BoI reveals shape of banks to come
Gradually the shape of post-crash Irish banking is emerging. What is already clear is that Bank of Ireland and AIB, which had a combined loan book of more than quarter of a trillion euro at the top of the market, will end up shrinking their loan books by up to 40 per cent through sell-offs and closing other businesses.
In mid-2008, Bank of Ireland had a loan book of more than €140bn, while the AIB topped €130bn. On Friday, Bank of Ireland announced that it was selling the ICS Building Society and winding down several other loan portfolios, mainly in the UK. These measures will shrink Bank of Ireland's total loan book by about €41bn. Throw in the €12bn going to Nama and amounts already written off and Bank of Ireland's loan book will shrink to a little over €80bn.
The extent of the surgery required at AIB isn't yet clear. However, a sale of its Polish subsidiary which had an €8.5bn loan book at the end of last year is a racing certainty. In addition AIB is transferring about €23bn of bad loans to Nama. Don't be surprised if the EU Commission also demands that AIB either dispose of or flog off some of its UK and capital markets businesses. It's difficult to see the new-look AIB having a loan book much over €80bn.
However, it's not all bad news for the "big two". As foreign banks flee, the Irish market competition is disappearing. This is allowing both AIB and Bank of Ireland to push up the rates. In practice all lenders have been quietly pushing up their rates on overdrafts, business loans etc, over the past 18 months.
Now that Nama is up and running they are increasing their politically sensitive mortgage rates.
This is classic post-crash behaviour by the banks. By how much will the banks push up rates? Permanent TSB has already increased its mortgage rate by 1.5 per cent. If AIB and Bank of Ireland managed to reprice even their reduced loans books by an average of 1.5 per cent, it would translate into €1.2bn each a year in extra profits for both banks.