AIB must up rate another 1.5% for profitability

Goodbody Stockbrokers analyst Eamon Hughes says AIB will have to hike its interest rate on standard variable rate mortgages by a further 1% to 1.5% to return the bank to profitability and enable it to start lending again.

“The net interest rate margin in Ireland is less than 1%, which is well below the 2.5%-3% interest rate margins in markets similar to Ireland. There is a 2% interest rate margin in the UK,” said Mr Hughes.

AIB announced a 0.5% increase in its standard variable rate for residential mortgages to go from 3% to 3.5%. AIB also announced a 0.5% increase in the standard variable rate for buy-to-let mortgages to increase from 3.95% to 4.45%. There are roughly 70,000 AIB customers on standard variable rate mortgages.

AIB’s tracker mortgages and existing fixed rate mortgages remain unchanged. EBS mortgages are also unaffected by the move.

AIB chief executive David Duffy said no decision has been made on whether future increases are on the way, although he pointed out the AIB’s standard variable rate on residential mortgages at 3.5% is still the lowest in the market. The market average interest rate for standard variable rate mortgages is 4.1%.

There is a high cost of funding for Irish banks because they have to pay a much higher cost for deposits than peer countries. Moreover, the cost of wholesale funding for Irish banks is also high. The future cost of funding for Irish banks depends on developments in the eurozone and whether Ireland can successfully exit the current EU/IMF bailout programme.

At a half-year results press conference yesterday, Mr Duffy said AIB’s current pricing levels are uneconomical relative to the cost of funds and because of this AIB’s mortgage portfolio, including the standard variable rates, are lossmaking. Mr Duffy said the increase in the mortgage rate is essential if AIB is to return to a viable operating model.

But given that AIB is State-owned, there is likely to be stiff opposition to further hikes in mortgage interest rates.

Chief operations officer for the Professional Insurance Brokers Association, Rachel Doyle, said justification for an AIB interest rate hike of 0.5% c at this point is highly questionable. She noted that a 0.5% increase would add €56 a month to repayments on a €200k mortgage.

“While the bank does have the lowest mortgage interest rate, it has also received billions from the taxpayer.

“In the current extraordinary environment one has to question if the decisions behind today’s announcement is purely focused on getting back to profitability by 2014,” Ms Doyle said.