The first half of the year saw the collective net profits of the final three Irish retail banks rocket up by 18%, reaching €2.05 billion. This rise was largely due to increased interest rates as part of the ongoing battle against inflation by central banks. Each bank has recently announced these results.
Throughout the past five years, there has been a more dramatic rise. Profits experienced a near 240% increase from the €608 million reported for the same period in 2019 by AIB, Bank of Ireland and PTSB. This was during a phase when banks were experiencing persistently low rates and a lull in loan demand.
On the other hand, the overall asserts of these banks have only inflated by a third throughout the past five years, reaching €325.5 billion. The trio’s monopoly on the majority of Ulster Bank’s and KBC Bank Ireland’s loan market has helped this – as these competitors bow out of the market even though households and SMEs carry on repaying loans at a fast pace rather than adopting new debt.
Nevertheless, a significant proportion of this growth can be attributed to savers depositing cash into the banks. The banks then convert these liabilities into assets, largely by depositing this idle money with the Central Bank. These deposits have proven to be beneficial assets.
Approximately two years ago, banks were made to pay a 0.5% charge for these deposits, as the European Central Bank (ECB) had implemented a negative rate policy to encourage inflation. Almost all of these deposits are now reaping benefits from the current ECB rate of 3.75% – even though this is a decrease from the previous 4% before a decision to reduce headline rates was made by the ECB in June.
At the close of the first half, Bank of Ireland had €28 billion deposited with the Central Bank, while AIB had nearly €31 billion. In contrast, PTSB did not provide a breakdown in its half-yearly report this week due to having lower surplus money than the other banks. However, the Central Bank would be responsible for the bulk of the €2.81 billion “loans and advances” provided to AAA-rated banks. Combined, the three banks amount to over €60 billion.
Central Bank data shows that in Ireland, 88% (around €120 billion) of the €138 billion cash held by households with banks are sitting idle in current and on-demand deposit accounts as of May. This cash is earning an average interest rate of 0.13 per cent, one of the lowest in the eurozone.
Last autumn, the headline interest rates for certain deposit products for three banks were increased to 3%. However, even this move hasn’t stirred the largely inert customer base. Myles O’Grady, CEO of Bank of Ireland, revealed many funds are stagnant in current accounts, more than is generally observed in other markets.
Last year, AIB executives were hopeful for a massive influx of customers into higher-rate fixed-term deposits. They anticipated paying depositors about 30% of increased ECB rates by the end of 2023. However, AIB CEO Colin Hunt stated this figure is likely to be only around 15% by the end of this year, a ratio known in banking language as deposit betas; this is one of the lowest across Europe.
Many are left questioning why banks have raised on-demand account rates when most customers are content with existing terms. Whatever the reasons behind this customer standstill, it has enabled AIB and Bank of Ireland to increase their net interest income predictions for this year, with the slower than expected ECB rate cuts also bolstering these predictions.
The stance here is clear: should you be concerned by the substantial profits being made by banks whilst your funds are sat in low-yield accounts, then the responsibility falls onto you.
Analysts anticipate a slow increase in the amount of money households put into term accounts in the future. This forecast remains despite expected drops in headline rights due to forthcoming rate reductions by the ECB. AIB’s Hunt, speaking on Friday, suggested an incremental rise in his group’s deposit-to-loan ratio which was 63% as of June.
Hunt believes the trend of households and businesses reducing their overall debt for the past 15 years has reached a watershed. More borrowing than repayment appears to have begun between the third quarter of last year and 2024’s first quarter. “It’s possible that the years-long debt reduction in Ireland’s economy has come to an end,” he stated. However, past experiences have included similar false starts.