Inside the world of business
Banks keen to restore margins
WHILE THE failure of Bank of Ireland, Ulster Bank and National Irish Bank to pass on the European Central Bank quarter-point interest rate cut is bad news for borrowers, it is a fillip for the shattered profitability of these banks.
The net interest margin – the difference between what banks pay for deposits and other types of funding, and what they charge for loans – was squeezed by the lending frenzy of the boom years. Permanent TSB, the biggest mortgage lender over those years, told Cantillon its margin fell from 2.75 percentage points in 1995 to 1.17 in 2007, the peak year of the boom.
This has been squeezed further by the higher cost banks are now paying for funding due to the increased risk associated with Irish banks. The margin narrowed to 0.86 of a point in 2010. The bank says that if it includes the cost of the Government guarantee, which was yesterday extended to the end of 2012 because the banks can’t survive without it, then the margin fell to a 0.65 of a point.
Given that Permanent TSB, effectively State-owned, is predominantly a mortgage lender, the margin is squeezed even more tightly as more than 90 per cent of its loans are mortgages. Of that, about 60 per cent are tracker-rate mortgage, which automatically got the ECB rate cut.
In contrast, Bank of Ireland – 15 per cent-State owned – and Allied Irish Banks – almost fully State owned – have other customers to prop up their net interest margins. AIB has passed on the ECB rate cut but the relief of mortgage customers is cross-subsidised by SMEs and its other borrowers. Bank of Ireland has recently gone further, by starting to price business loans off its own new blended funding rate instead of the traditional inter-bank rate. No wonder the bank is getting the thumbs up from new investor Wilbur Ross for not passing on the ECB rate cut. It is aggressively focused on widening that margin.
Business looking for a little light relief
Business is feeling distinctly unloved as the Government puts the finishing touches to its austerity budget. Reports suggest that Minister for Social Protection Joan Burton is asking the business community to bear increased costs in two separate initiatives – forcing employers to shoulder the burden of the first four weeks of their staff’s sick pay and halving the level of employers’ redundancy rebate from 60 per cent to 30 per cent. The Labour minister forecasts that the initiatives will save €150 million and €50 million respectively.
The sense of betrayal among the business community is all the greater because it felt that the Government was more attuned to its needs. It had after all moved to completely remove the right to upward-only rent reviews for landlords in the corporate sector and by its insistence that there would be no changes to income tax rates in a budget where it needs to find an extra €3.8 billion.
The Government also made great play of throwing all its “new investment” eggs into the basket of a jobs creation package.
However, it is a separate commitment that has proved the undoing of business in their efforts to reduce, or at least not increase, the cost of labour.
Ms Burton has to find savings of €700 million from her departmental budget but the Government has promised not to cut core social welfare rates. That narrows room for manoeuvre.
Business may soften the blow between now and budget day but unless the Government wakes up to the need to make some genuinely hard choices – ones that will, between them, hit all sectors, including business – it is going to struggle to achieve the savings agreed with our friends in the troika.
