Could bank exits actually help cut mortgage rates?

The planned exits of Ulster Bank and KBC Bank Ireland from the Irish market has been universally acknowledged as a bad thing for competition given that they account for about 25 per cent of home loans. Especially at a time when the average new Irish mortgage rate remains well above the euro-area norm.

Irish banks have long been bleating about the effect on rates from them having to hold much higher levels of expensive capital against mortgages as your standard European bank, a legacy of the losses sustained by lenders following the property crash.

In an interesting analysis, Eamonn Hughes, the banking analyst with Goodbody stockbrokers, which is being acquired by AIB, has been busy with his calculator piecing together the building blocks of mortgage rates.

Hughes estimates that the average rate for Irish owner-occupier mortgages is 2.63 per cent among the three listed banks, compared to 1.31 per cent across the EU. Adding in fees that typically apply to European loans and the average EU rate rises to 1.58 per cent.

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The capital charge in the Republic equates to 0.5 percentage points of a mortgage rate, 2.6 times the EU figure. Irish funding costs, at 0.4 points, are almost a third higher, while loan impairment charges account for 0.2 points locally, compared to 0.12 across the EU.

But the real difference is in running costs, including staff, IT spending, levies and other general overheads. Hughes estimates that operating costs account for 1.05 points of the average Irish mortgage rate, compared to 0.65 points across the EU.

The analyst reckons that Irish banks make a 0.47 per cent profit on mortgages. While this is higher than the 0.32 per cent EU norm, Irish profit margins are lower at 18 per cent. European banks generate a margin of 24 per on their average headline rates. “There are no supernormal profits’ in Irish mortgages,” he insists.

If Permanent TSB and Bank of Ireland add scale by taking over most of the mortgages of Ulster Bank and KBC Bank Ireland, at a time when the housing market is dysfunctional, they could chip away at running costs and pass on some of the savings to borrowers. That's the theory at least.