Business Irish

Wednesday 18 September 2019

Banks in Ireland have become more profitable since the financial crash

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Charlie Weston Personal Finance Editor

Bank in this country have become more profitable since the financial crash.

At the same time other EU banks have seen their level of profits decline, a new paper from an economist based in the Central Bank has found.

Banks here are gaining from the low cost of funds, and from the fact that they have very little competition for savings deposits, and so pay some of the lowest rates in the EU.

Low levels of banking competition mean banks here do not have to compete for deposits, unlike banks in other countries.

Separate studies have found that deposit rates paid by banks in this country are among the lowest in the European Union.

Mortgage rates are so high the Central Bank has repeatedly found that home buyers are paying multiples of what is being charged in other countries in the euro area.

Earlier this month European Central Bank president Mario Draghi, speaking in Dublin, blamed a “quasi-monopoly” among banks here for the high mortgage rates.

AIB and Bank of Ireland dominate the mortgage market, accounting for 60pc of home lending. AIB made profits of €762m in the first half of this year, with Bank of Ireland making €500m over the same period.

Central Bank economist Ciarán Nevin has found that banks here are highly profitable due to what he calls “historically low levels of competition” since the crash.

He looked at what is called net interest margins, a key measure of the bank profitability. It is the difference between the interest income generated by banks on the likes of mortgages and the amount of interest paid on deposits.

Mr Nevin found: “In the post-crisis years, the net interest margins (NIM) of Irish banks has increased significantly, while the NIM for the sample of other EU banks declined.”

The study said this may be because of greater competition for deposits in the rest of the euro area, pushing deposit rates up.

He said historically low levels of competition meant Irish banks here were in a position to capitalise on low funding costs and increase their margins substantially.

However, these benefits appear to be diminishing in recent years. The study looks at the period between 2003 and this year.

And banks may actually make even higher profits if European interest rates rise, as this would increase the return on loans.

The highly profitable nature of Irish banking may attract new entrants.

“The concentrated nature of the Irish banking sector, where market power allows for wider margins and greater profits, may attract market entrants in the future and increased competition may place downward pressure on [profit] margins.”

The Central Bank economist wrote that more competition would force banks here to “make efficiencies in order to increase returns”.

This would likely lead to greater competition in the market, which may benefit consumers through reduced costs and increased choice.

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