Brendan Burgess
Founder
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It looks like it. Non-bank lenders have been quicker to raise rates over the last six months. I presume their funding rates have gone up quicker.Is it reasonable to say that the large deposit-taking banks now have a large cost advantage against these non-bank lenders?
Is it reasonable to say that the large deposit-taking banks now have a large cost advantage against these non-bank lenders?
I don't see much sign of retail interest rates on current accounts or deposits rising, so these banks have access to billions of deposits at more or less 0% funding cost = AIB, BoI, ptsb
yep you've nailed it - a deposit base for the last decade was a liability.....its now a very meaningful asset as a capital market yields rise and the spread available on wholesale funding against Irish mortgage rates compresses..........people who are obsessed with the mortgage rates in Ireland vs. EU have perhaps rightly pinned the differential on the lack of competition in the mortgage market itself (I personally think its way more complex and multivariant issue)........moving forward the differential will actually be explained by the lack of competition in the deposit taking side of the Irish banking system and were likely to see some of the wholesale mortgage providers exit or scale back operations............there are lots of financial activities in Ireland right now that can be characterized as 10-YR T-Bond substitution activity......PRS & wholesale mortgage lending.......last time i checked the US 10yr treasury are cruising towards 3-4% range pretty soon.......why sub, when you can just the buy the real thing
P.S. if 10 year bund gets anywhere near 3% this stuff goes away for sure.......US T-bill can substitute for a European pension fund....if you can suitably hedge the FX and still create the same income stream.
I confidently predicate a time when Irish people will pray for the 'cuckoo funds' to fly back to Irish shores and visit us once again
@unknowninsider Yeah this is an option but not really - rates generally move in a highly correlated way moving from the most risk free (ECB rate/10yr bund)...with everything else priced according to risk against this.......it would be highly unusual, in an OECD country, to find any retail mortgage rates trading below that of the sovereign's 10 year bond for the reasons you stated. A mortgage is sovereign 'risk plus' asset & it should always trade with a higher yield to maturity unless something screwy is going on.
The math moving forward will be to see what % of ECB rate rises flow through to interest rates on Irish deposits....or put another way with people just happy to have a bank account after the KBC/UB debacle how likely are AIB/BOI right now to feel the pressure to up their current account rates lest they start meaningfully losing deposits to other institutions? I'd imagine the pressure is ZERO.........so the banks capture the spread between their deposit rates and mortgage rates minus their cost to originate/service the loan and their deposit taking franchise + the time value of the shareholder equity that needs to be held against each loan. Mortgages, even with the cost to originate/service, should always offer a more attractive return on equity versus ECB rate/government bonds. If any bank was doing what you've described just picking up government paper then shareholders should immediately demand that their equity (the only "real" money in a bank) be returned and they themselves could invest in government gilts & capture that spread without all the overhead.....you dont need a fancy CEO, marketing, branding, branch network and underwriters to do that!! Banks exist to achieve a higher RoE than simply holding government paper.......they exist to intermediate money through loans & deposits.....their higher RoE vs. holding gilts too itself represents the inherent additional risk of giving your capital to a financial instituion
There must be plenty of money too be made in it so.
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