How big is the Irish mortgage market for a new entrant?

[Brendan Burgess]

I have just had this discussion with someone about why foreign lenders don't come into the Irish market. I have concluded that it's just too small.

Because of the difficulty in enforcing the security, lending more than 70% to Irish customers is not a good idea. But lending should be very profitable at 70% and even more profitable at 50% LTVs.

But the potential market is much smaller than I thought.

The new business market is very small, so they would have to attract a lot of switchers.

There is about €105 billion outstanding in home loans.

1) No one on a tracker is available to move so that eliminates half the market - down to roughly €50 billion
2) Of the €50 billion in non-trackers, around 35% have an LTV of < 70%, so that reduces the market to around €20 billion.
3) Many of these will be very small mortgages with only a few years to go, so the savings in interest would not compensate for the legal costs of switching - so that probably reduces the potential market to €10 billion.
4) So they would be fishing in a pool worth around €10 billion. Natural inertia would mean that very few of these would move.

If a new lender started offering fair mortgage rates of, say 2.5%, the other lenders would cut their rates. So the potential business for a new entrant would be reduced even further.

Brendan

 

[jathclare]

I would also add that many of the potential new entrants were already here, got burnt, pulled out and would face stiff opposition from share holders to come back. I wouldnt hold my breath.

 

[Monbretia]

That would be my thinking too, most have been and gone with their tail between their legs. Ireland is just too small and spread out, there is as many people in a decent sized UK city alone.

 

[44brendan]

Was involved in an internal survey related to the OP! Summary was exactly what Brendan has posted. There is no scope here for a new entrant focused exclusively on the mortgage market. However, there is definitely scope for a new banking entrant with a broader interest to look at the market. Overall margins (exclusive of retention of current level of SVR's) are attractive and the change in the Dairy Quota system has resulted in a potential for significant increase in borrowing demand for the Agri Sector.
However the overall Irish market is small so we will not be high on anyone's radar at the current time.

 

[Sarenco]

Does the above analysis not ignore new lending? Irish banks wrote approximately €3.7 billion in new mortgage loans last year, which is hardly small beer.

There have certainly been rumours that a number of global players seriously considered entering the Irish mortgage market in recent years but baulked at the uncertainty surrounding our insolvency regime and the difficulties associated with enforcing security in Ireland.

 

[Brendan Burgess]

Hi Sarenco

I very much doubt that a new entrant with any sense would be interested in 80% and 90% LTV loans.

They would probably lend a maximum of 70%. So that would reduce the new mortgage market from around €3.7 billion to €1 billion?

If they got a 10% share, that would be €100m - which is small beer.

Brendan

 

[Sarenco]

Hi Brendan

I'm not sure I follow your figures but around 60% of new home loans by value in 2013 (well before the new Central Bank rules were conceived) were at LTVs of less than 80%.

If a new entrant to the market offered loans at significantly lower rates than other market participants and the incumbents were unable to compete (due to higher cost of funds and/or capital), then I think you could be confident that the new entrant would capture significantly more than 10% of the market.

It is also the case that the €3.7 billion annual mortgage lending figure may well rise in the future. Mortgage drawdowns in the first quarter of 2015, for example, were approximately 64% higher than the corresponding amount in Q1 2014. Davy previously predicted that around €4.5 billion would be advanced as new mortgages this year.

Even if a new entrant only managed to capture 25% of that projected mortgage market, you are still looking at over €1billion of loans at a healthy NIM.

In my opinion, the only thing that is holding new entrants back is the perceived difficulty regarding the enforcement of security. If this was resolved, I would have no doubt whatsoever that we would see new entrants to the market and significantly lower mortgage rates.

 

[Brendan Burgess]

Hi Sarenco

It's very difficult to project such figures. Let's say that new mortgages of around €5 billion will be handed out in 2015.

The problems enforcing security should deter lenders from entering the high LTV market i.e. 80% and 90%.
It should not be a deterrent to someone lending up to 70%.

I am surprised at the 60% below 80% in 2013. We really need to know what that figure is now. I had thought it would be no more than 25%. But from your figures, it seems higher. Let's say 50% unless you have harder information.

So the possible market is 50% of €5 billion or €2.5 billion.

If a new entrant to the market offered loans at significantly lower rates than other market participants and the incumbents were unable to compete (due to higher cost of funds and/or capital), then I think you could be confident that the new entrant would capture significantly more than 10% of the market.

You might be confident, but I certainly would not. Low ltv lending is profitable from around 2% for the existing banks. If Santander enters the Irish market and charges 2.5%, I would expect the existing lenders to reduce their rates to 2.5%. So I would be astonished if a new lender got more than 10% of the market. So that is €250 million.

 

[Sarenco]

Hi Brendan

Yes, I fully accept that it is difficult to accurately project the future size of the mortgage market but the IBF produce quarterly figures which gives a fairly up to date picture of the current trend.

The 60% figure comes from the consultation paper produced by the Central Bank prior to the introduction of the new mortgage lending rules. As those rules are now in place, I would have thought that the vast majority of new loans would now be at LTVs of less than 80%. I don't see any reason why the proportion of LTVs greater than 80% would have increased since 2013.

Would the incumbent banks continue to be profitable if they started writing variable rate mortgages at 2.5%? They are barely profitable (and not yet profitable in the case of PTSB) at current lending rates. I really don't see how the incumbents could possibly compete with a new lender that offered variable rate mortgages @ 2.5%, given the legacy of mis-priced and non-performing mortgages on their books. These legacy issues feed directly into their provisioning requirements and their cost of funds.

Even if your projections are right, €250m per annum of profitable mortgage lending is far from insignificant.

So what's holding new entrants back? Well, press reports from a couple of years ago suggested that Investec concluded that the main reason for not entering the market were the difficulties associated with enforcing security:-

http://www.independent.ie/business/...or-new-mortgage-lending-on-hold-29818741.html

 

[Monbretia]

On top of that you have customer inertia, lots of people never bother going to the hassle of switching to cheaper providers be it mortgage, electricity, phone etc especially those with small mortgages and low LTV, once the monthly amount is manageable they don't even see the ads or give it a thought.

 

[Brendan Burgess]

Would the incumbent banks continue to be profitable if they started writing variable rate mortgages at 2.5%? They are barely profitable (and not yet profitable in the case of PTSB) at current lending rates. I really don't see how the incumbents could possibly compete with a new lender that offered variable rate mortgages @ 2.5%, given the legacy of mis-priced and non-performing mortgages on their books. These legacy issues feed directly into their provisioning requirements and their cost of funds.

This is the point that most people keep missing. It is not a question of the overall profitability of the lender. It is the profitability of the individual products. If it's profitable for BoI to lend at 2.5%, then they should do so rather than not lend at all. Of course,they prefer lending at 4.5%.

 

[Sarenco]

This is the point that most people keep missing. It is not a question of the overall profitability of the lender. It is the profitability of the individual products. If it's profitable for BoI to lend at 2.5%, then they should do so rather than not lend at all. Of course,they prefer lending at 4.5%.

Well, I would suggest that the point you keep missing (or ignoring) is the fact that historic losses impact the pricing of new loans.

A new entrant would have a lower cost of funds and would have to raise and set aside less loss-absorbing capital for new loans, because they would not have experienced the same historic losses as the incumbents.

If, for the sake of argument, BOI could lend profitably @2.5%, then Santander could lend profitably @2% and thereby build up market share.

 

[Brendan Burgess]

OK Sarenco

Let me try again.

Aer Lingus announces a special offer. Anyone booking a flight before the end of June can fly for the next 20 years for the cost of the airline fuel alone. Hundreds of thousands sign up for this wonderful deal and Aer Lingus is stuck with it. For simplicity, let's call these guys the tracker customers.

They then realise their mistake and start charging the non-tracker customers higher prices to compensate.

Everyone would just choose a different airline. Aer Lingus cannot use its history to determine the price of flights. The market determines those prices.

So if Ryanair charges €100 from Dublin to Manchester, Aer Lingus will have to charge €100.

Likewise if Santander starts charging 2.5%, AIB and BoI will have to reduce their rates for new business to 2.5%. Customers won't care that their costs are higher or that they have historic losses. Although it makes no sense to me, you may be right about the Basel rules saying that they must set aside more capital even though the history is not relevant to new business. But so what? All that means is that AIB and BoI will make lower profits than Santander. It won't mean that they will continue to charge new customers 4%.

So Santander would be wrong to make the following calculation:

There is €2.5 billion of new mortgage business below 70% LTV every year in Ireland.
We can charge 2.5%.
No other bank can match our rates.
So we will get 25% of the market.

If Santander could lend profitably at 1.5%, then AIB and BoI might have to exit the market. But I very much doubt that would happen.

Brendan

 

[frankde]

"even more profitable at 50% LTVs"

I think this would definitely have some interest

I am non resident (live in Asia) and unable to get a loan, and am willing to put down 50%...
I also have some family back there who have loans, and so this prevents them from getting more loans, as their income will not cover an extra mortgage
I think if some new lender would lend non-recourse then they would see a lot of business in Ireland

It seems to me that Irish banks will lend to their pals the property developers very easily, yet the common guy on the street has a meet a whole list of conditions...

I have been able to secure loans for property in the UK with UK banks, I find them very professional to deal with, much more so than Irish banks....

 

[Brendan Burgess]

Well, I would suggest that the point you keep missing (or ignoring) is the fact that historic losses impact the pricing of new loans.

A new entrant would have a lower cost of funds and would have to raise and set aside less loss-absorbing capital for new loans, because they would not have experienced the same historic losses as the incumbents.

Hi Sarenco

Rather than discuss this issue in two places, I have replied to this point in this thread

http://www.askaboutmoney.com/thread...he-arrears-profile.194405/page-2#post-1435161

Brendan