'Penal restrictions' will hurt banks' profits next year, warns analyst
Proposed caps on mortgage lending will hit banks' abilities to make profits next year, analysts have warned.
AIB, Bank of Ireland and Ulster Bank are all expected to return to profit this year for the first time since the crash, but that process is hampered by losses the banks clocked up as a result of cheap tracker mortgages and boom-era losses.
Returning to profit depends on increasing more profitable new lending.
"The new mortgage business is the most lucrative and the most efficient for bank balance sheets," said Ciaran Callaghan, an analyst at Merrion Capital.
The caps proposed by the Central Bank amount to "penal restrictions" and will inevitably lead to fewer mortgages being available next year, he said.
First-time buyers, who account for around 60pc of new lending, will be the most affected, with many forced to defer home buying as a result of the need for a larger deposit, he said.
On the flip side, borrowers who would still be eligible for home loans after the proposed changes come into force in January, will be even more in demand as bank customers, according to Mr Callaghan.
"We expect these measures to have an adverse impact on the number of transactions in the market, constraining the banks' ability to re-price back books and potentially placing further pressure on front book (new lending) rates, as lenders compete more fiercely on price to attract new business," Mr Callaghan said.
Over the longer term the market is likely to adjust, he said, and the new regime may potentially help make the banking sector less risky.
The Central Bank yesterday announced a plan to restrict lending for house purchases to no more than 80pc of the value of a property in most cases, and 3.5 times salary. The measures are aimed at cooling house price rises. However, the new rules will hinder banks' efforts to increase lending, which they must do to restore profitability.
Goodbody Stockbrokers analyst Eamonn Hughes said the restrictions will hit the volume of lending.
"Any new measures next year are likely to dampen mortgage- lending capacity," he said.
He estimated mortgage lending in Ireland will grow 23pc next year to about €4.6bn, compared with €40bn when the market peaked in 2006.