Saturday 24 March 2018

Re-election key to government push on banks

Reducing mortgage rates will make the banks less attractive for investors but there's a general election in less than a year, writes Joe Brennan

CALL FOR cuts: Finance Minister Michael Noonan
CALL FOR cuts: Finance Minister Michael Noonan

Joe Brennan

Finance Minister Michael Noonan has an election to win in less than a year, and the country's banks may be among the biggest losers along the way. Noonan this week summoned banking chiefs to his department, ratcheting up a campaign to force them to cut mortgage rates. Homeowners are still struggling with the legacy of Europe's biggest property-market collapse almost five years after we followed Greece by seeking a financial rescue and used taxpayers' money to bail out its banks.

Reducing loan rates would reduce the value of the lenders as the State seeks to sell them, said Fiona Hayes, an analyst with Cantor Fitzgerald. "But, ahead of an election, it may be more astute for the Government to play into the pockets of mortgage holders," she said.

Noonan says he may consider introducing a "penal" levy on banks if there isn't sufficient movement on interest rates by September. Noonan and Taoiseach Enda Kenny don't want to repeat the mistakes of the last government, swept out of power in 2011 after we were forced to bailout the banks. Though Noonan has led Ireland out of its bailout, and bond yields are near record lows, the failure of banks to pass on ECB rate cuts to homeowners leaves him vulnerable to political attack.

Fianna Fail is on the warpath. Variable mortgage rates are now so high that a customer with 20 years left on a €200,000 home loan is paying €4,000 a year in extra interest compared with customers on tracker loans, according to Michael McGrath, the party's finance spokesman. Those loans are tied to the ECB's benchmark rate of borrowing. "It is absolutely inexplicable that a number of banks continue to charge up to 4.5pc on variable-rate loans, despite their cost of funds falling towards 1pc," McGrath said.

To an extent, the 300,000 homeowners on the variable rates are paying for bankers' past errors. During the property boom, banks began offering tracker loans, and about half of Irish mortgages are now linked to the ECB rate, which is at a record low.

"It's the unfortunate truth that this segment of the market is subsidising ECB tracker mortgages, which have been loss-making for banks," said Hayes.

Noonan's difficulty is that he's preparing to start selling the nationalised AIB even as pressure for rate cuts mounts. The Government also controls mortgage lender Permanent TSB, and a 15.1pc stake in Bank of Ireland. "Investors would not be comfortable with the not-so invisible hand of the State interfering," said Davy analyst Diarmaid Sheridan. "Especially as the banks are still generating below-par underlying returns on equity."

AIB executives have cut the bank's variable rate twice in the last six months. Each 0.25 percentage-point reduction in mortgage rates chips more than €40m off AIB's annual income, according to Hayes.

While Noonan called the AIB cut announced last month a "first step," other bankers are proving more resistant. BoI executives told lawmakers last month that borrowers should move to fixed rates if they wanted lower repayments. Ulster Bank's Jim Brown also ruled out any action on rates anytime soon, stating that costs in Ireland are higher than in the UK.

Following the meetings with Government, banks agreed to have "simple options" to cut monthly mortgage payments for variable customers by July.

"What's perplexed me is that there is no talk about the inevitability that there's going to have to be a trade-off with lower deposit rates for the two million or so Irish banking retail depositors," said Goodbody's Eamonn Hughes.


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