Bank profit margins 'set to fall'

RESIDENTIAL mortgage holders will save more that €300 million a year as increased competition erodes the profit margins banks and building societies make, analysts said yesterday.

Central Bank figures show that Irish home owners owe close to €75.536bn on outstanding mortgages and any cut in bank profit margins will deliver massive savings for Irish families.

Goodbody Stockbrokers analyst Eamonn Hughes yesterday said banks' profit spread could fall by as much as 30% by 2007.

"In recent research, we have been debating the long-term profitability of the domestic mortgage market, particularly with Danske likely to be up and running by 2006/2007 and Ulster Bank emerging from its integration of First Active.

"We believe competition will naturally drive down new mortgage business spreads."

Mr Hughes added: "Any change in the stance on below-cost selling would obviously add a further dynamic to the longer-term structural decline in mortgage spreads. This would impact all players in the market, but particularly those most dependent on the consumer - Irish Life & Permanent."

Mr Hughes believes that as pressure on lending institutions margins begin to bite they will put the pinch on independent financial advisors (IFAs).

"In addition, if spreads were to erode, it would obviously make the banks more aggressive with IFAs, so we would expect to see commission rates suffer also.

"This is not time sensitive, but we will obviously be watching developments in the industry closely," he added.

Mr Hughes also predicted that at the very least changes in the codes for switching accounts between banks will result in a reduction of transaction charges after Irish Life & Permanent launched its new no-fee current account.

"Over time, we expect the new code will erode the current account market shares of the two large banks and IL&P looks poised to perform strongly on this front," he predicted.

Commenting on the IL&P move, Davy Stockbrokers' analyst Scott Rankin said the bank is hoping that it can attract around 60,000 new current account customers this year, up from around 40,000 in 2004.

"Obviously there are a number of low-cost options already out on the market, apparently half the population don't pay fees anyway, eg students, OAPs, but they tend to have a catch, ie you must keep a minimum balance or in the case of Permanent TSB you benefit from reduced fees if you move over your mortgage.

"This (new) product appears to have no such conditions attached," Mr Rankin said in a note to clients.

He also believes that the bank's move increases competition in the market.

"It will be interesting to see how this plays out over the coming year. We will be particularly interested in the level of customer inertia shown," he concluded.