Exit wounds – why the Ulster Bank departure will hit hard

Pillar institution has been forced out and a PTSB takeover would be an ill wind

THE IRA couldn’t drive you out of the fledgling Irish free state in 1922 despite boycotts and threats to your staff. You persevered in keeping 60+ branches open south of the border after independence and along with two other Northern banks, played a badly needed and important role in financing the new Irish economy.

Now you’re the last of those Northern banks to leave… a belated victim, apparently, of the 2008 financial crisis.

Following the banking collapse, banking regulators brought in rules requiring banks here to maintain extremely high levels of capital on their books.

Ulster parent – the giant UK bank NatWest – had to hold 20% of its total capital in Ireland (an economy the size of Manchester), according to Brian Hayes, head of the Banking and Payments Federation Ireland (BPFI).

‘I suspect it is asking itself this question in the course of the last couple of years: “could that capital be deployed elsewhere?”’, he said following Ulster’s announcement.

For every €100,000 an Irish bank lends, it has to keep €5,500 in cash on its balance sheet compared to €2,000 for French and German banks, according to Mr Hayes.

‘That’s one of the reasons why the cost of credit is more expensive here,’ Mr Hayes insisted.

A BPFI report from 2020 showed Irish home-owners could be paying far less interest on their borrowings if European regulators loosened capital rules for Irish-based banks – as they should after loan performance improved dramatically.

The cost of lending and mortgages is much higher here because the five banks have to put aside an additional €2.5billion to deal with ‘unexpected losses’.

At the launch of the report, Mr Hayes insisted that the approach of the European Central Bank to Irish banks hasn’t changed in recent years despite a great improvement in loan losses, leaving Irish banks an outlier in the eurozone.

Non-performing loans (NPLs) in Ireland fell from 10.5% in 2017 to 4% by last September.

The European Union average is 2.8%.

As a result of this, Ireland had the second most expensive mortgage rates in the euro area last December, second only to Greece.

Brokers Ireland said this is costing

Irish mortgage holders well over €80,000 on a €300,000 mortgage over 30 years.

The BPFI report also noted that the difficulty in repossessing property is another key factor driving banks away from the Irish mortgage market. In Ireland, the average recovery rates of a home after enforcement through the judicial process is around 11%.

This compares with 46% in the rest of Europe.

And the Central Bank’s controversial rules restricting mortgage lending doesn’t help matters.

Things will only get worse for mortgage holders now with the departure of Ulster Bank.

One of Ireland’s pillar banks, it will leave a gaping hole in the market.

It’s not a branchless digital bank that gives us gimmicks instead of real value.

Ulster Bank is a proper bank with 88 real branches, over a million customers, 2,800 staff and a €20.5billion loan book. It has had some quirks but it always has been competitive, with some of the cheapest fixed rates around.

‘Ulster Bank has always been a fair lender,’ said Brendan Burgess, founder of Askaboutmoney.com.

‘They were the first lender to publicly commit to allowing existing customers to move to the lower rates on offer to new customers.

‘They never engaged in cash back which distorts the market and allows lenders to maintain higher rates for existing customers.

‘And until the arrival of Avant, they had the lowest fixed rates on the market.

‘They still have the cheapest two- and four-year fixed deals for 80% loan-to-value mortgages, an important loan type for switchers.’

Mr Burgess is concerned over reports that PTSB might be allowed to take over Ulster Bank’s home loans.

‘To do this, it would require a capital injection from the major shareholder (in PTSB), the State. This must not be allowed to happen,’ Mr Burgess said. So what’s wrong with PTSB? ‘After the financial crisis, Permanent TSB pushed up their standard variable rate to 6.25% when AIB and Bank of Ireland were charging 3% and 3.25% respectively. They only brought rates down after a long campaign by Permanent TSB mortgage holders,’ Mr Burgess recalls.

But that was a good while ago. What about lately?

PTSB has always been a bit, well, gimmicky.

It’s pricey and nearly everything it does has marketing written all over it.

There are two types of mortgage lenders. One type offers straightforward cheap deals – such as AIB, KBC, Ulster, Avant Money.

The other type offers cashback sums – Bank of Ireland, PTSB and ESB.

Does anyone seriously believe that the ‘free money’ we get from this lot is not going to cost us more in the long run?

Well, it does. A first-time buyer would pay many tens of thousands more for a €300,000 home loan over 30 years if they stuck with a dearer ‘cash back’ lender compared to a cheap bank like Avant Money.

‘The only way that Permanent TSB can attract new customers is through cash-back and discounted one-year rates. But Permanent TSB customers pay heavily for this over the full term of the mortgage (through higher mortgage rates),’ said Mr Burgess.

Borrowers could of course also ‘take the money and run’ by pocketing the cash-back sum and then switching to a cheap lender anyway, although few borrowers do so. Lenders like PTSB know this very well and cash in on this inertia.

After our regulators effectively kyboshed the mortgage market by driving out Ulster Bank, the State owes its hardpressed mortgage holders a favour.

The least it can do for us now is not facilitate PTSB taking over Ulster’s loan book.