AIB plays ball on mortgage rate cuts, but don’t expect a stampede

It was no coincidence that on the same day AIB was due to meet the Minister for Finance to discuss its standard variable mortgage rates, it was also launching a campaign advertising its second rate cut in six months.

The SVR reductions range from 0.25 per cent to 0.38 per cent. So, from June 2nd, AIB customers will pay an SVR of 3.9 per cent, EBS’s will pay 3.95 per cent, and Haven’s 3.97 per cent. Importantly, the reductions will apply to existing and new customers.

AIB's rate cuts have also put some clear blue water between it and Bank of Ireland, its biggest rival, whose SVR is 4.5 per cent. These things are never black and white, of course – Bank of Ireland will pay the 1 per cent stamp duty for first time buyers.

Nevertheless, this message might be percolating through to customers, with AIB claiming that its market share rose by by six points in the first quarter of this year to just under 40 per cent. Bank of Ireland’s share is around 30 per cent.

Ulster Bank was also in front of Minister Michael Noonan yesterday, having just launched a campaign to explain to fixed rate customers that they could continue to avail of a lower fixed rate rather than moving to its SVR.

It was well timed, given that the Government is currently waiving a big stick at the banks, threatening punitive action if they don’t play ball and reduce their SVRs for mortgage holders in short order.

This could amount to a hefty levy, or legislation empowering the Central Bank to regulate rates.

Neither is desirable. The banks already pay a levy, which is expected to bring in €150 million a year between 2014 and 2016. It’s a cost to the banks that is passed on to all customers, and while the exchequer’s coffers might swell there would be no redistributive effect for SVR mortgage customers.

Legislating is feasible, but it's a power that Central Bank governor Patrick Honohan has indicated that he doesn't want.

Promote stability

Honohan’s priority in his six years as governor has been to promote financial stability in the sector. The Irish banks are only recently back in profit, save for

Permanent TSB

, and forcing them to cut their mortgage rates might threaten that recovery.

There’s no doubting that Irish SVRs are out of whack, given that the official ECB rate is 0.05 per cent. It’s well publicised that Irish rates are higher than in most other euro zone countries. The banks counter that this is the result of higher input costs here and the fact that they have to cross-subsidise their loss-making tracker mortgages, a big feature of the boom years.

Some 300,000 SVR customers are in the system. They feel they’re being ripped off and, with an election coming into view, pressure has increased on the Government to help them.

Moral suasion seems to have worked with AIB, and perhaps Ulster Bank to a lesser degree, but the Minister’s Thursday meetings with Permanent TSB and Bank of Ireland will be altogether different.

PTSB recently raised €525 million in a successful capital raising exercise that reduced the State’s holding to 75 per cent.

Its prospectus warned potential investors of “heightened scrutiny in connection with the setting of variable mortgage interest rates”, but gave no indication that an interest rate reduction by the bank was imminent.

Wrong message

It would be difficult for PTSB chief executive

Jeremy Masding

to now turn around and tell them that a rate cut was being pushed through at he behest of the Government. It’s just not the type of message you want to send to your new investors.

And don’t forget the small matter of PTSB still being a loss-making entity, with its tracker book acting as a €75 million drag on its bottom line.

Then there's Richie Boucher and Bank of Ireland. The chief executive has held his ground with politicians, refusing mortgage debt write-offs on the basis that he has a duty to protect shareholders' funds.

Bank of Ireland has also taken a different line on split mortgages by charging interest on the warehoused portion of the loan.

Like PTSB, Bank of Ireland introduced a mortgage rate cut in January that applied to new customers but not existing ones. The Minister wants any cuts to apply to all customers.

Boucher is expected to take the same line as at Bank of Ireland's recent AGM and his appearance before the Oireachtas Finance Committee – namely, that the interest rate charged by the bank reflects a number of different input costs, including the cost of capital, operational expenses, and the cost of risk.

He would also say that rates are kept under constant review and any changes will be communicated to the stock market at the appropriate time.

Having repaid its bailout funds in full, Bank of Ireland has a stronger hand to play, and Boucher won’t be easily cowed.

No likely reaction

Competition would be the ideal way of resolving this issue, but there are no new banks looking to enter the Irish market. AIB’s rate cuts might provoke a reaction from its rivals, but I wouldn’t hold my breath.

One banker told me yesterday that department officials were “reasonably forceful” in stating that the Government would take action if the banks don’t. It seems to want a signal of action within six to eight weeks.

A statement will be issued on Thursday on the outcome of the meetings. We will then have a better view on how long this game of chicken is likely to last. Twitter: @CiaranHancock1