Ireland’s banking crisis has left the country in disarray. Yet, the pain being experienced by hard-pressed Irish taxpayers may only be a taste of what’s to come. Now, in addition to tax hikes to pay for bailed out banks, the average Joe is being hit by higher banking fees by those very same banks. What’s more, at a time of historically low interest rates, many of these banks are also increasing their mortgage interest rates in an effort to return to profitability, meaning a double-whammy for some customers.
Meanwhile, the Irish government is taking a back seat watching developments unfold. Minister of Finance Michael Noonan says the government can’t interfere, claiming, ‘This is purely a commercial decision for the banks.”
A bit far fetched when it was the government that kick started the crisis by issuing the bank guarantee back in 2008, effectively bankrupting the country and leaving it to the ordinary Irish citizen to pay the bill at an estimated €16,500 per head.
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The initial bailouts given out to Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY) and Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR) amounted to €3.5 billion each. Yet, despite the money, by the end of 2010 the state had no option but to go, cap in hand, to the European Union’s Financial Stability Facility and the International Monetary Fund for a unprecedented €67.5 billion. Since then, the government has had to introduce a fleet of new taxes hitting ordinary people already reeling from the recession.
Customers Voting with Their Feet
Unsurprisingly, customers blame the banks and aren’t happy about higher charges and the widening gap between the ECB interest rate and that charged by their bank.
Michael Elderfield, Ireland’s Financial Regulator, commented, ‘”Interest rate increases for borrowers are an unfortunate, but an inevitable consequence of the banking crisis. It’s important to be frank and acknowledge that the coming months are likely to see a continuation of the process of the banks repricing their mortgage books.”
Consumers, of course, don’t accept this. Dermot Jewel, chief executive of the Consumers’ Association of Ireland, said, ‘The more people suggest that something is inevitable, the more of a reality it becomes. It’s too easy for the banks to use the regulator’s comments for increasing rates.”
Many Irish citizens are switching banks to minimize fees. Permanent TSB Group (OTCMKTS:ILPMY) is one bank that is benefiting from a stream of customers leaving Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY) and Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR). A spokesperson for the Permanent TSB said, “Since we began our free banking initiative, we’ve seen a rise of 60% in new account openings and we expect that growth to continue.”
So where does this leave Allied Irish Bank and Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR)? Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY)’s price has been moving downward ever since 2008. Where once it hovered just under €9, the price now fluctuates under 10c. The government might be keeping the bank alive, but investors see the stock for what it is – a dead duck. Sixty-seven branches have closed in the last year and 2,500 staff will have left by the end of 2014.
Yet AIB still says it hopes to make a profit next year. At a poorly attended shareholder meeting last month, Chairman David Hodgkinson said, “We still aim to generate a pre-provision profit in 2013 and return to post-provision profitability in 2014.”
Standard and Poor disagrees, stating just this week that there was ‘a one-in-three probability’ that Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY)’s rating will be downgraded in the next 12 months. “For Allied Irish Banks, this is based on our view that the bank still faces considerable challenges to return to profitability.”
Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY) was unable to comment on what action was being taken to stop customers leaving, but Allied Irish Bank’s Director of Products, Fergus Murphy did say, “We recognise that any increases in charges to our customers are unwelcome, but, unfortunately, we have no option to ensure that the bank is covering costs on the services it provides. Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY) is providing information on how to minimise bank charges, which is available in banks and on our website. We would strongly encourage customers to review the materials to consider how using alternative channels for day-to-day transactions can help to reduce charges.”
A Gap in the Market
Profits continue to slump at Bank of Ireland, as the Central Bank puts pressure on its margins and mortgage arrears continued to mount. An increase in bank charges here too has customers looking elsewhere.
Certainly, there’s a gap emerging in the market for an institution that’s prepared to offer free banking to those fleeing the sinking ships. One bank that has made waves in the Irish market is Rabodirect, part of Dutch multinational, Rabobank. This entity has already pried customers away from the others with high interest savings accounts and could do well if they moved into the current account sector. However, when asked about their future plans for the Irish market, Rabodirect was noncommittal, stating that, for now, they were concentrating on deposit accounts and investments.
These are certainly interesting times for the Irish financial sector, and not to mention, scary times for investors. But, as long as the only way is up for bank charges, then customers are going to continue to look for alternatives to the likes of Allied Irish Banks and Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR). Surely it’s only a matter of time before someone steps in to mop up the market.