Central Bank of Ireland August ’23 Report: the Data Behind Record Bank Profits
Bank of Ireland, self-proclaimed ‘The National Champion Bank’ generated over €1bn in profits in H1 2023. It’s net interest income of €1.8bn and net interest margin of 2.96% pipped AIB, its only real domestic competitor who generated €1.78bn and 2.94% respectively, to the finish.
According to data from the Central Bank of Ireland published in August 2023 Irish banks are continuing to generate vast profits from businesses. The banks are squeezing businesses by increasing interest rates on overdrafts and loans but not passing on the higher interest rates for deposits and other bank funds.
The data for NFC’s (Non Financial Corporations) clearly shows that business customers are earning a very poor return on bank funds. Poor banking structures and legacy commercial arrangements are contributing to the rising cost of banking.
Whereas the average cost of new loans to companies and organisations (NFC’s) rose to 5.57% in June up from 3.22% in 2022 interest rates on NFC overnight deposits was only 0.10% in June 2023. Interest rates on new NFC deposits with agreed maturity rose to 3.38 per cent in June.
The widening of net interest margins has caused furore in political circles around Europe particularly in Italy and Spain where its Governments are looking at windfall levies on the banks. Other governments including Ireland have considered imposing penalties on banks for not fairly passing on the benefit of higher base rates to customers.
Many businesses have legacy banking arrangements that don’t allow them to benefit from interest rate increases. This is often because the low-interest rate environment that prevailed since the global financial crisis presented no compelling reason to modernise their banking arrangements. There was little benefit in changing their banking structure as it didn’t impact their profitability.
There is now a compelling opportunity for businesses to improve their revenues by optimising their banking structure to benefit fully from higher interest rates.
Non-Financial Corporations (NFC) Lending Rates
- NFC overdrafts stood at €6,462 million at end-June, an increase of 7 per cent from June 2022. The associated weighted average interest rate was 5.34 per cent.
- New NFC loan agreements decreased to €1.1 billion in June, 31 per cent lower than June 2022. The weighted average interest rate was 5.57 per cent in June, up from the previous year (3.22 per cent). The equivalent rate in the euro area rose to 4.78 per cent in June.
- New NFC loans of up to €250k amounted to €137 million in June, with the associated weighted average interest rate at 6.65 per cent. There was €95 million worth of new NFC loans of over €250k and up to €1 million newly agreed in June, with a weighted average interest rate of 5.25 per cent.
- The volume of new NFC loans of over €1 million, which account for 79% of all new NFC loans, equalled €870 million in June, a decrease of 37 per cent compared to June 2022. The weighted average interest rate on this instrument category was 5.44 per cent in June (Chart 1). This reflects a year-on-year increase of 229 basis points.
Chart 1: Interest rates on new loan agreements, by loan size, for Non-Financial Corporations
Chart 2: Interest rates on outstanding loan agreements, by loan size, for Non-Financial Corporations
Non-Financial Corporations Deposit Rates
Interest rates on NFC overnight deposits increased to 0.10 per cent in June 2023 (Chart 3). Interest rates on new NFC deposits with agreed maturity rose to 3.38 per cent in June. The corresponding rate in the euro area was 3.16 per cent.
Chart 3: Interest rates on overnight deposits for Ireland and Euro-area
Source: Central Bank of Ireland – Statistical release published 9th August 2023