Macquarie predicts bleak growth prospects for Irish banks
Irish banks will be forced to rein in "unsustainably high" mortgage rates by 2019, Macquarie Bank has predicted in a blisteringly negative assessment on the growth prospects of the State's pillar lenders.
Macquarie, a global bank headquartered in Sydney, has held a bearish outlook on the sector since November 2016. It doubled down on that view last week with a report titled 'Irish Banks: Irish eyes aren't smiling', laying bare challenges facing the main lenders, from sluggish loan growth, bloated cost structures, stubbornly high levels of non-performing loans and tougher regulations that threaten to undermine CET1 ratios or core capital buffers.
Analysts Namita Samtani and Piers Brown point out that Irish customers pay over 3pc for a new variable mortgage rate, but UK consumers avail of similar loans priced at less than 1pc. They attribute this spread to Irish banks' efforts to "dilute historic low margin tracker mortgages", which were amassed in the boom era. But the analysts note that in a single-currency zone, Irish banks are "charging about 300bps+ for short-dated mortgage loans in a euro interest rate environment dominated by negative rates".
Macquarie argues this "is unsustainable from a competitive basis, given that the euro market is open to all EU banks".
Proposed regulatory changes may also force the banks to reverse course and ultimately squeeze their profits. Macquarie points to a draft bill designed to "give the central bank powers to cap mortgage rates, which would have negative implications for net interest income if passed through". While these comparatively expensive home loans may be "partially justified by the need for the sector to recover from the crisis" - particularly as low-growth trackers still account for 45pc of existing mortgage loans - the strategy threatens to entice external new entrants.
According to Macquarie, French or Benelux banks, for example, have ample euro funding and could offer Irish customers simple, commoditised, low-LTV mortgages at a fraction of the cost currently charged by local banks.
In that scenario, Macquarie concludes, "mortgage profitability will decline in Ireland".
The sins of past excesses look set to loom over the Irish banks for years even as the economy roars ahead, outpacing the Eurozone. Macquarie predicts the pillar banks will struggle to expand their loan books significantly until 2019, stressing that "mortgage and business lending done in 2016 was well below 'normalised' expectations".
The bank predicts that only then will mortgage transactions, as a percentage of total transactions, rise to over 60pc - a pivotal level which indicates the lenders are back in "positive growth territory".
Macquarie only covers Bank of Ireland and Permanent TSB but predicts AIB will be caught up in the same dynamic.
The analysts expect growth in net interest margins - a key profitability measure - will be flat for the banks in 2019, compared to their 2016 numbers, which they acknowledge is a "non-consensus view".
Macquarie cut its rating on PTSB to neutral from outperform and held its underperform rating on Bank of Ireland.