Brendan Burgess
Founder
- Messages
- 54,687
Addressing the SVR issue
Our second priority in recent months has been to try to address the issue of the comparatively high interest rates being charged by the bank on variable rate mortgages.
It’s important to understand that SVR mortgages are not our most common mortgage and the average balances of mortgages on SVR – at approximately €70,000 - are much lower than is generally understood.
Nevertheless we accept that as a result of decisions taken in 2010 and 2011, permanent tsb had become an outlier in respect of variable rate mortgages and that is not acceptable.
Here again we have made important progress.
·At the end of April – within days of receiving positive support from the Troika - we announced a unilateral reduction in our variable rates of 50 basis points for home loan mortgages.
·Last week when the ECB reduced its rate by 25 basis points we announced that we will pass this reduction on – plus a further 10 basis points - to all variable rate customers – even as many competitors declined to pass the reduction itself on.
Combined these two moves have had the effect of reducing our rates by 85 basis points. It has significantly improved our position compared to our major competitors and we have ended that outlier status.
I understand that some people believe our rates are still too high. Based on today’s Irish banking market economics – high deposit pricing, high loss rates and high overall funding rates – there is little room to manoeuvre without passing on further burden to the taxpayer. I will not chase down rates to levels that will negatively impact the already fragile state of the bank – and the economy.
However, let me be clear, I am not saying that there is no room for further reductions but clearly that room is dependent on us working together to create an environment for a rational banking model. Let us develop a normalised market and everybody will benefit.
A Rational Banking System
I think further clarity on the rates issue is very important. Our staring point is that we have a responsibility to re-establish a rational banking model in permanent tsb.
To our mind, a rational banking model starts with the funding side of our balance sheet. Critics say our lending rates are too high. But you don’t run a rational bank by setting out your lending rates and then hoping you can source your funding and run your operating cost base to match. You identify your costs and they dictate what rates you can set.
As I mentioned previously, we have three components to our costs:
·First, the high costs we face in raising money to finance our mortgage loans – particularly the high costs of deposits in this country which are only partially reduced by an amount of relatively cheap money being provided temporarily through the ECB
– money that is required due to the closure of wholesale markets to the bank but which is not a sustainable source of funding (at either price or quantum).
·Secondly, the high costs we face in making provisions for those who cannot repay their loans – and that cost is rising as impairments are rising.
·And thirdly our operating costs…literally what it costs to operate the bank and, over time, provide a realistic return for our shareholder. I have commented already on the Restructuring Plan.
I have no desire to run a bank where the rates are dictated by what we believe the market can bear. We have a blended, average cost of funds and that dictates lending product pricing and returns.
I hope that as we go forward the costs I’ve outlined will reduce – particularly the current irrational cost of deposits. If they do, I believe we’ll be able to reduce our variable rates further. But by the same token, if those costs increase then we will come under further pressure to raise rates.
That’s how a rational banking system works and that’s the type of system we need to re- establish in this market. Well-regulated competition – with this bank playing a core role – will raise standards, drive innovation, reduce taxpayer burden and transfer benefit to the end customer.
Other points made in response to questioning from TDs
The SVRs are not subsidising the trackers. All sectors of the business are loss-making.
The cost of funds is "north of 2.2%"
Splitting the loss-making trackers off into an asset management unit (his name for a bad bank) won't reduce the the SVR as the SVR business is losing money now anyway.
It would cost €30m to give a 0.5% cut in the SVR
The book is funded as follows:
Our second priority in recent months has been to try to address the issue of the comparatively high interest rates being charged by the bank on variable rate mortgages.
It’s important to understand that SVR mortgages are not our most common mortgage and the average balances of mortgages on SVR – at approximately €70,000 - are much lower than is generally understood.
Nevertheless we accept that as a result of decisions taken in 2010 and 2011, permanent tsb had become an outlier in respect of variable rate mortgages and that is not acceptable.
Here again we have made important progress.
·At the end of April – within days of receiving positive support from the Troika - we announced a unilateral reduction in our variable rates of 50 basis points for home loan mortgages.
·Last week when the ECB reduced its rate by 25 basis points we announced that we will pass this reduction on – plus a further 10 basis points - to all variable rate customers – even as many competitors declined to pass the reduction itself on.
Combined these two moves have had the effect of reducing our rates by 85 basis points. It has significantly improved our position compared to our major competitors and we have ended that outlier status.
I understand that some people believe our rates are still too high. Based on today’s Irish banking market economics – high deposit pricing, high loss rates and high overall funding rates – there is little room to manoeuvre without passing on further burden to the taxpayer. I will not chase down rates to levels that will negatively impact the already fragile state of the bank – and the economy.
However, let me be clear, I am not saying that there is no room for further reductions but clearly that room is dependent on us working together to create an environment for a rational banking model. Let us develop a normalised market and everybody will benefit.
A Rational Banking System
I think further clarity on the rates issue is very important. Our staring point is that we have a responsibility to re-establish a rational banking model in permanent tsb.
To our mind, a rational banking model starts with the funding side of our balance sheet. Critics say our lending rates are too high. But you don’t run a rational bank by setting out your lending rates and then hoping you can source your funding and run your operating cost base to match. You identify your costs and they dictate what rates you can set.
As I mentioned previously, we have three components to our costs:
·First, the high costs we face in raising money to finance our mortgage loans – particularly the high costs of deposits in this country which are only partially reduced by an amount of relatively cheap money being provided temporarily through the ECB
– money that is required due to the closure of wholesale markets to the bank but which is not a sustainable source of funding (at either price or quantum).
·Secondly, the high costs we face in making provisions for those who cannot repay their loans – and that cost is rising as impairments are rising.
·And thirdly our operating costs…literally what it costs to operate the bank and, over time, provide a realistic return for our shareholder. I have commented already on the Restructuring Plan.
I have no desire to run a bank where the rates are dictated by what we believe the market can bear. We have a blended, average cost of funds and that dictates lending product pricing and returns.
I hope that as we go forward the costs I’ve outlined will reduce – particularly the current irrational cost of deposits. If they do, I believe we’ll be able to reduce our variable rates further. But by the same token, if those costs increase then we will come under further pressure to raise rates.
That’s how a rational banking system works and that’s the type of system we need to re- establish in this market. Well-regulated competition – with this bank playing a core role – will raise standards, drive innovation, reduce taxpayer burden and transfer benefit to the end customer.
Other points made in response to questioning from TDs
The SVRs are not subsidising the trackers. All sectors of the business are loss-making.
The cost of funds is "north of 2.2%"
Splitting the loss-making trackers off into an asset management unit (his name for a bad bank) won't reduce the the SVR as the SVR business is losing money now anyway.
It would cost €30m to give a 0.5% cut in the SVR
The book is funded as follows:
- Deposits: 40%
- Wholesale funding: 25%
- ECB : 25%
- Shareholder funds: 10%