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Overview
To date, 2023 has been a year that has brought about significant challenges as well as substantial changes to the Irish banking market – challenges and changes that will shape the market's path going forward.
In 2022, we saw Ulster Bank Ireland DAC ("Ulster") and KBC Bank Ireland (KBC) continue to sell off their loan book and wind down operations in Ireland with its final conclusion of operations this year. We also saw the impact of war on the global economy by the Russian invasion of Ukraine and this in turn kick-started an unrelenting period of inflation and high interest rates which has continued through to this year.
With the shadow of the macroeconomic factors being cast over much of this year, it has prompted a moment of reflection by borrowers and lenders alike.
Given this current backdrop, what follows is an overview of the trends and developments in the banking and finance market in Ireland for 2023.
Irish Economic Trends and Developments
Following the announcement in 2021 of the exit of Ulster and KBC from the Irish market, on 3 February 2023, the legal ownership of KBC mortgages, deposits, credit card and business and personal loan accounts transferred to Bank of Ireland. Ulster officially closed for business on 21 April 2023, with Permanent TSB and AIB acquiring the majority of its loans and assets. This has significantly altered the Irish banking landscape, with the market now reduced to three domestic Irish banks.
These departures from the Irish market have nevertheless not deterred the remaining pillar banks of AIB, Bank of Ireland and Permanent TSB from investing back into the market by coming together for a joint venture in developing "Synch", an instant payment platform for Irish consumers and businesses to rival and compete with the existing neo-banks such as Revolut. This will be achieved through the development of a mobile application known as "Yippay" to facilitate instant payments between customers through the use of a phone number alone. Initially, it will provide a peer-to-peer service for retail and business customers, and eventually broaden to person-to-merchant payments. Once established, it is intended that Synch's services will expand to the merchant acquirer sector to provide an alternative to in-store and online merchant card acceptance. Synch received clearance from the Irish Competition and Consumer Protection Commission in June 2022 and intends to launch in 2024 pending authorisation from the Central Bank of Ireland (CBI).
Non-Bank Lenders The withdrawal of Ulster and KBC from the Irish market could have the potential to reduce competition but has in fact created more opportunities for non-bank lenders (NBLs). NBLs have featured in the Irish market for over a decade and are a key source of funding for Irish property and small and medium-sized enterprises (SMEs) while also being a catalyst for competition. The emergence of more alternative lenders, which includes the likes of Wayflyer, BlueBay Asset Management and Novellus, and their significant growth over the recent years is evidence of an exciting diversification in the Irish market.
While NBLs may be more exposed to the unstable global financial conditions in the market, the Central Bank's Financial Stability Review 2023 reports that NBLs have proven resilient to the rising interest rates showing a greater risk appetite and flexibility by offering multi-currency revolving facilities as well as term loan single currency facilities.
It is clear that the dynamic of the Irish banking sector is changing with NBLs expected to continue the evolution in the lending landscape in Ireland and indeed carve out their own lending ecosystem.
Interest Rates
Over the last year, we have seen the Irish market follow the global trends of high inflation rates alongside increasing interest rates. At the time of writing, interest rates have surpassed 4% and are at their highest rate in over 20 years, with nine consecutive increases in a twelve month period by the ECB. In turn, the Irish pillar banks have increased their interest rates on variable and fixed-mortgages. The immediate effect of this is the increased cost of funds for borrowers resulting in a significant reduction in lending activity in Ireland this year, particularly in the real estate sector. However, the banks have yet to pass on these interest rate increases to their savings customers and deposit holders, and have recently been criticised by government for failing to do so, with the Minister for Public Expenditure advising Irish savings account holders to deposit their savings with other European banks in order to benefit from much higher interest rates than those available in Ireland. This provides another opportunity for non-Irish banks in the Irish banking market.
At the time of writing, the rate of inflation in Ireland is 4.8% compared to an average 5.5% inflation rate across the Euro area. As we look to the remainder of 2023, the outlook for the Irish banking market will depend on the ECB's decision making – whether it will continue to pursue the aggressive target of a 2% inflation rate over the medium term, or whether there will be an acceptance that inflation and interest rates have reached a standing position whereby the market will find a new level in order to encourage lending activity again.
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