'Controlling the controllables' but BoI is struggling to shift gear

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Donal O'Donovan Twitter Email

February 25 2020 02:30 AM

Bank of Ireland CEO Francesca McDonagh was at pains to repeat that the bank is "controlling the controllables" as it tries to ride out the impact of Europe's lower-for-longer interest rates.

Unfortunately for Bank of Ireland it is the factors beyond its control that are driving performance.

Key among them is the interest rate environment.

Real interest rates for banks with cash on deposit at the ECB are below zero, but Bank of Ireland - like its peers - is desperately reluctant to pass that cost on to ordinary savers.

The official lending rate at zero, meanwhile, means many borrowers automatically benefit. That combination is slowly squeezing the breath out of banks.

The increasingly hot competition in the mortgage market only makes new lending harder and less profitable.

Bank of Ireland is better placed than most of its Irish rivals because it does generate fee income through the New Ireland insurance and pensions business.

Those proceeds go at least some way to offset the weaker interest income.

But that only helps so much. Similarly, managing costs -which generally means sacking people - is bank managers' other 'controllable'. But they have to tread carefully - if cutting costs means cutting corners the risk of expensive blunders rises.

Banks also need to keep and even increase spending on technology just to stay afloat, never mind actually push back against the likes of Revolut and N26.

All of those factors are true for banks across Europe. Brexit has added an extra doubt when it comes to the Irish banks, and Bank of Ireland's shares in particular have yo-yo'd based on the Brexit headlines.

If that wasn't enough, the February general election here and the rise of Sinn Féin's vote in particular on a platform that has explicitly put lenders in its sights means for Bank of Ireland those uncontrollables are only increasing.

For bank shareholders -including the State, that all means any return to profits growth is moving into the increasingly distant future.