Brendan Burgess
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The transcript from Richie Boucher's appearance before the Oireachtas Finance Committee is here I have extracted the bits relevant to the SVR
Chairman: http://www.oireachtas.ie/members-hist/default.asp?housetype=0&HouseNum=31&MemberID=1841 Before I bring in the other members, I wish to ask Mr. Boucher a question. In regard to the net interest margin on standard variable loans, the margin the bank has in respect of those loans at over 3% seems quite high.
Mr. Richie Boucher: The margin is not necessarily based on it because we have a liquidity risk with mortgages. A mortgage is a 20 to 25-year instrument and we take liquidity risk in the provision of mortgages. We look at those as they operate elsewhere. Yesterday the Irish Government, which is, in effect, the base risk-free investment, issued a 15-year bond at just under 2.5%. Our fixed rate offering is 4.99% and that is a 2.5% margin. For our margin, and, in particular, for our capital allocation models and the capital allocation the Central Bank requires to hold against our different books, we must take into consideration our loss experience.
Our loss experience on our Irish mortgage books has been different from what it has been in Europe. Another comparator I would note is that we have a business in the UK and our mortgage business in the UK is roughly the same size as our Irish mortgage business. It is a very similar type of market structure and I will return to why that is the case. The spreads and margins in the UK in which we operate are the same.
Some reference has been made to a comparison between Irish rates and European rates. A couple of features I would note in that respect is that the loss experience is different, so the capital allocation is different. However, a very significant feature of a number of the European markets is tax-based subsidies for bond markets. An example is the Pfandbriefe market in Germany where banks operate as originators and issuers and they sell their mortgages on to bond markets. If we take into account that there is tax-based or taxpayers' subsidy for those bond markets, it is not comparable. The more comparable market in terms of market structure and access to bond markets is the UK market against the Irish market.
Deputy Michael McGrath:
I welcome Mr. Boucher, Mr. Farrell and Mr McLoughlin. As my time is limited, I can only cover some of the key issues. I want to continue with the issue the Chairman raised, in particular about the pricing strategy for standard variable rate mortgages. The bank is currently charging in the region of 4.5% for a new mortgage if the loan-to-value is over 80%. How can Mr. Boucher justify that when his stated cost of funds is 1.15%, which have come down by about 30% in the past 12 to 18 months? The bank's margin has increased very substantially. Most people would regard a variable rate product as one where if the market conditions are bad, the rate is going to go up, but when the market conditions are good, people expect the variable rate to come down, but that has not happened. When was the last standard variable rate reduction by Bank of Ireland in respect of mortgage products?
Mr. Richie Boucher: The last reduction would have been in 2008 or 2009. There has been no significant interest rate cycle in that period. The group's net interest margin has improved in the 12 month period from 1.65% to 2.08%. That is progress but is certainly not an exorbitant margin. We have to get 98% of our credit decisions right before we can make any money or cover our costs at that particular margin. As I was trying to identify in my answer to the Chairman's question, the structure and liquidity risk one takes against mortgages are important. We are providing a mortgage which has a significant liquidity risk. We have a repricing opportunity but we are giving a 25-year commitment of money to the customer. We cannot raise that money so it is not necessarily comparable to look at our overall cost of funds. For example, if we issue a covered bond or unsecured debt in the markets, we are issuing it at about 2% to 3%. The Irish Government in raising 15-year money in the market at 250 basis points. One has to take account of the nature of the product one provides, the liquidity risks, the historic credit losses one has taken and the capital one applies. There are a range of factors in that. We have to enhance our margin but we try to ensure our products are competitive on an ongoing basis. We are a commercial business, we operate in a competitive market and we must ensure our products are sustainably competitive, that we can continue in the market, attract customers and do business.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 The bank's margin has increased very substantially. Its cost of funds has reduced very substantially by about one third in the past 12 to 18 months and yet Mr. Boucher is telling me it is about six years since Bank of Ireland has reduced the standard variable rate being charged. One of the bank's main competitors, AIB, has stolen a march on it in the market and has reduced its rate. I presume Bank of Ireland will have to follow suit. Mr. Boucher will not confirm that today but, ultimately, the market will dictate the bank's reaction. I submit to Mr. Boucher that the bank is taking advantage of variable rate customers. They are being exploited. It will come as a surprise to nobody that a bank seeks to maximise profits, but this bank is profiteering on the backs of variable rate customers. Mr. Boucher made the comparison with the UK market which he said is the best comparison with Ireland.
[Deputy Michael McGrath:
Across the Border, Bank of Ireland offers a 1.98% fixed rate up to January 2017 if I have a low loan-to-value ratio of 60% or a 2.09% fixed rate or a variable rate of just over 2% for at least two years if my LTV ratio is 75%. There is a more competitive environment in the North. If, after two years, Bank of Ireland does not keep the rate low for a customer, he or she can switch to another bank. Customers in the South do not have that option. How can Mr. Boucher justify such a massive difference between the rates Bank of Ireland charges in the Republic and the rates it charges in Northern Ireland and the rest of the UK, given his statement to the effect that both markets are remarkably similar?
Mr. Richie Boucher: Our average spread on new lending in our UK mortgage business, which is growing and developing, is between 3.99% and 4.5%. That is a factual matter.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 Bank of Ireland has advertised that it is offering a fixed rate of as low as 2% and a variable rate of just over 2% for defined periods of time where people have relatively low LTV ratios, but those rates are much more competitive than what Bank of Ireland is charging in the Republic.
Mr. Richie Boucher: I should note that the Deputy also cited our fixed rates. We can buy fixed rate money and we offer fixed rate mortgages. We are still surprised at the lack of take-up of fixed rate money in the market. We note that the Government has made a decision to try to fix rates over a period. We try to offer attractive fixed rates. We would encourage customers to consider fixed rates. A fixed rate gives a customer certainty and control of his or her finances in so far as that is possible. We provide attractive and competitive fixed rates.
As the Deputy stated, we operate in a competitive market. We review our rates on an ongoing basis. We also bear in mind our responsibilities to all of our stakeholders - our depositors, our shareholders and the taxpayers whom we have repaid. The strategies of other banks are something we keep an eye on, but we have learned not to follow them slavishly. We consider other banks, the sustainability of their propositions and their ability to attract capital to fund themselves and meet all of their commitments to their stakeholders.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 Has Bank of Ireland any intention of reviewing its standard variable rate on mortgages in light of current market conditions?
Mr. Richie Boucher: We consider what competitors do and review our rates on an ongoing basis.
Deputy Michael McGrath:
Is the bank open to switcher mortgage applications? If I am with another bank, in a healthy financial position and want to transfer my mortgage to Bank of Ireland, would it be open to that?
Mr. Richie Boucher: I will ask my colleague, Mr. McLoughlin, to assist Deputy McGrath.
Mr. Liam McLoughlin: Bank of Ireland is certainly open to new business from switchers. However, the Irish market is dominated by tracker mortgages, amounting to approximately 60%. The inclination to switch mortgages is not as it is in other markets, but we are keen to switch business into Bank of Ireland.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 When the committee asked that question of Bank of Ireland previously, the response was that switchers accounted for a low proportion of its mortgage business.
Mr. Liam McLoughlin: That is the fact. It is so low because keenness for switching mortgages when 60% of the market is on tracker rates is also low. Therefore, the quantum of switching in the Irish market is low. However, we are keen to-----
Mr. Richie Boucher: We have switcher products, but the desire of a customer to switch to a variable or fixed rate mortgage when he or she is on a tracker rate is very low.
Deputy Michael McGrath:
I do not find Mr. Boucher's argument about pricing policy convincing. He was the one who drew the comparison with the UK market, calling it remarkably similar to Ireland's. He stated that the average rate Bank of Ireland charged in the UK was approximately 4%. However, the offering it makes to new customers in Northern Ireland and the rest of the UK is remarkably competitive and strikingly different from the offering it makes in the Republic. Mr. Boucher has cited a rate of 4.5% at a time when its cost of funding is probably 1% or so. That is a remarkable margin to charge for variable rate products. I am not just referring to mortgages but also to personal loans for which Bank of Ireland charges approximately 12%, to credit cards for which it charges 20% or so and to loans to small to medium-sized enterprises, SMEs, which are paying way over the odds.
Mr. Richie Boucher: I will point out that the group margin is 2%. We must take into account liquidity risks, especially as regards mortgages. It is a 25 to 30 year proposition to customers. As such, we must take a liquidity risk for that duration. The Government has taken out a 15-year bond at 2.5%. It is difficult to compare one product or its features with another. We must have subordinated capital. We must have a range of instruments of various maturities to match our different products. We are also required to take into account the weighted cost of capital against products. This must also factor in loss experience. Our loss experience on our UK mortgage book is different. To assist the Deputy, though, we will provide him with our UK and Irish mortgage rates so that he can have an appropriate comparative.
Chairman: http://www.oireachtas.ie/members-hist/default.asp?housetype=0&HouseNum=31&MemberID=1841 Before I bring in the other members, I wish to ask Mr. Boucher a question. In regard to the net interest margin on standard variable loans, the margin the bank has in respect of those loans at over 3% seems quite high.
Mr. Richie Boucher: The margin is not necessarily based on it because we have a liquidity risk with mortgages. A mortgage is a 20 to 25-year instrument and we take liquidity risk in the provision of mortgages. We look at those as they operate elsewhere. Yesterday the Irish Government, which is, in effect, the base risk-free investment, issued a 15-year bond at just under 2.5%. Our fixed rate offering is 4.99% and that is a 2.5% margin. For our margin, and, in particular, for our capital allocation models and the capital allocation the Central Bank requires to hold against our different books, we must take into consideration our loss experience.
Our loss experience on our Irish mortgage books has been different from what it has been in Europe. Another comparator I would note is that we have a business in the UK and our mortgage business in the UK is roughly the same size as our Irish mortgage business. It is a very similar type of market structure and I will return to why that is the case. The spreads and margins in the UK in which we operate are the same.
Some reference has been made to a comparison between Irish rates and European rates. A couple of features I would note in that respect is that the loss experience is different, so the capital allocation is different. However, a very significant feature of a number of the European markets is tax-based subsidies for bond markets. An example is the Pfandbriefe market in Germany where banks operate as originators and issuers and they sell their mortgages on to bond markets. If we take into account that there is tax-based or taxpayers' subsidy for those bond markets, it is not comparable. The more comparable market in terms of market structure and access to bond markets is the UK market against the Irish market.
Deputy Michael McGrath:
I welcome Mr. Boucher, Mr. Farrell and Mr McLoughlin. As my time is limited, I can only cover some of the key issues. I want to continue with the issue the Chairman raised, in particular about the pricing strategy for standard variable rate mortgages. The bank is currently charging in the region of 4.5% for a new mortgage if the loan-to-value is over 80%. How can Mr. Boucher justify that when his stated cost of funds is 1.15%, which have come down by about 30% in the past 12 to 18 months? The bank's margin has increased very substantially. Most people would regard a variable rate product as one where if the market conditions are bad, the rate is going to go up, but when the market conditions are good, people expect the variable rate to come down, but that has not happened. When was the last standard variable rate reduction by Bank of Ireland in respect of mortgage products?
Mr. Richie Boucher: The last reduction would have been in 2008 or 2009. There has been no significant interest rate cycle in that period. The group's net interest margin has improved in the 12 month period from 1.65% to 2.08%. That is progress but is certainly not an exorbitant margin. We have to get 98% of our credit decisions right before we can make any money or cover our costs at that particular margin. As I was trying to identify in my answer to the Chairman's question, the structure and liquidity risk one takes against mortgages are important. We are providing a mortgage which has a significant liquidity risk. We have a repricing opportunity but we are giving a 25-year commitment of money to the customer. We cannot raise that money so it is not necessarily comparable to look at our overall cost of funds. For example, if we issue a covered bond or unsecured debt in the markets, we are issuing it at about 2% to 3%. The Irish Government in raising 15-year money in the market at 250 basis points. One has to take account of the nature of the product one provides, the liquidity risks, the historic credit losses one has taken and the capital one applies. There are a range of factors in that. We have to enhance our margin but we try to ensure our products are competitive on an ongoing basis. We are a commercial business, we operate in a competitive market and we must ensure our products are sustainably competitive, that we can continue in the market, attract customers and do business.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 The bank's margin has increased very substantially. Its cost of funds has reduced very substantially by about one third in the past 12 to 18 months and yet Mr. Boucher is telling me it is about six years since Bank of Ireland has reduced the standard variable rate being charged. One of the bank's main competitors, AIB, has stolen a march on it in the market and has reduced its rate. I presume Bank of Ireland will have to follow suit. Mr. Boucher will not confirm that today but, ultimately, the market will dictate the bank's reaction. I submit to Mr. Boucher that the bank is taking advantage of variable rate customers. They are being exploited. It will come as a surprise to nobody that a bank seeks to maximise profits, but this bank is profiteering on the backs of variable rate customers. Mr. Boucher made the comparison with the UK market which he said is the best comparison with Ireland.
[Deputy Michael McGrath:
Across the Border, Bank of Ireland offers a 1.98% fixed rate up to January 2017 if I have a low loan-to-value ratio of 60% or a 2.09% fixed rate or a variable rate of just over 2% for at least two years if my LTV ratio is 75%. There is a more competitive environment in the North. If, after two years, Bank of Ireland does not keep the rate low for a customer, he or she can switch to another bank. Customers in the South do not have that option. How can Mr. Boucher justify such a massive difference between the rates Bank of Ireland charges in the Republic and the rates it charges in Northern Ireland and the rest of the UK, given his statement to the effect that both markets are remarkably similar?
Mr. Richie Boucher: Our average spread on new lending in our UK mortgage business, which is growing and developing, is between 3.99% and 4.5%. That is a factual matter.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 Bank of Ireland has advertised that it is offering a fixed rate of as low as 2% and a variable rate of just over 2% for defined periods of time where people have relatively low LTV ratios, but those rates are much more competitive than what Bank of Ireland is charging in the Republic.
Mr. Richie Boucher: I should note that the Deputy also cited our fixed rates. We can buy fixed rate money and we offer fixed rate mortgages. We are still surprised at the lack of take-up of fixed rate money in the market. We note that the Government has made a decision to try to fix rates over a period. We try to offer attractive fixed rates. We would encourage customers to consider fixed rates. A fixed rate gives a customer certainty and control of his or her finances in so far as that is possible. We provide attractive and competitive fixed rates.
As the Deputy stated, we operate in a competitive market. We review our rates on an ongoing basis. We also bear in mind our responsibilities to all of our stakeholders - our depositors, our shareholders and the taxpayers whom we have repaid. The strategies of other banks are something we keep an eye on, but we have learned not to follow them slavishly. We consider other banks, the sustainability of their propositions and their ability to attract capital to fund themselves and meet all of their commitments to their stakeholders.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 Has Bank of Ireland any intention of reviewing its standard variable rate on mortgages in light of current market conditions?
Mr. Richie Boucher: We consider what competitors do and review our rates on an ongoing basis.
Deputy Michael McGrath:
Is the bank open to switcher mortgage applications? If I am with another bank, in a healthy financial position and want to transfer my mortgage to Bank of Ireland, would it be open to that?
Mr. Richie Boucher: I will ask my colleague, Mr. McLoughlin, to assist Deputy McGrath.
Mr. Liam McLoughlin: Bank of Ireland is certainly open to new business from switchers. However, the Irish market is dominated by tracker mortgages, amounting to approximately 60%. The inclination to switch mortgages is not as it is in other markets, but we are keen to switch business into Bank of Ireland.
Deputy Michael McGrath:
http://oireachtasdebates.oireachtas...&pid=MichaelMcGrath&year=2014&month=11&day=05 When the committee asked that question of Bank of Ireland previously, the response was that switchers accounted for a low proportion of its mortgage business.
Mr. Liam McLoughlin: That is the fact. It is so low because keenness for switching mortgages when 60% of the market is on tracker rates is also low. Therefore, the quantum of switching in the Irish market is low. However, we are keen to-----
Mr. Richie Boucher: We have switcher products, but the desire of a customer to switch to a variable or fixed rate mortgage when he or she is on a tracker rate is very low.
Deputy Michael McGrath:
I do not find Mr. Boucher's argument about pricing policy convincing. He was the one who drew the comparison with the UK market, calling it remarkably similar to Ireland's. He stated that the average rate Bank of Ireland charged in the UK was approximately 4%. However, the offering it makes to new customers in Northern Ireland and the rest of the UK is remarkably competitive and strikingly different from the offering it makes in the Republic. Mr. Boucher has cited a rate of 4.5% at a time when its cost of funding is probably 1% or so. That is a remarkable margin to charge for variable rate products. I am not just referring to mortgages but also to personal loans for which Bank of Ireland charges approximately 12%, to credit cards for which it charges 20% or so and to loans to small to medium-sized enterprises, SMEs, which are paying way over the odds.
Mr. Richie Boucher: I will point out that the group margin is 2%. We must take into account liquidity risks, especially as regards mortgages. It is a 25 to 30 year proposition to customers. As such, we must take a liquidity risk for that duration. The Government has taken out a 15-year bond at 2.5%. It is difficult to compare one product or its features with another. We must have subordinated capital. We must have a range of instruments of various maturities to match our different products. We are also required to take into account the weighted cost of capital against products. This must also factor in loss experience. Our loss experience on our UK mortgage book is different. To assist the Deputy, though, we will provide him with our UK and Irish mortgage rates so that he can have an appropriate comparative.