Jim Power: We have a two-and-a-bit banking market that is harming customers

AIB last week published bumper results of over €2bn in net profits, which the chief executive described as the best financial performance in the bank’s history. 

The collapse of the Irish banking system over a decade ago will live long in the memory of Irish people, as well as in the minds of the European Commission and the IMF. The State, or more precisely, the Irish taxpayer had to step in to rescue the financial system.  

Thankfully, the banking system recovered, but the shape and nature of Irish banking changed dramatically, and not in a positive way. Customer service is bad and competition is not a feature of the market.

We moved from a model where there was a lot of competition to a marketplace somewhere between a monopoly and an oligopoly, but which is, thankfully, quite heavily regulated.

AIB and Bank of Ireland dominate the market, with PTSB a much smaller player: We have a two-and-a-bit banking market that is harming the banking public, both business and personal customers. 

A well-regulated competitive market where banks must compete for business would be the optimal scenario, but, unfortunately, I fail to see where meaningful competition is going to come from. 

Non-bank intermediaries will continue to chip away and do their part but will have limited impact.

AIB last week published bumper results of over €2bn in net profits, which the chief executive described as the best financial performance in the bank’s history. 

The major contributor was in interest income, which is basically the difference between what a lender pays out on deposits and what it charges on lending. 

Its net interest income soared by over 83% and AIB now controls 33% of the new mortgage market.

Over at Bank of Ireland, the news was also good: It delivered an underlying profit before tax of €2bn and net interest income of almost €3.7bn. 

And at PTSB, underlying profit jumped to €166m and net interest income increased by 71% to €620m. PTSB had a 19% share of the new mortgage market. 

In a nutshell, the three banks, which basically are the Irish banking system, control an enormous share of the mortgage market, are returning strong profits, and are growing their net interest margins, dramatically.

Business and personal customers end up paying significantly higher lending rates and earning low deposit rates, while the banks rake it in on net interest margins. 

The lack of real competition means the lenders can get away with it. 

Rising interest rates gave them a licence to print money. The transfer of customers out of KBC and Ulster Bank expanded the balance sheets of the three existing banks without the trio having to try very hard. 

It wouldn’t exactly take a genius to generate profits in such an environment.

From the perspective of the beleaguered customer, there is perhaps some good news on the horizon. 

At the ECB meeting in Frankfurt last week, president Christine Lagarde said that inflation had come down faster than expected and that economic growth was weaker. This suggests that rates should start to come down from early summer. 

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Elsewhere, the ESB announced profits after tax of €868m. It said it was "very mindful" that higher energy prices continue to pose challenges for their customers. 

Luckily for the ESB, its generation and supply businesses must operate separately. Massively higher profits from its generation division cannot be used to alleviate the pressures on customers in its Electric Ireland business.

At one level it is good to see Irish companies generating strong profits, but the circumstances in which it is happening does give some pause for thought. 

Personally, I am more impressed by a company like Ryanair that generates strong profit growth, operating as it does in an intensely competitive environment, and its customers are the ultimate winners. 

It takes more genius to generate profits than for companies that are benefiting enormously from rising interest rates and high energy prices.