An Post mortgage plan rattles Irish banks. But should they be scared?

Twenty-four hours before then taoiseach Brian Cowen gathered with officials in Government Buildings on September 29th, 2008, to hammer out the fateful banking guarantee of six lenders, Belgium, the Netherlands and Luxembourg stepped in to save a group called Fortis.

Dragged down by large investments in toxic US subprime mortgages and the strain put on its balance sheet the previous year by buying part of Dutch bank ABN Amro, Fortis would be carved up within weeks. It would ultimately result in the demise of the Republic's little-remembered seventh bank: Postbank Ireland, a joint venture between Fortis and An Post set up with high hopes in 2007.

A decade later, An Post is back – last week declaring plans to park a tank on the lawns of the State’s remaining mortgage lenders, with home loan rates that will undercut rivals by one percentage point.

It's a bold statement in a market where the average standard variable rate is about 3.2 per cent, almost double the euro area average. And it rattled investors in Irish banks, driving as much as a 9 per cent-plus slump in the share prices of AIB and Bank of Ireland.

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In effect, a State-owned company has dented the Government’s prospects of selling another chunk of shares in the bailed-out banks any time soon. AIB, in which the Government sold an initial 29 per cent stake on the market last year, fell below its €4.40 initial public offering (IPO) price for the first time on Friday.

Retreating

However, there’s one major problem with An Post’s pitch. It hasn’t actually found a vital partner to finance its foray into the mortgage market. In fact, it hasn’t even issued documents seeking proposals. It makes the group’s price claim and aim to be in business by mid-2019 questionable.

Overseas banks haven't exactly been banging at the door to get into the Irish mortgage market in the past decade. Traffic has been the other way, with Bank of Scotland (Ireland), which brought tracker mortgages to Ireland in 2001, and Danske Bank retreating with indecent haste in the wake of the crisis.

Still, that hasn't gotten in the way of analysts speculating that Spanish lender Bankinter could be just the ticket, after announcing this week that it is acquiring Irish consumer finance lender Avantcard through its purchase of certain assets of Madrid-based EVO Banco from private equity firm Apollo.

Avantcard entered the Republic in 2012 through its purchase of the local operations of MBNA. It offers credit cards through insurance broker Chill.ie and, earlier this month, announced a venture with An Post to provide personal loans and credit cards.

A nice add-on

On the face of it, mortgages would be a nice add-on for Avantcard in the Irish market. Analysts at Investec predict new home loan lending will grow by 25 per cent this year to €9 billion and a further 20 per cent to €10.9 billion in 2019 (though still well off the €40 billion peak of 2006).

A move by An Post may just prompt long-anticipated consolidation among some of the smaller lenders

However, the sheer scale of the crash in the State has left banks, under direction from regulators, holding considerably more expensive capital for mortgage lending than many European peers. It’s a massive barrier to entry.

This reflects facts such as non-performing loans hitting a peak of almost 32 per cent in 2013 (three years after lenders off-loaded their toxic commercial property loans to the National Asset Management Agency), as well as the difficulty lenders have in seizing and selling off the underlying home when a mortgage gets into trouble.

Banks that have sought in recent times to sell portfolios of hard cases (either borrowers who have consistently refused to engage or who are too difficult to find a workable solution), have courted negative public and political commentary, even though they are under mounting pressure from European regulators to draw a line under the problem.

Compensating elsewhere

As one adviser to the Government at the time of the 2008 banking guarantee, who shall remain nameless, put it to me recently as he reflected on the legacy of the crisis: “We seem to have decided in Ireland – and this, to me, is entirely fair – that it is not acceptable to kick people out of their homes. It is not the way we do things and I actually think that’s a pretty good decision to make in principle. But if you take that decision, the banks have to cover the cost of those losses by compensating elsewhere by charging higher interest rates. But you can’t have it both ways.”

Still, if An Post does find a partner willing to accept all and still offer the best rates in the country, it may just prompt long-anticipated consolidation among some of the smaller lenders. Cue another wave of “third force” talk.