Irish banking sinks deeper into crisis as KBC follows Ulster out the door

Commentators sound alarm bells as the 'two big boys' look set to control 70% of the Irish mortgage market
Irish banking sinks deeper into crisis as KBC follows Ulster out the door

The shock decision by Belgian lender KBC Bank to exit the Irish banking market is the latest twist in a brewing crisis for consumers and businesses. Picture: Brian Lawless/PA

The shock decision by KBC Bank, the Belgian lender, to exit the Irish banking market and for most of its €10.5bn of home loans to be gobbled up by Bank of Ireland is just the latest twist in a brewing crisis for consumers and businesses.

It comes just weeks after the decision of Ulster Bank to shut up shop in the Republic and for its €20.5bn in mortgage and business loans to be carved up between AIB and the financially scarred Permanent TSB.

It comes just a few weeks after that Bank of Ireland decided to announce during the Covid pandemic its plans to shut over 100 branches in the Republic and the North and it follows plans in recent weeks by AIB to buy back Goodbody Stockbrokers, and the likely sale of scandal-hit Davy, Ireland’s largest stockbroker, to Bank of Ireland.

Second banking crisis

The flurry of developments means Ireland is facing a second banking crisis, just 10 years after the system was supposedly returned to health with the help of €64bn of taxpayers’ cash.

Experts say that “crisis” and “meltdown” are appropriate terms to describe the state of Irish banking. The market here has long been dysfunctional with market power since their rescue vested in the big two lenders, AIB and Bank of Ireland.

No surprise then that Irish mortgage rates and loans to small businesses are among the costliest in the eurozone, analysts say. Almost at whim, the concentrated nature of Irish banking means the big two banks have been able to outspend and see off rivals for years.

Impacts on consumers

For consumers, the shockwaves of the KBC exit and the proposed purchase of its performing mortgage book by Bank of Ireland can be put simply: 

The lender that provides Ireland’s cheapest home loans is about to be acquired by the lender charging the most expensive home loans in Ireland.

KBC controls around 12% of the mortgage market and vies with Spanish-owned Avant Money, the minnow that recently entered the market, to offer the cheapest loans, with no costly incentives such as cashback loans. For a long time, KBC could rightly say it was the mortgage competition in Ireland.   

To add to the pain, the next consistently competitive in the mortgage market is Ulster, but it too is exiting after its British NatWest parent decided its shareholders would be better served by using its capital elsewhere.

'Two big boys' to dominate market

“On mortgages, if you consider both AIB and Bank of Ireland have just under 60% of the market and KBC has over 12%, that means that over 70% of the market is going to be controlled by the two big boys. And on top of that they will get a little bit from the Ulster Bank loans too,” said Michael Dowling, a leading mortgage broker.

He points out stark figures: KBC offers a mortgage with a loan-to-value of 90% that is fixed for three years at a rate of 2.35%. For the same product, Bank of Ireland offers a rate of 3%.

KBC had the best rates with Avant for 80% and 90% loan-to-value mortgages, in other words, offering the best-priced loans for first-time borrowers.

Worse, Mr Dowling said that Bank of Ireland “hangs its coat” on cashback incentives that are widely discredited as offering the least financially knowledgeable the worst interest rates. “It is not good for consumers,” he said.

Normal rules don't seem to apply

This second banking crisis in a decade goes wider again. The normal competition rules applied by the Competition and Consumer Protection Commission in many business markets seem not to apply in banking.

The exit of Ulster and now KBC, in quick succession, has wider implications. The policy of the Central Bank and the ECB in returning the Irish banks to health was to allow lenders to sell off to vulture funds their distressed mortgage loans, the long-running sore from the financial crash.

The sale of distressed mortgage loans was designed to rid their books of billions worth of soured loans with the aim of freeing them up to lend to households and businesses at competitive rates. However, the Irish banking market has ended up in a bad place where two significant lenders are set to exit, while a huge chunk of the distressed mortgages from hard-pressed households are owned by foreign-owned funds, who are not anchored in the country.

Eoin McGee, the presenter of RTÉ’s 'How To Be Good With Money' is concerned at the Irish market's lack of attractiveness to potential competitors for the dominant banks. 
Eoin McGee, the presenter of RTÉ’s 'How To Be Good With Money' is concerned at the Irish market's lack of attractiveness to potential competitors for the dominant banks. 

Financial adviser Eoin McGee, author of How to be Good with Money, said that KBC had long made the case that it was the bank that was providing competition “and now it is gone”. 

“We have to accept that we are not attractive to international banks. The existing international banks want to get out. There are hard questions to be asked here,” he said. 

The exit of KBC so soon after the departure of Ulster from which it could have been expected to take advantage is alarming. 

In 2017, after a lengthy review, its Belgian parent had decided to stay, and as recently as February its chief executive here, Peter Roebben told the Irish Examiner the Belgian group was committed, despite the Irish unit posting a hefty €48m loss during the 2020 pandemic. However, in a first sign that all was not well, KBC last month said it was moving Mr Roebben to its Bulgarian bank, but denied at the time that the move was significant.

Call for State intervention

The market is wide open for Ireland's two big banks 'to literally construct this market as they see fit,' said Dermot Jewell, who advocated State intervention in the banking market. 	File photo: RollingNews.ie
The market is wide open for Ireland's two big banks 'to literally construct this market as they see fit,' said Dermot Jewell, who advocated State intervention in the banking market. File photo: RollingNews.ie

Many experts say there is no going back to old ways. The Government can no longer base its hopes on attracting foreign-owned competitors. 

Dermott Jewell, policy adviser at the Consumers’ Association of Ireland, said there is no longer anything close to competition in Irish banking. He urges State intervention to fashion a new banking force from credit unions and others:  

It leaves the market wide open to the main two banks to literally construct this market as they see fit and that is never going to be good.  

Paul Joyce, senior policy adviser at Free Legal Advice Centres, or Flac said the failure of banking policy in the past 10 years is shown in that there is a limited number of Personal Insolvency Arrangements and a failure to decisively deal with the mortgage arrears.  

Feargal O'Brien, director of public policy at business group Ibec, said the State will be required to increase its role in Irish banking, building on its initiatives with the Strategic Banking Corporation of Ireland (SBCI) and the Ireland Strategic Investment Fund.

The exit of KBC "moves us a step closer from an effective duopoly to an actual duopoly", said Neil McDonnell, chief executive of business group Isme. Mr McDonnell said the Government can try and deal with the fallout as best it can but that Finance Minister Paschal Donohoe “has no market power” to wield in the crisis. 

He said the State could extend the SBCI to give loans directly from a small number of regional offices in Dublin and Cork and elsewhere but with no branches. There also needs to be legal changes over the security of loans for banks. 

"It is a meltdown for the Irish banking market," said senior economist Jim Power. 

“There has been a market failure and there is a banking crisis, and the Bank of Ireland is closing branches. The private market is not providing the solution and market forces are going to make matters worse so there is a requirement for Government intervention,”  Mr Power said.

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