Ireland's mortgage market would be "highly vulnerable" to an increase in interest rates by the European Central Bank, Bank of Ireland chief executive Richie Boucher has said.
Mr Boucher was speaking to the media following the release of the bank’s full-year results, which showed a pre-tax profit of just more than €1 billion. His remarks follow comments this week by Bundesbank president Jens Wiedmann that a normalisation of interest rates could happen by 2019.
“We’ve made it clear [that] we don’t take interest rate risk in the bank,” Mr Boucher said. “We cut it out wherever we can and we have got criticised for focusing on fixed-rate offers,” he said.
“This is a variable rate market and is highly vulnerable to an interest rate [increase]. That’s why we are investing our shareholders’ money in making fixed rates attractive to customers.”
Some 75 per cent of the €1.4 billion in new Irish mortgages lent by Bank of Ireland in 2016 were at fixed rates, up from 35 per cent two years ago.
“People have problems paying their mortgages for two reasons. Either their income reduces or the cost of the mortgage goes up. People must make their own decisions but...if anyone who is taking out a 25-year mortgage thinks that interest rates aren’t going to rise then I’d say, ‘you shouldn’t be buying a house’.”
Variable rates
Bank of Ireland offers some of the most expensive variable mortgage rates, charging first-time buyers 4.6 per cent on a loan-to-value (LTV) ratio of greater than 80 per cent. Its fixed rates range from 3.7 per cent upwards. By contrast, AIB’s standard variable rate is 3.4 per cent.
Bank of Ireland’s results showed a 16 per cent decline in its full year pre-tax profit. It also postponed the resumption of a dividend payment until this time next year as a result of the effects of Brexit and issues with its pension deficit.
Net interest income declined by 7 per cent to just under €2.3 billion. Other income grew by 1.7 per cent to €842 million, with operating income declining to €3.1 billion from just under €3.3 billion previously.
The bank said the reduced income was due to a foreign exchange impact relating to its UK business, the continued low interest rate environment and impacts on its liquid asset portfolio.
All of its divisions were profitable during the year. However, profits at its UK retail division (down 24 per cent in sterling terms), and its corporate and treasury unit declined during the year.
Growth in core loans books of €1.7 billion was achieved and it continued to be the largest lender to the Irish economy.
The bank achieved a net interest margin, a key measure of profitability, of 2.19 per cent for the period, with a run rate of 2.27 per cent in the second half of the year.
It reduced non-performing loans by €4.1 billion to €7.9 billion with defaulted loans declining to €3.7 billion to €7.9 billion.
Mr Boucher said the UK’s decision to leave the EU may impact on customers and business growth in the coming years.
He said the bank’s investment in its IT infrastructure would soak up between €175 million and €225 million of its capital annually for the next four years. This was designed to improve the customer experience, he said.
On the likely cost of redress for customers in Ireland who might have been denied a tracker mortgage rate in recent years, Mr Boucher said the bank had taken a provision of €25 million in its accounts but declined to estimate the final cost
