More resilient households could better afford to borrow and have the appetite to take on more, sustainable debt, knowing they were better insulated this time from a downturn.
Not a bit of it. AIB shares tumbled 3.4pc on Thursday, while Bank of Ireland was down 3.5pc. The share price falls had nothing to do with the state of Irish households – the banks’ main customers – but more to do with the banking sector in general.
It has fallen so far out of favour with investors that it isn’t even up there with a steady, boring utility. Banks are back paying dividends but they face greater regulation, tighter margins and increased competition.
Irish banks have put so much stock in the future growth of the mortgage market, yet Central Bank rules on lending limits remain steadfast.
No wonder AIB chief executive Colin Hunt recently called for mortgage lending limits to be eased (not abolished).
AIB is dependent on the Irish market for growth. Bank of Ireland has a joint venture in the UK with Royal Mail, but still remains massively dependent on what happens in Ireland.
Permanent TSB announced on Thursday that its long-standing CEO Jeremy Masding would be leaving some time next year. He has held the position since 2012.
Under Masding’s efforts, the bank has come a long way from the loss-making, clapped-out, failed business model inherited from the boom years.
But it isn’t so clear where it has got to. It no longer loses money but reported first-half profits of just €28m in July, down from €57m for the same period last year.
Its market capitalisation is just €562m on a share price of €1.23. It is just four years since the State sold 25pc of the bailed-out bank to investors, based on a valuation of around €2bn. Even a year ago, Permanent TSB shares were trading at €1.86. But this isn’t a Permo problem.
It is a wider challenge for bank share prices in general. Last week also saw a trading statement for Ulster Bank from its parent, Royal Bank of Scotland.
In the first nine months of the year, net interest income at Ulster Bank shrank to £302m (€350m) from £334m, as its net interest margin – the difference between the average rates at which it funds itself and lends to customers – contracted to 1.6pc from 1.8pc. Its loan book declined by £200m, to £19bn.
The sector is a grim tale of investor carnage. I recently spoke to one financier who has invested in many sectors over the years, including banking.
His view was that you would be mad to put money into bank stocks right now.
Some of the industry’s woes in Ireland are part of a wider sectoral challenge, but others are self-inflicted wounds.
Derville Rowland of the Central Bank was giving evidence at an Oireachtas committee on the tracker mortgage scandal and talked about how banks had paid out €700m in refunds and compensation to the 40,000 mortgage holders caught up in the scandal. She said she believed individual accountability within the sector could be further strengthened via amendments to “our legislative framework”.
She said a lack of accountability was widely seen as a key driver of misconduct.
Maybe part of the problem for banks and bankers is that the shoe is now firmly on the other foot.
Having got the better of light-touch regulation during the boom, the bankers are now the ones under the cosh of the regulators.
This is about profitability and growth as much as banker behaviour.
The Central Bank can be comfortable there has been a repair in the finances of Irish households, but it doesn’t mean this situation is best for bank lending.
Irish households have paid down debt, reined in their borrowing and are now much more cautious about their appetite for risk. This is good for regulators, but isn’t ideal for banks looking for a way to grow.
IAG collects from Aer Lingus
Few could question the success enjoyed by Aer Lingus since it was taken over by IAG.
The airline has grown capacity, passenger numbers and profits. It has a strategic plan for transatlantic routes out of Dublin, which have been good for the airport and jobs.
Equally, few could argue about what a bargain IAG got when it bought the airline for €1.3bn. This was really borne out when figures emerged this week of how much in dividends Aer Lingus has paid to the parent group in recent years.
In 2017, it paid its first dividend to IAG of €200m. Last year, the dividend was €225m. Compare this with the dividends paid out by the parent company to shareholders in the same period.
In the financial year ending 2017, IAG paid out €446m in dividends and a further €513m the following year.
Of the €959m in ordinary dividend payments made by the group in those two years, Aer Lingus contributed €425m. The Irish airline carried a record 13.5 million passengers last year, as the overall group carried 113 million. Aer Lingus contributed 12pc of passenger numbers.
When it came to operating profits, Aer Lingus made €305m last year, a very strong performance. British Airways made an operating profit of €1.9m, and Iberia chipped in €437m. But Aer Lingus has paid 44pc of the dividends in two years.
Aer Lingus has thrived under IAG, but IAG has done very well out of Aer Lingus.
Govt needs emissions shortcut
Ireland remains toward the back of the class when it comes to greenhouse gas (GHG) emissions and reaching our targets set by the EU. Last year, we were more than five million tonnes over.
Farm herd sizes and farming practices are in the spotlight, as cows contribute enormously to GHGs.
Things are a lot more vague on the transport front. The Government has been fiddling around with electric car incentives and more plug-in points, but electric vehicle take-up remains pretty low. Electric vehicles may be the future, but it isn’t here yet. In the meantime, Ireland looks set to get hit with major fines from the EU in the short term.
One stop-gap measure might be ethanol, which could reduce GHGs in petrol engines relatively quickly. We have had 5pc ethanol in our petrol since 2005, but other countries have E10, which is 10pc ethanol.
A British parliamentary committee concluded that moving to E10 could cut carbon by as much as taking 700,000 cars off the roads in the UK.
Environmental groups have warned about the knock-on consequences of increasing the demand for ethanol, which is often imported from Asia, where it has encouraged deforestation.
Some governments, including the UK, do not accept this argument and have tried to develop the bio-ethanol sector which works off raw materials like used cooking oil.
Economist Jim Power wrote a report earlier this year, in which he argued that while we may move toward 100pc electric vehicles, it isn’t going to happen any time soon. In the meantime, E10 might present shorter-term results.
Engines can use E10 without any great modification but, inevitably, there would have to be incentives for the industry. This would cost money, but so too will the fines.
Sunday Indo Business