Bank boss: Mortgage rates likely to rise

MORTGAGE rates are “highly likely” to go up across the banking sector over the next year, according to the head of the EBS, who yesterday claimed his building society needs a €300 million capital injection from the State.

Chief executive Fergus Murphy said EBS would like to be invited to come under the scope of the National Assets Management Agency (NAMA) and have over €800m worth of property loans which are of “grave concern” to the building society taken over.

Mr Murphy said about 3% of its balance books are development loans, with €750m to €800m spread across 60 to 70 developers.

He told RTÉ radio he expects the discount applied to loans transferred to the taxpayer to be in the region of 20%-30% but could reach 75% for the worst-performing assets.

This is higher than the discount expected meaning NAMA will pay a lower price for the loans and the taxpayer will be less exposed. For the banks, such a large write-off of their property assets means they might require capital injections from the State to repair their balance sheets.

The details of the discounts were not included in the draft NAMA laws published last Thursday but will be outlined before it is debated in the Dáil in September.

Mr Murphy said his bank may require a €300m capital injection when the transfer to NAMA takes place.

Mortgage interest rates have already increased for customers of Permanent TSB and Mr Murphy said other lending institutions may have to follow suit.

“Margins in Irish banks at the moment are about half of what they are in the likes of the UK, Germany and France,” he said, adding that margins have to increase if banks are to get any lending from international investors.

“So margins are highly likely to go up over the next period of time rather than go down over the next year,” he said.

Mr Murphy said EBS is looking at other ways of increasing its profits: “We’re doing all we can to hold off the increase... We want to be seen to do the right thing, and to do the right thing in terms of helping people through the recession.”

This view was shared by Eoin Fahey, chief economist of KBC Asset Management, who said banks have to either make money from customers or get it from the Government.

He said the market rates banks now have to pay to borrow money from international markets are far higher than the ECB interest rates which they apply to mortgages.

“Banks borrow money that they then lend on to you and me, at market rates. And market rates are too high at the moment for banks to continue at the low mortgage rates that are there now,” Mr Fahey said.

“The more money banks make from their customers, the less, in general, they need from the Government. It’s a very strange situation but that’s where are.”

It has also emerged that banks and building societies could be forced into mergers under powers given to Finance Minister Brian Lenihan in the draft NAMA laws.