Tuesday 20 February 2018

Expect a rationing of credit and less competition

A rationing of credit and less competition are just two of many knock-on effects we're likely to see as a result of Halifax/BoSI's decision to pull out of the Irish retail market, writes Charlie Weston

Halifax/Bank of Scotland (Ireland), which is pulling out of retail banking here, had some of the most competitive savings products on the market
Halifax/Bank of Scotland (Ireland), which is pulling out of retail banking here, had some of the most competitive savings products on the market
Charlie Weston

Charlie Weston

THE announcement by Halifax/Bank of Scotland (Ireland) that it is getting out of retail banking here and laying off 750 workers is an ominous development for all those who have a bank account.

Here are some of the implications of the move by the Scottish bank for the wider banking sector.

Rationing of credit

During the boom foreign-owned banks provided one in three loans, according to Bloxham Stockbrokers.

But foreign banks, from National Irish Bank to ACC, and Ulster Bank, are either rationing credit or not providing it at all due to the near collapse of the Irish economy.

Foreign lenders in Ireland have become hugely compromised by bad debts, much of them caused by indiscriminate property lending.

This has led many of them to conclude that there is little point in engaging in additional Irish lending and little point in maintaining the expensive infrastructure of being a retail bank.

The withdrawal of the foreign lenders has dramatically shrunk the options for those seeking a mortgage.

Domestic lenders AIB and Bank of Ireland, and to a lesser extent EBS, are issuing the lion's share of home loans at the moment.

AIB and Bank of Ireland now account for 40pc each of the new mortgages issued. During the boom the two banks combined accounted for a third of all mortgages issued.

Fewer banks

Building societies EBS and Irish Nationwide, along with Permanent TSB are to be merged into one operation, First Active is to disappear and be merged into Ulster Bank, ACC is set to pull out of this market, and National Irish Bank is closing large numbers of branches.

From a situation where a typical Irish town had up to 11 banks, it now seems that more than half of these will be gone by the end of the year.

AIB, Bank of Ireland, the 'Third Force' of EBS, Irish Nationwide and Permanent TSB, Ulster Bank and Postbank will now be the most likely banks left competing in towns.

Financial adviser Justin O'Gorman, of myadviser.ie, said that less competition would lead to higher fees and charges.

"One less competitor in the system means that those left behind can increase margins more easily, which isn't good news."

Mortgage rates to rise

Banks and building societies are set to hike mortgage rates, following the lead of Permanent TSB.

The move would hit the thousands of people with standard variable rates, as lenders are free to increase these mortgage rates irrespective of what the European Central Bank does.

People with standard rate mortgages should lock in to a fixed rate, as these rates are at historically low levels, a report by Karl Deeter of Irish Mortgage Brokers, advises.

Under-pressure lenders will push up standard variable rates by as much as 1pc this year, and another 0.5pc next year, Mr Deeter said.

Some eight out of 10 mortgages in the Irish market are either standard variable or tracker mortgages.

Higher charges all round

Most banks are now loss making in this market. Banks have a range of options for increasing profits, according to senior financial adviser with my.adviser.ie Justin O'Gorman.

Transaction fees

For a lot of customers every quarter there is a debit on their bank accounts under the heading bank fees.

While some banks offer solutions to help avoid or reduce these charges, fees can be increased or the solutions can be changed to bring more customers into this net.

Reduction in deposit interest rates

Since the start of the credit crisis there has been an anomaly in interest rates in Ireland, Mr O'Gorman said.

Normally deposit rates are lower than mortgage rates.

The current rates are not sustainable and banks will move to reduce these over time (indeed, compared to this time last year, deposit rates have fallen back).

When the European Central Bank starts to increase its base rates, however, don't expect to see banks pass on these increases to deposit account holders says Mr O'Gorman, a fee-based adviser.

Other charges

These charges cover non-run-of-the-mill transactions like bank drafts, foreign payments, unpaid cheques etc.

There is a charge for each of these transactions and it is paid at the time the transaction occurs.

An increase in these charges would also increase profits for the banks.

Surcharge interest

If your current account goes overdrawn without an overdraft facility or you exceed your overdraft facility, not only are you charged the prevailing overdraft interest rate, you are also charged excess interest on the portion of the debt which is unauthorised.

For example, AIB presently has a surcharge interest rate of 12pc. This is on top of the standard overdraft rate.

Irish Independent

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