KBC Exiting the Irish Market

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Gordon Gekko

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I see that KBC are exiting the Irish market.

This was kept surprisingly quiet.

Bank of Ireland have signed a Memorandum of Understanding to take over the performing loan book and KBC’s circa dozen branches will obviously go.
 
Here's the story:


I'm surprised they did it now. It was rumoured a few times post-GFC but never happened.
 
Impressive they kept it quiet.

No great suprise though. On the face of it Ireland looked like an attractive place for lenders but when you see how skewed things are towards keeping people in their homes (at almost any cost) and the delays/costs associated with legal enforcement it really is a bit of a quagmire for a lender.

Timing makes sense. Now is the time to get out before the full Covid-19 chickens comes home to roost.
 
Not good for competition but not surprising. It means non Irish banks have all tried and failed to make it in the Irish market. We're too small and the laws over repossessions make it too expensive to resolve non performing loans. The fact that we still haven't resolved cases from the 2008 crash says it all.
 
As a KBC customer last month my mortgage direct debit changed to Pheonix 7 from the regular KBC, this was reported on in the independent. I received a text message saying it was just an error and nothing was unchanged, but I wonder if this was the bank engineering towards the sale. If they have secured 33k mortgages and raised cash by selling an RMBS on the bank of it, that would mean that these mortgages couldn't be transferred to BOI unless BOI just becomes the servicor i.e. the collector of the payments?

From research by this publication, it appears that there are 33,000 mortgages worth €5.9bn that were bundled together, securitised and called Phoenix 7. In what is a highly technical piece of financial engineering, KBC Bank Ireland ownership of the mortgages transferred to another entity within the wider KBC Group.



Details on the RMBS

 
I really do dispair hearing this news. Not only are all paying higher direct taxes as a result of banking failures of the past, we're going to continue to pay higher interest rates, which is a tax by another name.

I can only hope the N26s, Revoluts & others of this world can step in, because I don't see an insular, Irish dominated, state owned, banking force being competitive or innovative.
 

In a world of low interest rates and high regulation, retail banking is not profitable and banks costs are continuing to be squuezed. I would also worry that despite the lack of competition the Irish banks will struggle to be profitable and continue under the current operating model.
 
This is my first draft of a briefing note on the issue

Briefing note on KBC sale to Bank of Ireland

Brendan Burgess

Founder askaboutmoney.com



Very bad news for mortgage holders

While the Minister for Finance is technically correct that the rights of the borrowers are unaffected, the reality is that the rights of the lender are not affected either. And Bank of Ireland has the right under the contract to charge what they like.

Bank of Ireland has the highest variable mortgage rate in Ireland – effectively forcing its customers to fix their rate if they wish to get any sort of value.

Mortgage rateAnnual interest on €300k mortgageTotal repayments over 20 years
Bank of Ireland SVR4.5%€13,500€455,000
KBC SVR3% to 3.3%€9,000 to €9,900€400,000 to €410,000
Additional cost of BoI€4,500 to €3,600€55,000 to €45,000




Bank of Ireland
All LTVs: same rate		KBC
Different rates for lower LTVs		Extra annual cost on a €300k mortgage
1 year fixed2.9%2.5%€1,200
2 year fixed2.9%2.3%€1,800
3 year fixed3%2.25% -2.35%€2,250 to €1,950
5 year fixed3%2.4% - 2.5%€1,800 to €1,500
10 year fixed3.5%2.85% - 3.2%€1,950 to €900


If Bank of Ireland’s rates are so high, why do they still have any customers?

Most borrowers are totally unaware of the mortgage rate they are paying. This is due to a combination of inertia and lack of financial knowledge.

Bank of Ireland attracts new customers with cash back incentives. This confuses customers. Without this incentive, Bank of Ireland would get no new business.

But the cash back allows BoI keep their rates high for existing customers.

If cash-backs were banned, then BoI would have to reduce their rates for all customers.

But when Bank of Ireland takes over KBC, can’t their customers switch to another lender?

They can. But most borrowers lack the financial knowledge to switch. They are confused by the offers out there and will usually make the wrong decision.

We have lost Ulster Bank and, now, KBC. What should the government be doing?

  • They should ban cash backs
  • They should make it easier for lenders to repossess homes where the borrower is paying nothing. Just like any other country in the World.
What would banning cash backs achieve?

Ulster Bank and KBC had the lowest mortgage rates. But they were losing business because customers were going to the banks who offered cash back – Bank of Ireland, permanent tsb and EBS.

Customers pay far more over the life of the mortgage, but many are attracted by the cash back which might allow them to furnish the house.

Banning cash backs would create a level playing people and force lenders to compete for new business based on mortgage rates.

In general, if a lender brings down rates for new business, existing customers can avail of them.

They should make repossession easier

Everyone agrees that people who get into mortgage difficulty but act responsibly should be protected.

But we have a large group of irresponsible borrowers who make no effort to repay their mortgage.

And the legal system makes it very difficult, very expensive and very time consuming to repossess a property.

The Central Bank rules require that the lender put aside huge amounts of capital for these non-performing loans.

The result is that the lender is forced to sell the non-performing loans at a big discount to vulture funds.
 


Brendan, great summary. Can I add the following

1. Switching - There is a cost of switching i.e. solicitor fees and maybe a broker. Lenders have also increased lending criteria on the back of Covid potentially preventing those that are paying their mortgages with KBC unable to switch. All the burden for switching is taken on by the borrower
2. What Should the Government be doing - The RWA (Risk Weighted Average) / capital required to be held against mortgages in Ireland vs rest of Europe which makes performing loans less profitable. I think the CBI should address these requirements, perhaps a good indication would be how many mortgages have gone into arrears during Covid. This is the first real world stress test of the mortgage market post the enhanced lending requirements.

Whilst I agree on the repossession piece, this is now becoming more of a legacy issue as the stricter lending criteria matures in the mortgage market. For example, looking at the figures in the IT article the NPL account for 13% of the portfolio they are looking to dispose off. They could have sold that to a vulture fund, but it seems that the remaining 87% is not profitable enough. With low interest rates the profit is already low, but with high capital costs this further erodes the profitability of a mortgage.


  • For Irish mortgages, modelled RWA densities are considerably higher than other European countries, with average risk-weights in Dec-18 (36%) almost 2.5 times the EU average (15%).
  • Current strategies to address high NPE levels will reduce the gap; however, this could be offset by conservative adjustments that may be introduced following the outcome of the ECB TRIM exercise.
  • The divergence in RWA density across individual Irish mortgage portfolios is significant. This will cause inconsistencies in minimal capital requirements set by the Supervisor.
  • Banks must endeavour to increase understanding of the strengths and limitations of internal models and ensure regulatory capital requirements accurately reflect their underlying credit risk. Senior Management must ensure that any excess variability when compared with other European banks is understood and, where possible, addressed through model redevelopments.

[broken link removed]
 
The cost of switching is not, at least for me and multiple people I've spoken to, the monetary cost. Having gone through the process last 2 years ago, there would need to be a very large saving for me to consider doing it again. The process was just too time consuming.

Finance Minister Paschal Donohoe was quoted as saying "competition would remain strong between domestic banks" after this. Has there ever been real competition between the domestic banks?
 
To counter this there are others like me who didn't find the process overly onerous and would do it again if there was a payback. I don't think anyone should be put off by the process. We need to encourage more to switch where possible.


Back on topic. What's happening to the current and savings account holders?
 

I am not the expert here. But what degree of discretion does the Central Bank actually have here with respect to the EU legislation? Also remember that all Irish mortgage lenders except ptsb are directly supervised by the ECB.
 
Hi all,

We currently have a tracker mortgage with KBC and we have made a number of over-payments over the years, with the option to redraw at a later stage. Do you know what the implications of KBC exiting the market will be for our mortgage? Perhaps, we should redraw the over-payments now.
 
Nothing has been agreed yet so you should do nothing for now.
 
NoRegretsCoyote said:
I am not the expert here. But what degree of discretion does the Central Bank actually have here with respect to the EU legislation? Also remember that all Irish mortgage lenders except ptsb are directly supervised by the ECB.
Click to expand...

They will likely be regulated by the Joint Supervisory team which has both ECB and CBI. The rules that applied should be the Basel rules which I understand are adopted in the same fashion across the EU. The irish lenders have Advanced IRB permissions which means they calculate the RWA based on internally developed models that have been approved by the regulators, the other option is a standardised approach which is generally more punitive. The below from KPMG gives a good summary, my two cents is that banks are trying to make a 10% Return on Equity, and a 36% RWA probably doesn't let them get there or there are more efficient places to deploy capital. My view is that KBC must have looked at it and said even by selling the NPLs the remaining performing assets will not generate the necessary ROE to sustain the business model. I should qualify, I am not an expert in this and just suggesting it may be an avenue to explore.

Irish Retail Mortgages – RWA estimates​

For their mortgage portfolios, all five Irish retail lenders have Advanced Internal Ratings Based (IRB) permission. This means that key credit risk parameters (Probability of Default (PD) and Loss Given Default (LGD)) are modelled internally from each Bank’s individual default and loss history. Key regulatory requirements include:
  • The PD must be calibrated to a long-run average measure minimising any pro-cyclicality within the estimate. This ensures capital levels aligned to grades within credit rating systems remain stable through both benign and stressed conditions.
  • The LGD must be estimated with a downturn measure – which is representative of adverse economic conditions.

Key factors​

In a European context, the average risk-weight in Dec-18 (36%) is almost 2.5 times the EU average (15%). This is partially driven by two key factors:
  1. Ireland’s ongoing high percentage of Non-Performing Exposures (NPE): NPEs attract higher risk weights when compared to Performing Exposures, which adversely skews the overall RWA figure for mortgage portfolios.
  2. Incorporation of Ireland’s most recent default and loss experience into Advanced IRB models: EBA guidelines on PD and LGD estimation require banks to have a representative mix of “Good” and “Bad” years in their reference datasets. The Irish mortgage data history contains strong adverse bias from the recent financial crisis. The extreme volatility from the recession to the current benign conditions is also likely to increase sensitivity in both the PD calibration and the downturn LGD estimate.

In the European context, the expectation is that the gap between Irish banks’ RWAs and the EU average is likely to reduce. This will be driven by a number of factors, including:
  • The on-going initiative in Irish banks to reduce NPLs: with portfolio sales likely to reduce the skewed impact of higher non-performing risk-weights; and
  • Updated re-calibration of long-run average measures: the recent improvement in the Irish economy should increase the number of “Good” years in the reference dataset. This should offset some of the bias towards the previous more stressed years.

[broken link removed]
 
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Correct! So how much discretion does the CBI have in this regard? Some posters think that the CBI can wave a magic wand and reduce the risk weights. It's not clear to me that they can.

I fully agree this backward-looking approach doesn't make sense for two reasons:
  1. The Irish property boom and bust was one of the largest ever recorded anywhere in the world, ever;
  2. Macro-prudential rules are now in force to stop mortgage lenders from repeating the crazy stuff they did in 2003-2008.
But the rules are the rules and I would like to know what powers the CBI actually has here.
 

I don't know exactly but the banks can propose model changes and seek approval from the CBI on a simple level. I don't believe there is a magic wand but there is definitely a more collaborative approach that can be taken. I have experience in financial services and dealing with regulation and in essence, there is no upside for the CBI or regulator to approve anything that results in less conservatism. Objectively they are not concerned with the ROE targets and viability of the banks business model and are only looking at one area in a silo.

Now that Banks are actively leaving the market this is an area requiring government intervention to push the case. Ultimately the data will tell the story, we've just gone through a real-world economic shock and house prices are remaining resilient, it will be interesting to see how many are defaulting on their mortgages now vs 08/09.
 
Exactly. CBI has a financial stability mandate, not a competition mandate. They are also very aware of their mistakes 15 years ago and for sure there is a conservatism bias.


Dublinbay12 said:
Now that Banks are actively leaving the market this is an area requiring government intervention to push the case.
Click to expand...

I agree. I just think this will have to be pushed on other margins other than supervision.
 
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