Banks have made out like bandits with their customers’ cash over recent years, largely because those customers could not be bothered to maximise their savings.
As interest rates rose, customers proved remarkably reluctant to make the most of their savings by moving them out of low or no-interest-demand deposit accounts and into longer-term or notice accounts offering better rates. Left with all the surplus cash, the banks simply lodged it with the Central Bank of Ireland where for the past 18 months they were guaranteed a return of between 3 per cent and 4 per cent.
The European Central Bank’s caution in moving to lower rates again meant the State’s big banks raised their guidance at the halfway stage for this year. Between them, AIB and Bank of Ireland expect to make about €7.5 billion in net interest income — the difference between what they pay customers for their savings and what they can get themselves for that same cash — this year.
But the party may be coming to an end.
Diarmaid Sheridan, analyst at Davy — now owned by Bank of Ireland, of course — says the expectation has grown over recent months that interest rates will fall more sharply next year and into 2026. “As a result, we now have a more cautious view on net interest income than previously with below consensus forecasts.”
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It’s not all doom and gloom with the markets expecting growth in lending and fee income to make up some of the lost ground, with returns at Irish banks remaining “very attractive” compared with the wider banking sector internationally.
Earnings will dip slightly, with Davy now pencilling in a 4 per cent dip in earnings per share next year at Bank of Ireland and 9 per cent at PTSB. As a result, the broker is trimming its share price target for AIB to €6.10 from €6.20 previously, and to €14.10 from €14.60 for Bank of Ireland. At PTSB, it is pushing up its price target, to €3 from €2.90.
Those prices remain well in advance of the €5.035, €9.51 and €1.69 at which the shares in the respective banks are trading, so while the days of easy money might be receding, the broker sees no sign of trouble ahead for the lenders.
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