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Households and businesses in the Republic, which are paying one of the highest interest rates on loans in Europe, may have to wait years to enjoy the benefits of ultra-low central bank rates, according to analysts at Deutsche Bank.
That’s because European and Irish regulators continue to force Irish banks to keep “unfairly high” levels of expensive capital in reserve compared to other European banks, due to the perceived risk of their loan books as a result of the financial crisis. they said.
“Irish banks are required to hold substantially more capital against their loan books as a penance for losses from the financial crisis,” Deutsche analysts Robert Noble and Rohan Singhal said in a report released Tuesday, adding that this is “hampering “the flow of low rates from the European Central Bank to Irish borrowers, affecting household disposable income.
“Unfortunately, in the short term it does not seem that this is going to change,” they added.
However, they said that “in the next 10 years” Irish capital levels could “normalize” to lower levels as the effects of the financial crisis will have less influence on banks’ accounting models. This will help both the profitability of the banks’ profits and “probably at least a partial pass-through to households,” they said.
The average rate charged on new mortgages in the Republic during the last 12 months to August was 2.83 percent, compared with a euro area average of 1.35 percent, according to data from the Central Bank.
The 1.48 percentage point spread is costing Irish consumers € 80,481.60 on a € 300,000 mortgage over 30 years, Brokers Ireland said.
A sell-off by investors of Irish bank stocks as a result of the Covid-19 crisis so far this year, bringing its decline since January 2015 to 86%, compared to 50% for UK banks Joined, it means the market is pricing “Very unlikely” for repeat losses from bad loans and capital increases during the financial crisis, Deutsche analysts said.
Irish banks’ capital reserve levels “should be comfortable enough” to cope even with the loss rates seen in the financial crisis, although that is “an excessive benchmark,” analysts said.
They saw how Irish lenders were now in a stronger position as a result of more cautious lending and households and businesses concentrating on reducing their debt burden over the past decade.
Combined entity
Meanwhile, analysts said a possible merger between Permanent TSB and Ulster Bank (the latter’s UK parent NatWest is considering the future of its Irish unit) could result in a 59% increase in earnings before taxes of a combined entity if overall costs were reduced by 10 percent.
However, the high capital buffers banks must maintain means that the return on invested capital by shareholders, a key measure of a bank’s profitability, would only be 3 percent, according to the report.
Bank investors often see a return on equity of 8 to 10 percent as a sign of a healthy business.
Even if regulators allowed Ulster Bank’s Common Equity Tier 1 capital ratio, a measure of capital reserves, to fall from the current 26.5% to a “normalized” level of 14%, the rate of return on share capital would only increase to 5%. analysts said.
Sources have told The Irish Times that NatWest is actively looking to liquidate Ulster Bank, with a merger with another Irish lender seen as a less likely alternative.
Separately, it would take Ulster Bank “more than five years to achieve near-normal profitability,” according to the Deutsche report.
Analysts rate Bank of Ireland and AIB shares with a buy, while maintaining a holding stance on the permanent TSB.
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