Brendan Burgess
Founder
- Messages
- 52,117
Would ‘impairment’ and ‘funding’ not also be impacted?Hi Gordon
The banks keep shouting how much extra capital is required
I think it suggests that Irish rates should be about .5% above eurozone rates to allow for the extra capital costs.
This is a point I have often made, Irish mortgages should be a bit dearer but not twice the rate.
Brendan
Twice the rate isn't a helpful metric in my opinion. 0.2% is twice the rate of 0.1%, as is 20% twice the rate of 10%. The former is not worth even considering.Hi Gordon
The banks keep shouting how much extra capital is required
I think it suggests that Irish rates should be about .5% above eurozone rates to allow for the extra capital costs.
This is a point I have often made, Irish mortgages should be a bit dearer but not twice the rate.
Brendan
If I remember right, NAMA paid 9b.p. to covered banks to administer the loans taken on from the banks (at the start of the process anyway)... lean margins there!I was forwarded a note by Goodbody Stockbrokers which I thought was interesting - I had not seen the analysis before.
Our prior research shows that the average funding cost for the banking sector is 40bps (including cashback cost), the average Opex is 105bps, the average impairment charge equates to 20bps and the capital charge is 50bps. This leaves a profit market of 47bps, equivalent to ROEs of <20%, similar to peers in Europe. As such, the key delta going forward we think will be opex (banks have cost save programmes in place) and the capital charge as new lending on lower RWAs and underwritten under the macro prudential rules replaces legacy loans with higher RWAs. On the latter, c.33% of mortgages have been underwritten under the macroprudential rules and is expected to climb to c.50% by end 2023 and then c.65% by end 2025. This could see rates drift down but ROEs remain unchanged.
Eamonn Hughes
Financials Analyst
This is my table from the above:
View attachment 5915
Brendan
Yeah, that struck me as way out of line.Over 25 years my mortgage balance will average about €180k. At 105 bp opex that' s €1900 a year in cost to the bank. This seems massive for the work involved.
There was upfront underwriting of course. But after that there are direct debits and a few automated letters and a phone call every year to pick a fixed rate.
Yes that does seem obscene. A like for comparison with another EU player would be interesting as mentioned above.Over 25 years my mortgage balance will average about €180k. At 105 bp opex that' s €1900 a year in cost to the bank. This seems massive for the work involved.
There was upfront underwriting of course. But after that there are direct debits and a few automated letters and a phone call every year to pick a fixed rate.
Assuming profit margin is at least equal in other countries, what would be the conclusion? Capitalisation requirements keeping out the competition?
While capital costs in Ireland may be high surely capital costs in other eurozone countries are not zeroI think it suggests that Irish rates should be about .5% above eurozone rates to allow for the extra capital costs.
Partly, I'd say they look at Ireland and see the rates charged but then look at our default rates and cost/odds associated with repossessing property here. The risk adjusted return may not look so good.
The higher risk is also reflected in the capital requirements
While capital costs in Ireland may be high surely capital costs in other eurozone countries are not zero
The average interest rate on a new mortgage in the Republic, 2.72 per cent as of September, is the second-highest in the euro zone and more than double the currency bloc’s average rate.
An analysis by Goodbody Stockbrokers in July said the capital charge in the Republic on a bank home loan equates to 0.5 percentage points of a mortgage rate, 2.6 times the EU figure. Irish funding costs, at 0.4 points, are almost a third higher, while loan impairment charges account for 0.2 points locally, compared to 0.12 across the EU.
But the real difference is in running costs, including staff, IT spending, levies and other general overheads. The stockbroking firm estimated that operating costs account for 1.05 points of the average Irish mortgage rate, compared to 0.65 points across the EU.
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?