Irrational banking, non-competition creating profits unexpectedly.

That banking in Ireland is a little irrational at present is a given, however, there are occurrences in the market which will change pricing structures in the near future, interestingly, by trying not to compete for business, several banks will ultimately make the market more profitable for all of the banks, achieving almost the opposite of what they had hoped to do.

I’ll explain, at the moment we have seen widespread Sovereign Credit Retrenchment, that’s a fancy way of saying that banks who are bailed out by certain countries are only really focusing on their indigenous markets because it is those markets that bailed them out. Irish banks have done this, Irish owned UK operations are closed. Equally, UK banks here are doing this by making their existing business rates higher and their new business rates exceptionally high.

Bank of Scotland’s new business variable rate is 6.19%, a whopping 5.19% over the ECB, they are doing this to avoid lending, and they are also paring back LTVs so that you have to have greater equity in the deal to borrow, …

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‘Are we there yet?’…. when will the bottom of the housing market be reached?

The most popular question I am asked as of late is whether or not we are at the bottom of the housing market, and the answer is ‘no…. but perhaps closer than we think’. Today we will consider a few of the things we will need to see in order for ‘recovery’ to occur.

First of all we need to see a reduction in the massive overhang of housing stock, even if the number reduces, they all need to be sold and a degree of scarcity will need to develop in order to make prices go up again, currently supply is swamping demand and that dynamic will leave uncertainty in its wake.

However (and here is part of the ‘perhaps closer’ bit), NAMA will likely take a lot of housing off the market, in particular it will take it off the market and drip feed it back in, if this happens then it will avoid devastating fire sales, it might also lead to stagnation …

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Get ahead of the curve on fixed rates… Oops! Too late!

We have been touting fixed rates for quite some time on the basis that people needed to fix at the time rates were heading for historic lows, not after the fact, as well as that, the indications from the ECB that they would not go below 1% and instead would seek alternative options (such as QE) meant that once we got close to the 1% the forward market would price that in, but when we actually reached the 1% base that equally the forward market would price in rising rates.

That is exactly what has happened, it wasn’t front page news when we said it, although the Sunday Times did do a big story in their business section in mid-February, but now that banks are starting to raise their interest rates it certainly is!

It gets back to planning, without exception every client we had that deliberately went for a fixed rate in the interim is in a good position, some who have opted for variable rates are doing well …

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Irish variable rates March 2009

Here are the variable rates on offer at present from Irish lenders

AIB variable 2.79% ICS variable <50% LTV 2.90% BOI variable <50% LTV 2.90% AIB LTV 50-80% 3.00% EBS variable 3.13% Halifax LTV<50% 3.15% KBC (12mth disc.std.var) 3.98% Haven variable 3.7% PTsb LTV<80% 4.1% PTsb LTV>80% 4.2% NIB variable 4.23% Bank of Scotland 4.23% First Active 4.5% Ulsterbank 5.4%

These variable mortgage rates are as of March 2009 ranked according to prices.

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ECB says rates may hold until 2010

Jean Claude Trichet said last Thursday that he would hold interest rates as are and that he could not see inflation coming under control until 2010 meaning that for the foreseeable future we just have to get used to rates not having the prospect of coming down. We felt that there may be a rate cut on the way in early 2009 but always on the back of this was the belief that if inflation didn’t come down sooner that it would be Q3/4 of 2009 before we saw a rate cut (potentially).

The current news is partially sabre rattling by the ECB, laying down the strong message (and rightly so) that inflation must be beaten, anything short of the message given by Trichet might send out the belief that if the market falls and inflation remains that we might get a few ‘market favouring’ decisions, this hasn’t happened so far and with any …

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Intersted in going broke? Should banks raise interest rates?

I had the pleasure of being on Newstalk last week with Eamon Keane and during our brief chat I had mentioned that banks are lending out money cheaper than they can buy it, this was mentioned back to me by a client and he wanted to know if it was simply a slip of the tongue, because banks of course, do not lend money at a loss.

In fact that is precisely what is happening at the moment because the 3 month Euribor – which is the rate banks generally are buying their money at- is at 4.742%. Several banks are lending at less than this price namely NIB, Halifax, Bank of Scotland, Bank of Ireland and PTsb. So how is this happening? How can any CEO let their institution lend money at a price that will cause shareholder loss?

I suppose it’s down to a few factors, firstly banks don’t HAVE to buy money at the 3 month Euribor rate, they may be operating on the 1 month money which is currently selling at 4.349%, or they may be …

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