Wholesale 10 year rates

Interest income = 2,770m

Interest expense = 543m

Net interest income = 2,227

Net interest margin = 1.86%
 
Protocol said:
Interest income = 2,770m

Interest expense = 543m

Net interest income = 2,227

Net interest margin = 1.86%
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Thanks Protocol. As noted above, I'm talking about lending occurring today, the 9th June.

Over the period of the annual report, swap and funding markets were different. See my example above - that is what I'm struggling to understand.
 
unknowninsider said:
I don't see it that way. Below is how I understand it to work.

At present, EURIBOR is -0.30%.

Asset.
BoI receive: 1.9% fixed from customer

Liability.
BoI pay on hedge: 1.65% fixed (edit. 4yr swap now at 1.78% post the ECB annoncement).
BoI receive from hedge: -0.30% floating (current EURIBOR)

Gross lending margin: (1.9% - 1.65% + -0.3%) = -0.05%

BOI Net Margin= net lending margin - cost of funds (from annual report).

-0.05% - 0.04% = -0.09%.
Click to expand...

A swap is theoretically cost neutral at the outset (counterparty margin built into the rate, I think)?
 
Itchy said:
A swap is theoretically cost neutral at the outset (counterparty margin built into the rate, I think)?
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Yep - hence why swap sellers want 1.7%+ now for the variable interest rate risk. Forward rates imply that mortgage fixed-rates should have already moved up by 150bps. I can't rationalise why BOI, PTSB, AIB et al haven't done this already.

I fear customers will be left holding the interest rate bag when the banks spring a huge rate increase.. instead of prudently managing rates upwards in recent months.
 
@unknowninsider

For simplicity:

I go into ptsb today and lodge €200k for five years at 0.51%.

Tomorrow you go into ptsb and borrow that €200k ptsb for 2.5% fixed for five years .

Where is the uncovered interest rate risk? Why would ptsb need to hedge?
 
NoRegretsCoyote said:
@unknowninsider

For simplicity:

I go into ptsb today and lodge €200k for five years at 0.51%.

Tomorrow you go into ptsb and borrow that €200k ptsb for 2.5% fixed for five years .

Where is the uncovered interest rate risk? Why would ptsb need to hedge?
Click to expand...

That makes sense on paper - but in reality this is pure interest rate speculation.

What happens if (read: when) the interest rate on savings accounts needs to increase to 1% (which should happen as ECB rates increase)? This funding position you outlined is now loss making when factoring in the operating costs, risk capital. And the bank would also face structural liquidity issued similar to 2008.

Hence, all banks hedge this interest rate risk between overnight deposit accounts and any fixed-rate lending they undertake.
 
unknowninsider said:
Gross lending margin: (1.9% - 1.65% + -0.3%) = -0.05%
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I don't follow the logic. Issuing a 4Y fixed rate mortgage has positive NPV over the four years. Enter into a Swap with neutral NPV. When added together, you get a negative NPV? Am I missing some basics here?
 
unknowninsider said:
That makes sense on paper - but in reality this is pure interest rate speculation.
Click to expand...
But my example refers to assets and liabilities with identical maturities. There is no interest rate risk here.


unknowninsider said:
All banks hedge this interest rate risk between overnight deposit accounts and any fixed-rate lending they undertake.
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Absolutely all of it? What about on current accounts which don't and will likely never pay interest? You have risk of deposit flight but no real interest rate risk.
 
NoRegretsCoyote said:
But my example refers to assets and liabilities with identical maturities. There is no interest rate risk here.



Absolutely all of it? What about on current accounts which don't and will likely never pay interest? You have risk of deposit flight but no real interest rate risk.
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How much 5 year, 4 year or even 1+ year deposits do PTSB have as a proportion of their total funding model? It is far lower than whats on-demand, 1 month etc. So the aggregate duration of their liabilities is <12 months, most likely closer to 6 months. This is what their hedging towards.

For example, Davy reported recently that BOI have an aggregate hedge exposure of c. 3.5 years, AIB is near 5 years. PTSB would be around this range too as most bank lending is between 3-5 year fixed-rate periods.
 
Yes near 2.4 so far. I'm kind of lucky I fixed for 10 years on 22of May around 3 weeks ago and it was 1.7 so I have a cushion of .7 now to overpay the fixed without penalty. What I think is the main banks were happy to hedge when it didn't cost anything but now there is no point in hedging it's too expensive and they have their current accounts to tie them over. It will hit the back street lenders though big time-Avant, Finance Ireland and ICS. I believe funny enough Finance Irelands mortgage backed securities were being bought by BOI ! Looks like the backstreet lenders/mainstreet lender differential is going to invert!
 
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lomber said:
It will hit the back street lenders though big time-Avant, Finance Ireland and ICS.
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I believe that Avant's mortgage lending is funded by Bankinter's customer deposits in Spain, not by the wholesale market.
 
Well then its going to hit Finance Ireland and ICS big time. ICS is already at 3.6 for 5 years so still have a margin but even that could go up depending on rates. I dont see how FI can write their loans now unless they have sold their underwriting forward. Short term rates are still dirt cheap and negative.
 
lomber said:
I dont see how FI can write their loans now unless they have sold their underwriting forward.
Click to expand...
Well, it looks like they can't …

Finance Ireland announces substantial rate increases

From 27th June 2022: 3 and 5 year fixed rate products will increase by 120bps across all LTV bands (Progress & Progress Plus). Rates for longer term products (10, 15, 20 & 25 years) will increase by 50bps Loan Offers honoured at current rates All loan offers issued by cob Friday June...
www.askaboutmoney.com
 
Just to be clear here...........non-bank lenders without a pool of cheap 0% current a/c deposits and cheap deposit a/c are facing large rises in funding costs?

Is that correct?

This includes who?

Finance Ireland
ICS?


This means that the mainstream banks, with huge pools of cheap deposit liabilities, are less exposed?
 
Protocol said:
Just to be clear here...........non-bank lenders without a pool of cheap 0% current a/c deposits and cheap deposit a/c are facing large rises in funding costs?

Is that correct?

This includes who?

Finance Ireland
ICS?
Click to expand...

If interest rate forecasts are to be believed, these won't be staying at 0% for long. Markets currently pricing in rates of 3% within 18 months, I'd expect the banks to pass this on to savers.
 
Given the floods of deposits leaving KBC and UB, surely there are so much deposits, that rates will be slow to rise?

This suggests that the main three banks will improve their mortgage market share?
 
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