A new report on the future of the banking sector reveals that Irish retail banks are “sizeable and increasingly at a disadvantage” compared to other lenders and businesses due to restrictions on variable pay.
Pay limits for bank workers are among the most restrictive in the EU, making these workers an “obvious outlier” compared to those in financial services and many other industries, according to the Banking study and Payments Federation Ireland (BPFI) and consultants says EY.
“A standardization of pay and employment conditions in Irish retail banks – to allow banks to compete for people on an equal footing with other businesses – is necessary if they are to attract the necessary skills and employees to their future and to providing the services Irish consumers expect, ”states the Future of Retail Banking in Ireland report.
Earlier this week, Bank of Ireland announced that its CFO was leaving the lender for a similar post at Musgraves, with the bank accusing the government of imposing a salary cap on bankers for its decision.
The report indicates that the skill mix within banks is changing rapidly, with retail banks needing a range, including IT and digital skills, to meet changing consumer demands and regulations.
“The ever-growing demand for talent is a challenge for all businesses, including retail banks in Ireland, as they compete to attract people with the large international financial services industry, multinational technology companies, the growing industry of FinTechs and other companies nationally and internationally. ,” it is said.
The 66-page analysis also indicates that the future profitability and viability of Irish retail banks is critical to their ability to generate organic capital which in turn is fed back into the wider economy.
Their performance is also key to returning the remainder of the € 29.5 billion in bailout money injected into AIB, Bank of Ireland and Permanent TSB by the state during the financial crisis, he says, of which 17% remain unpaid.
But he finds that a combination of low interest rates, one of the lowest levels of customer loan-to-deposit ratios in the EU, and negative net lending growth has had a negative impact on the profitability of Irish retail banks, leaving it among the weakest in Europe..
“The scale and weight of Irish retail banking operating costs, including regulation, innovation / IT and labor costs, relative to the size of the market in which the Irish retail banks operate, have major impacts on the profitability of Irish banks, an impact believed to have influenced the decision of two retail banks in early 2021 to exit the retail banking market, ”he said.
In particular, the report points to Ireland’s high capital requirements, especially for mortgages, which are three times the EU average.
“Irish retail banks are to withhold additional capital estimated at 2.5 billion euros for mortgages, which will impact product prices and negatively impact the valuation of retail bank stocks.” , he says.
The report says it remains extremely expensive and takes a disproportionate time to repossess property in Ireland where borrowers have failed to meet their contractual obligations.
Recent research by the European Banking Authority found that Ireland has one of the lowest rates in Europe for the recovery of mortgage collateral in legal proceedings, at just 11% compared to a European average of 46 %, the study notes.
“The combination of legal fees, the time required to recover foreclosed properties and the lack of success in securing collateral plays a key role in increasing the level of capital required for unexpected losses in the Irish mortgage pool,” states he does.
“This ultimately drives up the cost of Irish mortgages both for the banks providing the mortgages and for the borrowers.”
The report finds that Irish banks face competing demands from stakeholders, with regulators on the one hand placing a strong emphasis on strength and stability, but shareholders focusing on sustainable profitability.
“These demands and expectations are not necessarily mutually exclusive, but there is a need to recognize and seek a way to achieve a balance between the demands of stakeholders,” he says.
He says that in the future, regulation will focus on an increasingly diverse set of priorities.
“Juggling these competing priorities while striving to achieve cost reductions and operating model improvements will require the right balance,” he says.
Banks will also play a leading role in Ireland’s green transition, according to the analysis.
It also indicates that continued investment in culture and trust remains a strategic priority within banks, which fully support the introduction of an individual accountability framework.
The research concludes that the banking industry is going through a period of unprecedented transformation, with accelerated digitization, changing customer trends and increasing competition from fintech and non-bank competitors, all contributing to the disruption of the traditional retail banking model.
Over-the-counter transactions at retail bank branches have fallen by more than 45% in the past three years, while overall digital payments have increased by 65% in the same period.
He finds that clients no longer use a single institution for all of their financial needs and that there is now competition from around 20 providers in the markets for mortgages, personal loans, overdrafts, loans to SMEs and more. payments.
Banks must therefore continue to adapt quickly, including by improving online and mobile banking services, while continuing to be of systemic importance to the economy, she says.
But despite the digital switchover, banks here have not been downsizing to keep pace with lenders across the EU, the report says.
“The reduction in the number of branches was also lower than the European average during the same period. In Ireland, the number of branches fell by 11%, while in Europe, the average was just under 20% ”, details the research paper.
In total, Irish retail banks employ around 22,000 people and the banking sector as a whole pays 1.6 billion euros directly to the Exchequer and an additional 11.64 billion euros to the economy each year.
Retail banks hold € 270 billion in deposits for Irish households and businesses and provide loans totaling € 152 billion, including more than 822,500 mortgages to homeowners in Ireland.