Banks thrive on mortgage rates

IRISH banks make more from their personal mortgage customers than any of their competitors in Europe.

A report on the European Retail Banking Sector by Wall Street bankers JP Morgan has found that Bank of Ireland nets €707 a year per mortgage holder while AIB nets €693, more than three times the European average of €221.

The report estimates that the two Irish banks make almost 50% of their profits from their core personal banking profits.

The Consumers' Association of Ireland chief executive Dermott Jewell said that the difference in profits per customer in Britain compared to Ireland showed that British banks were operating in a far more competitive market than Ireland, where he believes there is very little competition.

"There is a great degree of inertia among Irish consumers. They are a little too relaxed. But maybe a report like this will shake them up and they will demand cheaper services," he said.

Mr Jewell believes that the potential takeover of Northern Bank and National Irish Bank will bring in more competition to the Irish banking sector.

"We need more predatory competition," he said.

In the report JP Morgan state that the Irish banking market is effectively a duopoly, with Allied Irish Banks and Bank of Ireland having substantial market share across a wide range of banking products.

"We believe both banks hold roughly a 40% market share in the current account market and around 20% in the mortgage market. We believe their dominance in their domestic market is reflected by the fact that both banks have around 70% penetration rate in current accounts.

"Furthermore, we estimate both banks generate almost 50% of their profits from the 'core' personal banking products - mortgages, current accounts and deposits," the report's author, Carla Antuenes da Silva, said. Ms Antuenes da Silva said that besides the core banking products, the main differentiation between AIB and BOI is that AIB is strong in the small and medium size enterprise (SME) sector but relatively weak in life businesses.

"BOI has the strength in life but has said it is looking to expand in the SME segment. In conclusion, mortgage growth (or the Irish consumer segment as a whole) has been very buoyant in Ireland and we believe Irish banks remain in the camp of 'volume driven' banks, where profitability relies heavily on strong asset growth." the JP Morgan analyst said.