Bank of Ireland says ‘right balance’ needed on loan and savings rate hikes

Bank of Ireland chief executive Myles O’Grady insisted on Tuesday the group needs to maintain the “right balance” when raising mortgage and savings rates, as moving too aggressively on loans could trigger affordability issues for borrowers.

While the bank last week unveiled a new savings product with an introductory rate of 1.5 per cent for the first 12 months, it is still less than half of the 3.25 per cent annual rate banks are receiving for excess deposits placed with the European Central Bank (ECB).

This follows a series of rate hikes by the ECB since last July, totalling 3.75 percentage points. Bank of Ireland and peers are relying on household deposits remaining largely in current accounts and demand savings accounts, which earn little or nothing for savers.

Bank of Ireland had €33 billion of excess cash stored with the Central Bank on behalf of the ECB at the end of December.

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Mr O’Grady highlighted at the bank’s annual general meeting in Dublin on Tuesday that it has only raised rates on new fixed-rate loans by between one and 1.5 percentage points since the ECB started its cycle of increases and has kept its variable rates on hold. Bank of Ireland’s variable rates were the highest among mainstream banks before official borrowing costs started to rise.

“Our objective here is to strike the right balance between passing on ECB [rate increases] to mortgage customers, mindful of affordability, but also very mindful of rewarding deposit holders as well,” he told shareholders, when asked about low deposit rates in the Irish market.

The average Irish interest rate on household overnight deposits was 0.03 per cent in March, while those on new savings products with agreed maturity dates stood at 1.14 per cent, compared to 2.11 per cent across the wider euro zone, according to the latest figures from the Central Bank. New corporate term deposit rates on the other hand averaged 2.3 per cent in the Republic, close to the euro zone average of 2.57 per cent.

Chairman Patrick Kennedy described 2022 “as one of the most important years in recent times” for Bank of Ireland, which will mark the 240th anniversary of its establishment next month.

Last year saw the bank return to full private ownership as the Government sold its remaining shares in the bank, complete the purchase of Davy and progress the acquisition of KBC Bank Ireland’s €7.8 billion of performing loans and €1.8 billion of deposits, which was completed in February.

“All of these developments in their own right are noteworthy. But taken together, they underline the importance of the year for the group as a whole and for you, our shareholders, as Bank of Ireland was the top performing large euro zone bank stock in 2022,” he said.

Bank of Ireland shares jumped by 74 per cent last year as interest rates climbed and on the back of the KBC Ireland deal. It has added almost 3 per cent so far in 2023, leaving it with a market value of €9.78 billion.

Mr O’Grady, who rejoined the group as chief executive in November, having previously served as chief financial officer, has set his sights on the bank posting profit between this year and 2025 equivalent to about 15 per cent of tangible equity that shareholders (RoTE) hold in the business. That is up from its previous 10 per cent objective and the 10.6 per cent out-turn for last year, excluding noncore costs.