Business Irish

Sunday 25 February 2018

BoI warns rate cap on mortages could hit profits

Potential investors told Central Bank or Government may intervene and set limit, writes Ronald Quinlan

Outgoing ceo Richie Boucher. Photo: Mark Condren
Outgoing ceo Richie Boucher. Photo: Mark Condren

Bank of Ireland has warned prospective investors that its profitability could potentially be hit by the introduction of legislation capping the variable interest rate it applies to its mortgage customers.

The warning is one of a multitude of risk factors identified by the bank in a prospectus issued on August 11 last as part of its ongoing and regular market fundraising.

In a cautionary note on its exposure to the Irish mortgage lending market, the bank advised prospective subscribers to its €25bn Euro Note Programme that "changes in interest rates for mortgage lending - the regulatory authorities (for example, the Central Bank) or the Irish Government may introduce new requirements or ceilings in relation to the interest rates that the group charges for mortgage lending".

"A material decrease in interest rates for mortgage lending without a comparable decrease in funding and capital costs for the group could adversely impact the profitability of the group," it added.

Unsurprisingly, the bank also warned investors of the numerous potentially negative economic consequences for its operations of the UK's decision last year to vote in favour of Brexit. Quite apart from the wider impact of the UK's departure from the European Union on the Irish, Northern Irish, UK, EU and global economies, the bank highlights the "further adverse effect" Brexit may have on the value of sterling, saying that "a significant change to the currency exchange rates between euro and sterling would affect the translation of the group's UK net assets and profits into euro".

Moving beyond the UK's decision, the bank warns investors of the risk of other countries following suit, referring to "potential referenda on continued EU membership in other countries and the possibility of further exits from or the break-up of the EU".

Commenting on the potential risks facing the European Union, the prospectus states that: "the withdrawal from the euro by one or more countries that have already adopted its use and, in an extreme scenario, the cessation of the use of the euro could result in the dissolution of the European Monetary Union (the EMU).

"This could lead, inter alia, to the reintroduction of individual currencies in one or more EMU member states and the redenomination of financial instruments from euro to a different currency, the effects of which are impossible to predict fully."

Earlier this year Bank of Ireland appointed Francesca McDonagh as its new group chief executive. The pillar bank's first female chief will take up the role in October, succeeding outgoing ceo Richie Boucher.

Sunday Indo Business

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