from the full-service offering many customers require.

Competition in banking is a funny thing. The last time there was real competition for market share in the Irish banking sector, it was led by Anglo Irish Bank, with disastrous consequences for Ireland’s economy.

Following that great financial crisis, there was both a huge increase in regulation of and a massive drop in ‘risk appetite’ from the banking sector.

The prolonged period of low to negative interest rates from the European Central Bank helped to add to the stasis in the industry here.

Now that the ECB has lifted rates and the banking sector is both highly capitalised and tightly regulated, the stage should be set for a return of ‘risk appetite’ among bankers – and with it, competition for customers.

However, so far, we are seeing exactly the opposite happening. Consumer choice is the most limited it has been in generations and it seems that there is little on the horizon to change that any time soon.