Banks are not doing a whole lot at present

Mortgage lending in Ireland totalled €2.63bn last year, which although modestly higher than the previous year, was still a far cry from the almost €40bn lent in 2006.

Prior to the publication of the lending data for the final quarter of last year I had anticipated that the mortgage market for the full year would not have been too far north of €2bn, but the surge in lending in the final quarter blew my forecast out of the water. During the final three months just under €1bn was loaned, almost 38% of total lending for the full year. One interpretation of this surge was that the market was at last starting to function more normally, but a less benign interpretation was that the surge was due to the ending of mortgage interest relief at the end of December. The latter interpretation appears to be the more correct one.

The latest data on mortgage lending relating to the first three months of this year were released earlier this week and clearly indicate the mortgage market is still not functioning as it should, or more precisely the mortgage lenders are still not functioning as they should. Just €331m was loaned during the quarter, a decline of over 26% on the same quarter in 2012. This is a dismal level of lending, but if we try to adjust for the exceptional factors in the final quarter of last year, the picture is somewhat better — in the six-month period to the end of March, lending was 22% higher than the same period in 2012. This analysis may be too charitable, as it is clear the flow of mortgage credit into the system is still inadequate, and the mortgage lenders may struggle to achieve the €4bn in lending that I have anticipated for 2013. Only time will tell.

If banks are not doing very much in the way of lending, then one wonders what they are doing. The latest analysis from the Central Bank shows the banking sector is still dragging its heels in terms of addressing the thousands of borrowers in arrears. We know that at the end of 2012, 94,488 private residential mortgage accounts for principal dwelling houses (PDH) were in arrears of over 90 days. This is equivalent to 11.9% of PDH mortgages, and in monetary terms, accounts for outstanding loan balances of €17.5bn in serious difficulty. A further 28,421 buy-to-let (BTL) mortgages, with outstanding balances of €8.4bn, were in arrears of more than 90 days. In volume terms, this means a massive 18.9% of BTL mortgages are in serious difficulty. At the end of last year, there were 122,909 mortgages in arrears of more than 90 days, accounting for €25.9bn in loan balances outstanding. For most of those 94,488 PDH mortgages in particular, those families or individuals are effectively rendered impotent economic agents who are not in a position to participate in the economic life of the country. This has to be addressed.

The Central Bank analysis this week suggests the banks are taking a pretty proactive approach to restructuring loans before they go in to arrears, but have been a lot less proactive in addressing actual arrears. Furthermore, the approach has been more short term rather than a long-term fix. The banks have a lot of work to do.

In relation to lending to the vital Small & Medium Enterprise (SME) component of the economy, the Central Bank is suggesting that 25% of the SME/corporate loan book is impaired. This also is a very high figure, but is not terribly surprising given the serious economic headwinds facing that sector.

The overall conclusion from this week’s news is that the banking sector is still in serious difficulty and a resumption of adequate credit flow in to productive employment-creating parts of the economy is still very elusive. When combined with the news on Apple’s tax affairs from the US this week, the path ahead for the Irish economy remains extremely challenging.