- Ireland's banks have enjoyed a far better year, so far
- Mortgage approvals illustrate the difference
It is an old stock market truism that things go wrong when everyone gets back to the office after the summer break. This was demonstrated by a dismal third-quarter trading update season for many bank investors as the high-street giants delivered updates that veered between mediocre and disappointing.
Natwest (NWG) shares even briefly posted a record for their biggest one-day fall since the 2008 financial crisis. Overall, the impression was created that these days it is a lot more financially rewarding to be a bank depositor than an investor – but, unlike in 2008, at least the cash in the bank is now safe.
Overall, the trading update season underlined how much better Ireland’s banks have performed in a market that mirrors the UK banking sector in many respects. The question now is whether investors should give up on shares that are dirt cheap by almost any historical measure and find easy-to-access, though pricier, alternatives across the Irish Sea.
The reasons for UK banks' underperformance are many and varied. This reflects either an unsolvable structural problem with a bank, such as the wildly diverging lending and investment banking units that Barclays (BARC) insists on retaining, or margins contracting as the year progresses, with underlying evidence of mounting impairment losses; something that best describes Standard Chartered’s (STAN) experience so far this year. It is also joined on the Asian naughty step by HSBC (HSBA) which, despite throwing another $3bn (£2.44bn) share buyback into the mix to make it $7bn for the year, cannot escape the spectre that China’s property crash could become a source of impairments on its income statement for years to come.
Meanwhile, being a proxy for the British economy is fine, so long as that economy is doing well, but on this point Lloyds Banking Group (LLOY), despite offering up the least disappointment in terms of its expected figures for the quarter, looks likely to also suffer as a constrained lending market and mobile deposit base eats into margins.
In contrast to the UK sector's uncertain performance, Bank of Ireland (BIRG) increased its outlook for net interest income by 5 per cent compared with the first half due to higher interest rate expectations in the second half. This was based on a relatively steady housing market with a lack of supply generally supporting prices, although that situation may be about to change if outlier results for housebuilders such as Cairn (CRN) continue to show growing weakness.
For Bank of Ireland, a stable cost base and deposit churn that is below the European average mean wider margins for now, although Berenberg notes that its existing agreements with staff are due to expire soon and may lead to higher running costs when new remuneration deals are put in place. That leaves its forward rating of 5.5 times Berenberg’s forecast looking like the ceiling for the share price, rather than the floor.
Mortgage approvals are the key difference
On the surface, it may look as though the Irish banks are running rings around their British counterparts, but the picture is far more nuanced. The key difference between Ireland and the UK is starkly illustrated in the latest Bank of England (BoE) figures for housing transactions. These show how the ailing UK property market is the root cause of the banking sector’s underperformance.
The number of mortgage approvals in September was 43,300, down from 45,400 in August, which in total is a third lower than this time last year. For comparison, the figure for August 2020 at the height of the stamp duty holiday was 70,000 approvals per month. Banks are having to subsist on remortgaging business, which is less profitable than first-time buyer business and means that margin pressure is creeping in as we close out the year.
Ireland is also seeing a similar issue, although it is clear from the figures compiled by the Banking and Payments Federation that it differs by an order of magnitude – Ireland approvals are a tenth of the UK monthly total – but trends that still favour individual groups of buyers are still clear. For example, Irish first-time buyers still make up more than 60 per cent of approved mortgages by volume, whereas the UK is currently seeing a more-or-less 50/50 split between first-time buyers and remortgaging households. Paradoxically, in this respect, the UK might simply be ahead of Ireland at this point in the housing market cycle.
