PROFITS GROW AT BANKS AND ELECTRICITY COMPANIES
Profits growing due to external events rather than skill.
The collapse of the Irish banking system at the beginning of the second decade of the century will live long in the memory of Irish people and indeed of external bodies such as the European Commission and the International Monetary Fund. As we all remember, the State or more precisely the Irish taxpayer, had to step in and prevent the financial system from collapsing. Thankfully, the banking system has subsequently recovered, but the shape and nature of the Irish banking market has changed dramatically over the past couple of decades and not in a positive way. Customer service is bad and competition is not exactly a feature of the market.
We have moved from a model where there was a lot of real competition and not much in the way of regulation to a marketplace today that is characterised by a market model that is somewhere between a monopoly and an oligopoly, and which is thankfully quite heavily regulated. Two institutions, AIB and Bank of Ireland, now dominate the market, with PTSB a much smaller player. It really is a case of back to the future. We basically have a two-and-a bit banking market which is not good for competition, which in turn is not good for the banking public, be it business or personal. A well-regulated competitive market where banks must compete for business would be the optimal scenario, but unfortunately, we are nowhere near that now and I fail to see where meaningful real competition is going to come from. Non-bank intermediaries will continue to chip away, but will have limited impact.
This week AIB published bumper results. The CEO described 2023 as the best financial performance in the bank’s history. Its net profit jumped to €2.058 billion, which is 169 per cent ahead of the previous year. The major contributor to this massive improvement in profits came from net interest income, which increased by 83.3 per cent. This is basically the difference between what it pays out on deposits and what it charges on lending. New lending increased by €12.3 billion. AIB now controls 33 per cent of the mortgage market.
Over at Bank of Ireland, the news was also good. Bank of Ireland claims to have a 41 per cent market share of the Irish mortgage market. It delivered underlying profit before tax of €2.02 billion and net interest income of €3.68 billion, which is 48.3 per cent up on the previous year.
Over at PTSB, underlying profit jumped to €166 million and net interest income increased by 71 per cent to €620 million. PTSB controls 19 per cent of the mortgage market.
In a nutshell we have seen the three banks who represent the Irish banking system controlling 93 per cent of the mortgage market; returning strong profits; and growing their net interest margins dramatically.
While business and personal customers end up paying significantly higher lending rates and earning low deposit rates, the banks just rake it in on net interest margins. It is indeed an ill wind that blows no good. Due to the lack of real competition in the market, they can do this and there is not a lot anyone can do about it. The rising interest rate environment has presented a licence to print money, and as customers migrate from KBC and Ulster Bank, the balance sheets of the three banks are expanding without the banks having to try very hard. It wouldn’t exactly take a genius to generate profits in such an environment.
From the perspective of the beleaguered customer, there is perhaps some good news on the horizon. At the ECB interest rate meeting on Thursday, rates were left on hold as anticipated, but the ECB president said that inflation has come down faster than expected and economic growth is weaker. This all suggests that rates should start to come down after June. It will be interesting to observe how the monopolistic banks will handle lower ECB rates in the absence of any real competition.
On the non-financial front, the ESB announced profits after tax of €868 million, which is a decent performance. It stated that it is ‘very mindful’ of the fact that higher energy prices continue to pose challenges for their customers. However, lucky for the ESB, its generation and supply businesses must operate separately and so the massively increased profits from its generation division cannot be used to alleviate the pressures on its customers in the Electric Ireland business. Here we have another example of a company generating strong profits due to external events in the main, over which it has no control.
At one level it is good to see Irish companies generating strong profits, but the circumstances in which it is happening does give some pause for thought. Personally, I am more enamoured with a company like Ryanair generating strong profit growth, as it is operating in an intensely competitive environment, and the flying customers are the ultimate winners. It takes more genius to generate such profits, than in companies that are benefiting enormously from rising interest rates and high energy prices.
It’s the simple fact that our government didn’t have the guts to set up a savings establishment (even if they didn’t call it a bank) to aid people in leveraging the high interest rates on deposits that hurts us all so much. 😢
The question is why did so many banks leave the sector recently and why are fewer joining. Lack of competition affects the consumer with higher prices./rates. AIB is still gov owned. Is it due to excessive regulations that prevent new entrants joining in? Surely this is the case when you see the profits banks are making.