A decade after reaching a nadir, Ireland's banks are on the comeback trail, slashing NPL ratios and enjoying impressive capitalisation levels. However, the continued state ownership in the country's three largest banks and a distrust among the Irish public cloud the picture, as Marie Walsh reports. 


It is now 10 years since Irish taxpayers first began injecting capital into the country’s troubled banking system during the depths of the financial crisis. Ireland’s banking sector had suffered a particularly dramatic collapse. Prior to the crisis it had six major banking brands; now just three remain.

Allied Irish Banks (AIB) and Bank of Ireland (BoI), Ireland’s ‘Big Two’, as well as smaller brand Permanent TSB (PTSB), collectively received about €30bn in government funds – with €21bn of that going to AIB – and all three remain partly government owned.

It has been a difficult decade, but slowly the banks have been recovering. AIB, BoI and PTSB are all now well capitalised, with core equity Tier 1 capital ratios of 17.5%, 13.4% and 15%, respectively. These capital positions have made it possible for AIB, in 2017, and BoI, in 2018, to recommence dividend payments, although for PTSB, which has a higher ratio of non-performing loans (NPLs), this remains an aspiration.

A strong economic backdrop has aided recovery. Ireland had the top performing EU economy in the four years up to 2018, with 7.2% gross domestic product growth in 2017. And while growth is expected to moderate over the next two years, EU figures still forecast it reaching 4.1% in 2019 and 3.7% in 2020, compared with just 1.5% and 1.8% across the EU overall.

Falling NPLs

These economic conditions have helped Ireland’s banks to deal with the huge backlog of loans that soured when the country’s property bubble burst in the late 2000s. At the peak of the problem in 2013, Irish banks had €85bn in NPLs. This has now decreased by 79% to €18bn, according to Central Bank of Ireland (CBI) data. 

At an individual bank level, the drops have also been dramatic. In 2017, AIB had a NPL ratio of 16%. This now stands at 9.6%. PTSB has brought down its NPLs from 26% to 10%, whereas BoI’s have fallen from 8.3% to 6.3%.

Maurice Crowley, acting chief executive of the Banking and Payments Federation Ireland (BPFI), believes NPL levels will continue to fall during 2019. “Banks are determined to meet regulatory expectations of getting NPL levels down to the 5% mark,” he says.

Although the majority of reductions in recent years have been achieved through restructuring, write-offs and workouts, it is disposals that have attracted the most attention. AIB and PTSB, as well as smaller banks Ulster Bank and KBC Ireland, all sold NPL portfolios in 2018.

PTSB’s sale of a €2.1bn portfolio of NPLs to retail credit firm Start Mortgages, an affiliate of Lone Star Funds, proved particularly controversial due to its residential mortgages component, drawing accusations that loans were being sold to 'vulture funds'.

Nonetheless, disposals will continue in 2019, though there will be fewer of them, according to Owen Callan, an equity analyst at Investec. “Banks will certainly try to use the positive macroeconomic environment to dispose of any remaining non-performing buy-to-let mortgages or small and medium-sized enterprise loans, but owner-occupied mortgage disposals will remain challenging for political and public relations reasons,” he says.

A bill proposed by Irish political party Sinn Féin (currently working its way through the parliamentary process), which aims to prevent banks from selling on impaired mortgages without the consent of borrowers, would make sales involving residential loans particularly challenging.

Profitability and growth

Despite considerable progress on NPLs and the favourable economic circumstances, profitability remains a challenge for all three banks, with each reporting drops in pre-tax profits for 2018, compared with 2017. Any optimism that the European Central Bank (ECB) would start to raise interest rates later in 2019, easing some of the pressure on profitability, has now gone. Analysts do not expect any rate increases until the second half of 2020 at the earliest.

Instead, lending growth is expected to be the main catalyst for any increased profitability in the coming year. There is certainly scope for increased lending within the three banks, even while maintaining risk discipline. The Irish banking market remains a small fraction of its pre-crisis size. “The size of the new lending mortgage market was €39.8bn in 2006; in 2018 it was €8.7bn,” says Diarmaid Sheridan, financial analyst at Irish stockbrokers Davy.

Such lending growth is expected to be driven by continued strength in the Irish economy, a robust labour market as well as population growth, which is pushing up demand for property. Indeed, 2018 was the first year that AIB and BoI had seen net growth in their loan books since 2008. PTSB is still to reach this milestone.

Francesca Vasciminno, a senior director at rating agency Fitch, says: “We expect the large Irish banks to [continue to see lending growth] throughout 2019. This is underpinned by a growing demand for credit in Ireland and the improved financial health and capacity of banks to lend.”

Overall, the average net interest margin (NIM) for Irish banks has also enjoyed a considerable recovery since the crisis. A note by central bank economist Ciarán Nevin in November 2018 found that the average NIM increased from 0.87% in 2012 to 2.08% in 2017, compared with a 2017 margin of 1.2% across the eurozone.

Taken together with the fact that the average interest rate on new mortgages in Ireland stands at 3%, compared with 1.77% across the euro area, this has led to accusations that Irish banks are charging too much. However, this is only part of the picture. All three banks have seen drops in their NIMs since 2017, despite each bank having its own unique challenges.

Increased competition

It is these additional challenges that perhaps explain why relatively high NIMs have not attracted greater levels of competition into the Irish market.

BoI and AIB continue to dominate in the mortgage arena, something that prompted ECB president Mario Draghi to describe Irish banking as a “quasi-monopoly” when giving evidence to the Oireachtas (Irish legislature) Finance Committee in November 2018.

In the longer term, supervisors such as the ECB and the CBI view the completion of Europe-wide initiatives such as the Banking Union and Capital Markets Union as key for driving an increase in cross-border competition.

In the shorter term, some smaller fintech challengers, such as Revolut and N26, have started offering limited banking services in the country. Starling Bank is also expected to launch in Ireland later in 2019.

An Post, the state-owned postal service, announced in late 2018 it intended to enter the mortgage market and offer mortgages at one percentage point lower than current market rates. However, analysts have been sceptical about this. As Davys’ Mr Sheridan says: “We cannot ascertain how An Post or a partner will generate an appropriate return at that pricing point.”

State ownership

Ireland’s banking sector continues to be characterised by its high levels of state ownership. The government maintains a stake of 71% in AIB, 75% in PTSB and 14% in BoI. It has sold off some of its shares on two occasions to date: 25% of its stake in PTSB for €500m in 2015 and a 28.75% stake in AIB in 2017, raising €3bn.

It is unclear when there will be further sales. “I can’t imagine that the government wants to own the banks long term ,” says Nigel Greenwood, a director of financial services ratings at S&P Global. “It will be a long-term process to sell off the publicly owned parts. The banking collapse was so severe in Ireland that there is a strong public perception that people want their ‘pound of flesh’.”

Given the political pressures on pricing, finding the right time for further share sales will be far from easy. In July 2018, Conor O’Kelly, the head of the National Treasury Management Agency, the body which manages state debt, urged the government to make further sales and quickly, pointing out the risk that share values could start to fall “this late in the investment cycle”. As of mid-March 2019, shares in all three banks were trading at markedly lower prices, year on year.

In the long term, few doubt that continued government ownership would be a constraint on the banks. Mr Greenwood says: “From a credit perspective it is neutral, but it is certainly not supportive. It is not possible to generate investment from taxpayers and it places constraints on remuneration of senior staff.”

All three state-owned banks have a maximum pay cap of €500,000 and a ban on bonuses. Bank bosses have complained that this hampers their ability to hold on to top staff. AIB’s plan to introduce a share bonus plan for staff was rejected by finance minister Pascal Donohoe in April 2018, and in October 2018, just one month after AIB chief financial officer Mark Bourke had announced his departure, bank CEO Bernard Byrne announced he would be leaving. Colin Hunt, current managing director of wholesale institutional and corporate banking, is due to succeed Mr Byrne.

With several international banks increasing their presence in Ireland in light of the UK's departure from the EU, not to mention Ireland’s growing technology sector where such pay caps will not apply, this problem is predicted to become more acute. A department of finance review into remuneration at state-owned banks is now under way.

There is also a question to be answered about whether government ownership has affected how proactively banks have been able to manage their NPL portfolios, especially given that repossession rates in Ireland have remained low despite high levels of arrears. Investec’s Mr Callan says: “It has definitely impacted on the limited willingness or ability of the banks to deal with NPLs more forcefully.”

Digital transformation

AIB and BoI have both invested significantly in technological upgrades for their banking systems. BoI is currently midway through replacing its core banking system with one designed by Temenos, a transformation that will last until 2021. With a €1.4bn change programme, it hopes to reduce its cost-to-income ratio from about 65% to 50%.

S&P’s Mr Greenwood says these types of initiative are essential for driving growth. “We are at an inflection point right now with the broader digital agenda, which will be the start of a long-term change,” he adds.

AIB has now completed its three-year transformation phase. Davys’ Mr Sheridan says: “[AIB] focused on improvements to its existing systems and adding new systems as required, rather than a wholesale change to its core banking system.” 

With a current cost-to-income ratio of 53%, AIB’s more limited approach appears to have paid off in the short term, but BoI’s larger scale programme may pay off in the long run. Meanwhile, PTSB recently announced it is now at the beginning of its own four-year transformation programme, including changes to its core infrastructure and simplifying processes.

Industry and supervisors alike are confident that sufficient contingency measures have been established to mitigate against the worst impacts of Brexit on the Irish financial system. CBI deputy governor Ed Sibley says: “I am satisfied that from a financial stability perspective, the most material and immediate risks are now manageable.” However, a major economic disruption in the coming months would be difficult to shield against.

The news is not all negative. Ireland has seen an influx of requests for firms to establish or expand existing operations as a result of the Brexit-related exodus in the UK. “From large investment banks through to small payment servicing firms, well over 100 firms have applied,” says Mr Sibley. For the BPFI’s Mr Crowley, the expansion is a significant positive, with the level of interest “a good signal for Ireland Inc”.

Rebuilding trust

Rebuilding the public perception of an industry that still suffers from a heavily tarnished reputation also remains an important aspiration. Mr Sibley says: “Some progress has been made, but the levels of public trust in the financial system, banks and the effectiveness of regulation and supervision are low.”

The situation has not been helped by the so-called ‘tracker mortgages scandal’. Since it emerged in 2015 that some PTSB customers (former customers of its subprime unit) had been overcharged on their tracker mortgages, it has become clear that tens of thousands from across six banks were either overcharged or denied a tracker rate they were entitled to. As well as reputational damage, this has resulted in big compensation bills and the prospect of hefty fines once the central bank has concluded its investigations.

There are some initiatives in the pipeline. Similar to the UK’s Banking Standards Board, a Banking Culture Board for Ireland is in the process of being set up. There are also plans to introduce a Senior Executive Accountability Regime (a version of the UK’s Senior Managers and Certification Regime).

BPFI’s Mr Crowley sees both of these initiatives as evidence of serious industry engagement. “No matter what else happens, the reputation of banks needs to continue being built back up and this will be a big priority for us,” he says.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter