Tracker mortgages are costing the three domestic banks roughly €708m every year, which is a huge drain on profitability, according to research conducted by Merrion Stockbrokers.
These type of mortgages track the main ECB interest rate, which is at historically low levels. The cost of funding exceeds the returns on these mortgages.
AIB has a tracker mortgage book valued at €16.59bn. Merrion analyst Ciaran Callaghan estimates it costs the State-owned bank €290m to carry these mortgages every year. It costs Bank of Ireland €128m for its €17bn tracker mortgage book and €291m for Permanent TSB’s €14.9bn book.
An EU source told the Irish Examiner on Thursday that there could be an agreement between the troika, the Irish banks and the Government to put in place a solution for the tracker mortgage problem before the EU-wide stress tests scheduled for next March.
If a potential solution involves taking these tracker mortgages off the banks’ balance sheets it would have to pass EU competition law. Moreover, the cost of hiving off these books would create a capital hole in the banks that would have to be filled, according to Mr Callaghan.
“In order to avoid an off-balance sheet transfer which is likely to be capital destructive, the optimal solution in our view would be for the banks to internally ring-fence these portfolios in non-core units, while obtaining a cheap dedicated credit line to fund the assets.
“While such a structure would clearly be beneficial from the banks’ perspective, we are not as confident that the ESM and/or ECB will be as willing, or legally capable, in assisting with such proposal in the near-term,” he said.
In the UK, banks have the option of repricing tracker mortgages. However, Irish contract law prevents the domestic banks from taking a similar approach.
“Unfortunately as many of these loans were originated at the peak of the Irish property bubble, the majority of borrowers are likely to be impacted by negative equity.... we expect only modest redemption levels on these portfolios over coming years. This effectively locks the Irish banks into a negative carry trade for the foreseeable future.”
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