Lender’s five-year rate is a quarter point to nearly a full percentage point lower than the competition
Big shareholders in Bank of Ireland have begun questioning the bank’s “uneconomic” mortgage pricing after all its main rivals put up rates in the last two months.
AIB, Permanent TSB and Avant have all recently increased the interest they charge on fixed-rate loans in response to a series of aggressive rate rises from the European Central Bank.
But Bank of Ireland’s decision to absorb the hikes instead has baffled investors in recent weeks, according to market sources, as the bank’s pricing on mortgages has fallen below the market cost of funding.
“The rates that Bank of Ireland is charging on certain mortgage products are now uneconomic in a product profitability context,” said Goodbody senior banking analyst John Cronin.
“It will be interesting to see how long this lasts for, given resulting widespread institutional investor frustration.”
Mr Cronin said in a research note last week that Bank of Ireland’s reluctance to increase rates was a “constant theme of investor conversations”, especially as AIB and Permanent TSB were widely expected to move again soon.
A recent analysis by investment bank Bank of America found that Bank of Ireland’s five-year fixed mortgage was roughly in line with the five-year swap rate – a benchmark for cost of funds – and anywhere from a quarter point to nearly a full percentage point lower than the competition.
While keen pricing may be a boon to borrowers and help the bank attract new customers, investors looking for fat returns are less than supportive of the underpricing strategy and equity analysts are pointing them to other stocks.
“We appreciate that for this deposit-heavy bank, mortgage pricing is less central to revenue generation in this rising rate environment,” said Bank of America analyst Alastair Ryan in a research note. “However, stronger pricing is one reason we prefer domestic peers AIB and Permanent TSB at current prices.”
Market sources said there was currently no clear line of sight on where these higher returns would come from
Bank of Ireland shares have outperformed both AIB and Permanent TSB in the last year and got a boost in December when the bank upgraded its guidance for net interest income.
But market sources said there was currently no clear line of sight on where these higher returns would come from, especially as one-third of the mortgage book reprices annually, meaning a big chunk of mortgage business will be written at rates below swap rates.
Goodbody said that Bank of Ireland was trying to capture a bigger share of the “flow” of new lending in mortgages after AIB increased its market share in 2022.
Another explanation being floated in financial markets is that Bank of Ireland is concerned about the optics of booking big returns on lending while deposit rates remain low.
Meanwhile, new chief executive Myles O’Grady and the bank’s board have a big decision to make about increasing executive pay after the Government relented on remuneration restrictions last November.
As a result, pricing policy is expected to dominate the discourse around the bank’s annual results on March 7 with management due for a bout of uncomfortable questioning on the day.