Draghi says there is a quasi-monopoly in Irish mortgage lending

Discussion in 'The Fair Mortgage Rates Campaign' started by RedOnion, 9 Nov 2018.

  1. RedOnion

    RedOnion Frequent Poster

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    2,061
    Last edited: 9 Nov 2018
    There's some commentary this morning about an effective monopoly keeping rates high here after Draghi's appearance in front of Oireachtas committee.

    However, some coverage from Goodbody where they've included estimated ROE figures here vs elsewhere. The output of what I tried to explain above (emphasis added by me).

    "Mr Draghi’s references in relation to competition is likely to keep investors nervous
    about mortgage rates for the Irish banks. Having said that, from what we can see
    in the media commentary this morning, he made no references to the fact Irish
    mortgage RWAs at c.40-50% (even on IRB, post TRIM) are 3x Spanish, French
    Benelux & German levels, 3-4x UK levels and 6-8x Scandinavian levels. Even when
    NPEs reduce to average levels, the legacy of high LGD and PD inputs will keep RWA
    in models elevated in Ireland, relevant for pricing. Also, Irish mortgages don’t
    attract upfront fees and there is an elongated period for access to collateral on
    repossession in Ireland. We estimate that ROEs on new business for the Irish
    banks are 13-20% on new business if cashback offers are amortised over the
    effective life of the mortgage (9 years), but c.1.5-2ppts lower if over the fixed rate
    term (say 5 years). If you ran the numbers on the UK or Scandinavia or Spain,
    you’d get higher numbers. For example, in Scandinavia, a 1.25-1.50% mortgage
    rate on a 10% RWA with a 40% cost/income ratio and 10bps credit charge delivers
    30-40% ROEs.
    Mr Draghi, stop comparing apples with oranges!"


    https://www.goodbody.ie/assets/Goodbody_Morning_Wrap_09_November_2018.pdf
     
    Last edited: 9 Nov 2018
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  2. kildon

    kildon Frequent Poster

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    145
    This is really interesting, would the Irish rates be comparable if RWAs and credit costs were same, how much of a gap would there be? If you included some credit for cash incentives, would Irish rates be nearly the same?
     
  3. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,336
    Hi Red

    It's up to the Irish lenders to stop confusing matters by offering cash-backs. If the Central Bank were to ban cash-backs, then it would be easier to compare rates. Bank of Ireland and ptsb would have to compete on rates and it's likely that mortgage rates would fall.

    It is astonishing that lenders and the Central Bank claim that the lack of repossessions is responsible for the high rates and yet Ulster Bank charges the 2.3% for 90% LTV mortgages and 2.3% for 40% LTV mortgages. Likewise Bank of Ireland does not charge more for 90% LTV mortgages than 30% LTV mortgages. One would expect that if the difficulty in repossessing was the real reason Irish mortgage rates were 1.5% higher than the rest of the Eurozone , 90% mortgages would be around 1.5% higher than 30% mortgages, but they are not.

    There is also the problem of Risk Weighed Assets. It appears that an Irish lender (or any new entrant) issuing a 50% LTV mortgage today at 3 times the person's income, must base their risk weighting on the loss experience of Irish lenders lending 100% LTV mortgages at 5 times income. That is madness but it's a madness which suits the Central Bank and the Department of Finance. It deters foreign lenders and forces the 300,000 non-tracker lenders to boost the profits and capital of the Irish banks.

    Brendan