Banking on it: Following the

Dan’s Digest

With Dan White

VieWs on the latest eConomiC & politiCal neWs

Importing problems as likelihood Banking on it of hard Brexit advances Following the departure announcements last year by both Ulster Bank and KBC, Dan White current state of affairs in Ireland’s banking sector and the impact on bank customers reflects on the

As the countdown to 29 March continues, the likelihood of a “hard”, no-deal Brexit increases exponentially. If Britain does crash out of the EU without a deal in less than two months’ time, life will become much more complicated for Irish retailers.

With the Cabinet split and the House of Commons deadlocked, the unthinkable is rapidly becoming the probable. Both houses of the UK Parliament, the House of Commons and the House of Lords, have already passed legislation triggering Article 50 and setting 29 March as the country’s departure date from the EU. This means that a hard Brexit is the default position, i.e. if nothing happens Britain will leave the EU, deal or no deal, in less than two months.

Confronted with concrete reality

And given the current composition of both Cabinet and Parliament, “nothing” is almost certainly what we are going to get. Even postponing the Brexit date would involve marshalling a majority in both Houses of Parliament to either amend or repeal the existing Article 50 legislation. Good luck with that!

Having heard so much about a hard Brexit in the two-and-a-half years since the UK electorate voted to leave the EU in the June 2016 referendum, we will almost certainly be confronted with the concrete reality before the end of next month.

While it is exporters who have been most vocal about the possible impact of Brexit, the effects will be felt throughout the entire economy. Addressing the Oireachtas Finance Committee last month, Revenue Commissioners chairman Niall Cody told TDs and Senators that if Britain became a “third country”, i.e. left the EU without a deal, the number of import and export declarations would climb from the current total of about 1.7 million a year to as many as 20 million.

Captured by customs net

This huge increase in customs paperwork would result in the number of companies

With the deadline for Britain’s departure from the EU looming on 29 March, potential consequences of a no-deal Brexit for Irish imports Soaring bank profi ts are at least partially the result of the virtual disappearance of banking competition in the Irish market, Dan White examines the something that is very bad news for all bank customers, both businesses and individuals. falling into the customs net

Bank of Ireland was fi rst out of the traps on growing up to six-fold. At 28 February when it unveiled pre-tax profi ts of present, approximately 17,000 €1.22bn, Bank of Ireland’s highest since 2008 – companies trade with third the marginally higher 2015 fi gure was later countries. This could rise to revised downwards. over 100,000 companies if the

Next to report on 2 March was Permanent UK goes solo on 29 March. TSB, which announced pre-tax losses of €21m. AIB released its results the following day If the UK does leave the EU without a deal at the end of next month, not alone will revealing pre-tax profi ts of €629m. Irish exporters to the UK Back to the good old days? have to pay British tariffs, Irish importers from the With the two biggest banks earning combined UK (of whom there will be pre-tax profi ts of £1.85bn in 2021 and up to 84,000 if the Revenue Permanent TSB almost back into the black, is it Commissioners have got their back to the “good old days” for the Irish banks? estimates right) will also have

For the two main domestic banks maybe, to pay EU tariffs. Retailers, but it’s a different story for the general public. including grocery retailers, will almost certainly find Exit of foreign banks themselves in the firing line The big Irish banking story of 2021 wasn’t the if, or more likely when, this happens. strong profi tability of the indigenous banks but the departure of the foreign banks. Complexity of tariffs

On 19 February 2021, UK bank NatWest While Ireland is on balance fi nally confi rmed that it was pulling the plug a food-exporting country, on its Irish subsidiary Ulster Bank. Prior to we import large volumes of the withdrawal announcement, Ulster was the processed foods and other third largest bank in the Republic with a grocery products. Most of these customer loan book of €20bn at the end of 2020. As if this wasn’t bad enough KBC Bank, the Although Ireland is a food-exporting country on balance, most of our imported foods come either from or through the UK, making them imports either come from or through the UK. This would make them liable for tariffs after a other major foreign-owned bank operating in liable for tariffs following a no-deal Brexit no-deal Brexit. Imports of chocolate from the the Irish market, which had a customer loan book of almost €10bn at the end of 2020, UK will have to pay an 8.3% tariff, imported corn flakes will have to pay 3.8% while imports of meat will have to pay tariffs of up to 12.8% announced on 16 April that it too was bailing and fish imports from the UK will be hit with out of the Irish market. Unlike the Ulster swingeing tariffs of up to 26%. Bank announcement, KBC Bank’s departure And it isn’t just the tariffs themselves. There came as a complete bolt out of the blue. is also the incredible complexity of the tariff

The departure of Ulster and KBC removes regulations with over 200 - yes 200, that’s not whatever vestiges of competition remained in a typo - separate tariff categories for meat and fish alone. Even where imports from the UK aren’t liable for tariffs, importers will still have to go to the expense of ensuring that their imports are properly categorised.

the Irish market. We are now left with “twoand-a-half” indigenous banks, the “big two” of Bank of Ireland and AIB, with the much smaller Permanent TSB trotting behind.

Most of the KBC loan book has gone to Bank of Ireland while Permanent TSB has picked up the vast bulk of the Ulster scraps.

Result for Irish bank customers

And where does that leave Irish bank customers? Where indeed? Even before the departure announcements from Ulster and KBC, there was clear evidence that Irish bank customers were paying interest rates way over the odds compared to those being paid by borrowers in other eurozone countries – a very strong indicator of a lack of marketplace competition.

The most recent data from the Central Bank shows that Irish householders were paying the highest average mortgage rates in the Eurozone at the end of last year. The average Irish mortgage rate was 2.69% compared to a

Prior to its withdrawal announcement last year, Ulster Bank was the third largest bank in the Republic with a customer loan book of €20bn at the end of 2020

1.29% eurozone average. Our homeowners were even paying higher interest rates than countries such as Greece (2.55%) and more than twice the rate paid by German (1.33%) and French (1.06%) homeowners. While comparative interest rate data for business lending isn’t available, it seems reasonable to assume that Irish businesses, particularly smaller ones, are also paying over the odds for credit compared to their counterparts in other Eurozone countries.

Looking in the mirror

However, before we rush to pile all of the blame for this sorry situation on the banks, it might be a good idea to look in the mirror. Sure, the banks are no saints, but Irish society as a whole also has to shoulder its share of the blame. At the end of September 2021, there were a total 71,000 mortgages in arrears, of which 55,400 were secured on principal private dwellings and 15,700 on buy-to-let properties. ShelfLife March 2022 | www.shelfl ife.ie

That represented 8.5%, more than one-intwelve of all home loans.

So far so bad. What is even worse is that, almost 14 years after the crash and with house prices back to within a hair’s breadth of their pre-crash highs, more than 45,000 of these loans (5.3%) are at least two years in arrears with more than 7,000 being more than ten years in arrears.

Given our tortured history, it’s hardly surprising that most fi nancial institutions will bend over backwards to help a homeowner in diffi culty with their mortgage repayments and that, when the lender eventually does lose patience, the judiciary are equally reluctant to put someone out of their home.

Banks getting tough

While such forbearance is to be applauded when applied to those in short-term arrears through no fault of their own, who need breathing space to get back on their feet, there comes a point at which the banks and the courts have to get tough. It seems to be a reasonable assumption that, where a cent hasn’t been paid on a mortgage for more than two years, then the borrower either can’t or won’t pay.

This is particularly true of borrowers who are over ten years in arrears. When, in the immediate aftermath of the crash, the banks argued that cutting deals with distressed borrowers would encourage so-called “strategic defaulters”, most of us dismissed their warnings as being self-serving.

Strategic defaulters

Even if they were, it’s diffi cult to resist the conclusion that at least some of the borrowers now in long-term arrears fall into the “strategic defaulter” category.

However, whether it’s can’t pay or won’t pay, doesn’t really much matter anymore. By allowing large numbers of defaulting borrowers to string out proceedings to infi nity and beyond, we have let Ireland become an unattractive location for any overseas bank thinking of opening for business in this country.

What good are such seemingly high interest rates if the borrower, even on “secured” lending can apparently default with impunity? The inability of lenders to exercise their security on a secured loan is a major disincentive to new entrants, no matter how high the interest rates.

This is costing the rest of us big time. A fi rst-time buyer on the average €262,000 fi rst-time buyer new mortgage is paying €180 a month, €2,160 a year, more interest than someone on the average Eurozone rate.

With our tolerance of high levels of loan arrears deterring new entrants, the banks are free to treat such arrears as a cost of doing business which can be passed on to customers. It is borrowers, both individuals and businesses, not the banks who are paying the price for Ireland’s continuing high loan arrears. ■

On 28 February, Bank of Ireland unveiled pre-tax profi ts of €1.22bn, the bank’s highest since 2008

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