Two new lenders entering Irish mortgage market

Brendan Burgess

Brendan Burgess

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Charlie Weston has the story in today's Irish Independent.

www.independent.ie

An Post linking up with new lender MoCo to offer mortgages

An Post will join forces with start-up lender MoCo to enter the Irish mortgage market next year.
www.independent.ie www.independent.ie

Dublin-based MoCo is in talks with the Central Bank to get authorisation as a retail credit firm, effectively a non-bank lender.

It is understood that MoCo, which has funding from the money markets in the UK, will leverage off the An Post brand.

...
Meanwhile, another start-up – Nua Money – is seeking authorisation from the Central Bank to operate as a non-bank digital mortgage lender.

It plans to use technology to speed up the loan approval process, supported by experienced underwriters.

It seems odd when ICS effectively closed to new lending last week.

Brendan
 
Hard to see their arrival (if it happens) leading to much extra competition around mortgage interest rates since they will fund themselves from the money markets, which are currently expensive.
 
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

This means they can charge less on mortgages than a lender financed from bond markets.

Therefore, their market share will grow? Without having to sacrifice margins?

The only other possible source of low-costs funds that I see is the CU, they have billions of fairly immobile deposits?

Could the CU sector act a wholesale funder, rather than each CU trying to be a mini-mortgage bank?

Could 50 or 100 large CU each put 10m into a fund, and partner with a retail mortgage lender?

Or could the CU set up their own national lender, financed by a fund drawn from individual CU?
 
I have great respect for An Post, and I think their website, mail tracking have all improved.
  • Their parcels system seems to have improved.
  • An Post insurance broker is good, IMHO
  • postmobile is good

But in personal finances, has their current account had much impact?

I don't see their mortgages having much impact, unless they offer low rates like Avant did.
 
Protocol said:
Is it reasonable to say that the large deposit-taking banks now have a large cost advantage against these non-bank lenders?
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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.

A year or two ago I would've said the deposit -taking lenders were at a disadvantage as they were parking deposits overnight at the ECB and paying for the privilege. Not any more.
 
Protocol said:
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
Click to expand...

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
 
letitroll said:
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
Click to expand...

This seems spot on letitroll, and it makes a ton of sense if bank interest rates don't move. But just to work through your thinking on spreads vs. UST's, can we discuss this example with Irish Govt Debt?

Given that 4-Yr fixed rate Irish Govt bond yields are now yielding 1.0% and PTSB has a 4yr fixed rate at 2.05% (other banks have similar rates), at what stage does the board of the Irish Banks say, "lets bypass all the costs, risk capital issues, staff costs etc associated with selling a 2% mortgage, and invest in a 4-year Irish government bonds instead"?

I'm not privy to bank financials, but I'm almost sure that accounting for all the costs of issuing and holding mortgages, current mortgage rates the banks are offering cannot be more attractive than holding Irish government debt.
 
@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
 
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letitroll said:
@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
Click to expand...

Thanks for that explanation - it's pretty interesting to understand the arbitrage banks enjoy due to their zero cost of funds on deposits. I suspect shareholder expectations on ROE will begin to increase now that we're in a higher interest rate world. From what I read this morning most Irish banks were targeting 10% ROE when interest rates were <0%. Now that they're going to be >1.5%, will that ROE expectation now increase to c. 12%? The simple logic would imply that ROE expectations should also increase should the spread between ROE and 'Risk-Free' be maintained to justify the equity risk premium.
 
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Here is the Bank of Ireland cost of funds for last year from their Annual Report. I don't fully follow it.

1660812691404.png



Note 4 Interest income

1660812778987.png


Note 5 Interest Expense

1660812797382.png
 
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