PTSB between a rock and a hard place with mortgages

The imminent cuts in mortgage interest rates by AIB and KBC has put the cat among the pigeons in the banking sector.

Both have chosen to cut their standard variable rates, with KBC also trimming its fixed rates. And both are offering €2,000 towards professional fees for potential mortgage switchers.

As a result of these cuts, AIB’s lowest SVR is now 3.1 per cent while KBC’s lowest fixed one is 2.99 per cent.

Whether by accident or design, they have taken some of the sting out of the new Government’s commitment to reduce “excessive” SVRs here while also introducing a code of conduct on mortgage switching.

And they put it up to their rivals to follow suit or risk losing some share in what is already a constrained market due to a lack of supply in new housing stock and the Central Bank’s macroprudential rules.

To date, Bank of Ireland and Ulster Bank have refused to reduce their SVRs, putting their focus instead on fixed term rates, which gives them greater certainty on costs and margins.

Likely response

Bank of Ireland has had some success in recent months with its 2 per cent cashback offer and vies with AIB as the biggest lender of home loans. So some response from

Richie Boucher

seems likely in the near future.

But the bank hasn’t given any indication that it will it bend to political will in terms of reducing its SVRs.

Meanwhile, Fianna Fáil and Sinn Féin, the two largest Opposition parties, are planning to bring forward Bills this month to give the Central Bank powers to cap interest rates here.

The arithmetic of the new Dáil is such that there’s a good chance that they will be able to convert these Bills into law.

That’s not to say that the Central Bank would ever use those powers, a scenario that would test its independence from the Government and the Dáil.

The move by AIB and KBC was bad news for Permanent TSB, which is 75 per cent owned by the State.

Once the biggest mortgage lender here, it struggled for share in 2015, capturing 9.5 per cent of the market. KBC’s share was 14 per cent.

It responded this year with a 2 per cent cashback offer to new customers, mirroring Bank of Ireland's product. At its recent agm, chairman Alan Cook and chief executive Jeremy Masding said this had generated a good response among customers.

The bank has a trading statement out today and it will be interesting to see if it gives any figures to back up this statement. At its recent agm, Masding revealed that it’s current cost of funding is just 55 basis points. By comparison, its managed variable rate for those borrowing on a loan-to-value ratio of 90 per cent is 4.3 per cent and 4 per cent for those with an LTV of 80 per cent. These are the levels most relevant for first time buyers.

Its cheapest MVR is 3.2 per cent but the LTV has to be below 50 per cent and it only applies for the first year. After that, it reverts to 3.7 per cent.

Whichever way you shake it, PTSB is making a tidy margin on new home loans. Remember that the euro zone average mortgage rate is about 2 per cent.

When it comes to mortgage rates, PTSB is between a rock and a hard place. Its recovery is the most fragile of all the Irish retail banks. Its operating profit last year was a modest €26 million and it was dragged into the red by €460 million in exceptional costs.

Tracker mortgages

Roughly two-thirds of PTSB’s home loans in Ireland are tracker mortgages, which up to a couple of years ago were losing an aggregate €75 million a year. Its net interest margin for 2015 was a skinny 1.12 per cent, just more than half the level of AIB and Bank of Ireland.

That’s to say nothing of its loan arrears problems or the reputation damage done by its mortgage redress programme, which has already cost it €40 million.

Every additional rate reduction puts another dent in its profitability – AIB’s latest cut is estimated to reduce its net income by €30 million a year.

Squaring that circle while also generating the remaining €2.2 billion in bailout funds that it owes taxpayers will require some deft footwork by Masding in the years ahead. Either that, or taxpayers will have to swallow hard in the national interest. Twitter: @CiaranHancock1