Bank margins after NAMA

The current debate is raging over NAMA and the pricing of loans, much of it centres on the value of the properties in question and about the way in which a ‘loan’ is valued (as opposed to the underlying asset). This makes for good headlines, but it doesn’t help the average person who is not shaping policy and who’s sole role in this mess will be to carry the can and pay their part in the tax pool which will ultimately fund the bailout.

However, you may be affected in other ways, and these are things which you have the choice of opting out of, namely that of the margin you are paying if you currently have any debt/credit outstanding.

Once NAMA comes in it will be extremely likely that banks increase their margins, it is important to consider the ‘why’ as much as the ‘when’ though so we’ll take a look at those.

Why?

PTsb lead the way on this, because they are not getting NAMA protection they have no need to worry about the politics of the situation they raised their variable rates by 50 basis points this summer and despite all of the fuss created it went ahead successfully. They have realised that there is cash on the table in the respect that lending is scarce and therefore prices for it should be accepted at greater premiums.

It seems likely that PTsb will now be spun off (doing wonders for the Irish Life share-price in the process which will likely trade higher than €6 before the end of 09′) into a ‘third pillar’ in the banking system, the other companies that will be mashed into this new entity are likely to be the EBS and INBS, both of whom have considerable issues of mutuality to overcome for this to happen. Having said that, where there’s a will there’s a way and if NAMA goes ahead the impetus will be there for such a move after the two entrants with a difficulty have been effectively saved from extinction.

For a while we felt that this wasn’t likely, that INBS would be pushed into an arranged marriage with BOI and EBS would be forced into AIB (all lead there kicking and screaming), but this has -according to the recent headlines- been a misguided belief, we get it wrong here too!

AIB and BOI have not been able to do this for political reasons, all of the foreign based banks have already gone ahead and done this, and that means we are seeing a pattern evolve, non-NAMA protected banks have already raised their interest rates on variable rate mortgages, so what is stopping the others? Surely it doesn’t make sense to be extra competitive in a market with scarcity value?

And so we find ourselves asking the second part of the question.

When?

When… Q1 of  2010 seems to be the most logical time in our opinion. After the NAMA legislation has passed and things have started to change, the justification will be (from EBS/INBS side) that ‘new structures/prices etc.’ have forced a ‘reconsideration of risk pricing or margins’, nobody will be able to argue that one. PTsb will likely be at the table and having done this already, will not have any issue in being part of the move.

AIB and BOI will have faced down total nationalisation (BOI is a near certainty to avoid it at this point) and with the risky assets either off the book or guarantees of it, they will use the opportunity to shore up the coming residential slaughterhouse that the imposed policy of forbearance on repossession (as part of the re-capitalisation scheme) brought about. We’ll be sold the idea as ‘that of borrowers having to pay so as not to rely upon the taxpayer’ and apart from being right, we’ll all suck it up.

Ireland has the lowest lending margins in all of Europe (other than Finland) and this is set to end soon, the window of low margin lending is rapidly closing and along with it, access to credit will become reduced as it is directed towards businesses (rather than residential borrowers) and equivalent stress tests based on existing rates cause qualifying for a loan to get harder.

Included in this will be less of a reliance on depositors and thus the utopian deposit environment will turn on its head and depositors will be paid much less while borrowers will pay much more.

So it seems any prospective buyer has a Rubicon to face if they are not a cash buyer… Do you buy now and pay over the odds for the property? Or wait and pay over the odds for the finance required to fund the purchase?

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