Thursday 26 April 2018

The great bank profits rip-off

Exclusive: profits in banks here three times EU average

ECB data reveals extent of customer interest rate scandal

Economist warns banks an 'anti-competitive oligopoly'

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Jody Corcoran, Maeve Sheehan and Philip Ryan

Ireland's banks are up to three times more profitable than the average for major eurozone banks, according to European Central Bank data analysed for the Sunday Independent.

The analysis also reveals that the interest rates they charge to individual customers are the highest in the eurozone, according to the ECB figures.

Interest rates for certain crucial business loans are also among the highest in the single currency bloc.

Irish banks' "supernormal" level of profitability is explained by their excessively high interest charges.

The findings conclusively show that Irish home borrowers are charged an average interest rate of 3.2pc against a 1.9pc eurozone average while businesses here are charged an average 5.1pc against the eurozone average of 2.3pc.

Taken together with the unfolding tracker mortgage scandal, today's revelations are bound to provoke outrage among the public, which continues to be "gouged" by the banks.

The Central Bank's deputy governor, Ed Sibley, last week said in relation to the tracker rate controversy that the banks needed a "radical cultural change".

The Sunday Independent's revelations today will add to that widely held view and increase pressure on the Government to take action.

Following the banking crisis in 2008, taxpayers here bailed out the banks to the tune of €64bn. It currently costs some €6bn a year to service the national debt, which includes the bank bailout debt.

However, under legislative changes introduced in 2014, the banks can offset previous losses against future tax liabilities.

Therefore, Ireland's banks will not have to pay corporation tax on their huge profits for the next 20 years. But between now and 2021, a bank levy will bring in €750m.

However, the levy income must be set against burgeoning bank profits here: Allied Irish Bank, which is still State owned, made a full-year pre-tax profit of €1.7bn last year, while half-year pre-tax profits to July this year amounted to €814m; Bank of Ireland reported full-year pre-tax profits to February of just over €1bn.

AIB was last week described as "the most profitable bank in the eurozone" by an influential German brokerage, which stated that the profits were flattered by Ireland's high mortgage rates and the bank's ability in recent years to free up provisions previously set aside for bad loans.

AIB received the biggest bailout of all the Irish banks still trading, with the Government injecting €21bn into the bank during the financial crisis.

In June, the State sold approximately 28.75pc of its shares in AIB for €3.4bn. At the time, Finance Minister Paschal Donohoe said the sale showed a "clear pathway exists" to regain all of the money that went into supporting AIB.

The Sunday Independent can also reveal today that AIB has written to one of its tracker victims offering to sell back at full market value a house repossessed two years. The customer, whose case is still under review, was invited to apply for a new repayment plan on a "corrected mortgage balance" to take back possession of the property.

Mr Donohoe will this week threaten to take more influence on bank boards if the tracker scandal is not urgently addressed. He is understood to believe the scandal is a "gravely serious matter".

However, he is thought to be reluctant to contact gardai about the controversy over fears the banks would claim any investigation is "politically guided".

Read More: Bank offers to sell house back to tracker victim

There are two commonly used methods of measuring banks' profits in a way that allows ready comparisons to be made: one is to look at a bank's profits relative to the value of all its assets; the other is to look at profit relative to the bank's equity, or the difference between its assets and liabilities.

On the first measure of profits - return on assets - Irish banks were almost three times more profitable than the average for all the major banks in the eurozone in the year to March 2017. Other ECB figures available show that Irish banks have been enjoying this sort of high profit differential since 2014.

The second measure of profits - return on equity - shows a more modest differential, but a large one nonetheless.

Over the one-year period covered by the ECB's quarterly supervisory banking statistics reports up to March 2017, Irish banks were 50pc more profitable than the eurozone average.

Separate ECB data shows that by this measure in the 2014-15 period, banks here were more than twice as profitable as the eurozone average.

The investigation reveals that in August, the most recent month for which eurozone-wide rates are available, new Irish home borrowers were charged an average interest rate of 3.2pc. The lowest rate at 1pc was in Finland. The average rate across the entire euro region was 1.9pc.

ECB figures also reveal that Irish business customers were charged an average interest rate of 5.1pc on overdrafts and revolving loans, the second highest in the single currency area, after Greece.

Economist and Sunday Independent columnist Dan O'Brien, who has uncovered full details of the banks' "supernormal profits", today writes: "These facts are damning. Taken together with the unfolding tracker mortgage scandal, which increasingly resembles a widespread conspiracy to defraud, they paint a picture of a banking sector that has turned into an anti-competitive oligopoly."

He also says that, given the costs to consumers and business of exorbitant interest rates, the Government needs to introduce a three-year interest rate cap by legislation.

Sunday Independent

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