Easing of Irish banker pay limits will add to lenders’ costs, S&P says

Standard & Poor’s (S&P), the credit ratings agency, said the Government’s move this week to ease pay restrictions across rescued banks will increase staff costs, though this should be offset as revenues across the sector are on the rise.

Minister for Finance Paschal Donohoe said on Tuesday he was reintroducing bonuses of up to €20,000 for employees in the three bailed-out banks – the limit allowed before an 11-year-old law imposing an 89 per cent tax on sums above that threshold.

He also scrapped executive pay limits at Bank of Ireland after that company returned to full private ownership this year, and promised to lift remaining €500,000 executive pay limits at AIB and Permanent TSB (PTSB) as the State’s holding in each fell to unspecified “appropriate levels”. Taxpayers continue to own 57 per cent of AIB and 62.5 per cent of PTSB.

“The Government of Ireland lifting some banking industry pay restrictions in place since the global financial crisis is a positive development for talent attraction and retention, although it’s a factor further inflating costs,” S&P said on Thursday.

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“We believe this brings Irish banks an opportunity to retain talent and better compete with other domestic and international employers. It would also inevitably result in staff-related cost increases, but we don’t have big concerns over this. Irish banks have been committed to their cost-cutting plans, which among other initiatives include fewer full-time equivalent employees.”

S&P said it expects the banks’ revenue base to “benefit from business momentum and potentially compensate the increase in costs”.

Deutsche Bank analysts upgraded their earnings estimates for Irish banks this week, as they continue to be one of the main beneficiaries in the industry across the euro zone from rising European Central Bank (ECB) rates.

The uplift to date has chiefly been driven by Irish banks’ large surplus deposit books suddenly turning profitable after the ECB raised its own deposit rate from minus 0.5 per cent to 1.5 per cent between July and October. However, the banks have also started to raise mortgage lending rates in recent times.

Deutsche Bank now estimates that the three remaining Irish banks’ combined total income will rise from €6.25 billion this year to €8.45 billion in 2024.

Bank of Ireland told it staff this week not to expect any variable pay awards until early 2024 at the earliest, based on the company’s performance for next year.

A spokesman for the bank, where its new chief executive Myles O’Grady has been installed on the same €960,000 annual package as his predecessor, Francesca McDonagh, will take the Government’s move “into account when considering future pay arrangements”.

“However, we’re not in a position to immediately speculate as to what, if any, changes, may occur,” he said.

AIB and PTSB are also not expected to introduce variable pay until at least 2024, according to industry sources.