Profit and Banks

The retail bank I use is closing nearly all its branches and is opening a few Large customer centers and they are pushing everyone in to on line banking, other banks seem to doing the same and in a way I understand why its happening.

My point even with all this and the ending of free banking they still don't seem to be able to make a profit on retail banking ( not talking about investment and or mortgage banking ).

How come retail banking in Ireland ( and maybe the rest of the world ) has become a fundamentally unprofitable business.

General Atomic

The recession and the bursting of the credit bubble has caused people to focus on paying down their debts and saving money rather than taking out loans. The decrease in demand caused by this has reduced the number of business loans taken, since there's no need to expand to meet contracting demand.

The property market's collapse has also resulted in fewer mortgages being taken out and at lower cost than before. All of these factors combined with the general unwillingness of banks to give out loans due to perceived risk has reduced their overall revenue when compared to the boom years.

But with the ending of free banking they are charging for the use of a bank account, so money is coming in from that plus they have my and every other customers money on deposit yet its still not a profitable business ( retail banking )

ardmacha

Retail banking partly relies on money left, interest free, in current accounts which funds money transmission etc. As interest rates are low the value of this interest free money is less, so the charges go up.

Scofflaw

mariaalice wrote: »

But with the ending of free banking they are charging for the use of a bank account, so money is coming in from that plus they have my and every other customers money on deposit yet its still not a profitable business ( retail banking )

I don't think retail banking is unprofitable, it's more that the branches are cost centres. The branch itself doesn't generate the profits from retail banking - on the contrary, it costs money to staff, service, and maintain - and the branch is necessary only as long as there is no other way to deliver the services that retail customers require, and that's no longer the case.

The closure of a branch makes economic sense for the bank as long as the closure doesn't result in a loss of too many customers. AIB clearly think it won't:

Increasingly, customers have been moving away from traditional methods of banking with a large increase in the use of phone and online banking. Nine out of ten transactions are now conducted away from branch counters; over 750,000 customers are now actively using AIB Phone & Internet Banking and AIB Mobile Banking of which 215,000 customers are using AIB Mobile Banking.

In this environment, it is not feasible to maintain such an extensive retail network of branches, particularly where customer usage has reduced significantly. Many of the sub offices being closed operate on reduced days and hours, and typically carry out on average 20% of the transaction volumes of other AIB branches.

http://www.aib.ie/servlet/ContentServer?pagename=PressOffice/AIB_Press_Releas/aib_po_d_press_releases-0_08&cid=1343059262109&poSection=HO&poSubSection=%20&position=first&rank=top

So, while retail banking probably remains profitable, it becomes even more profitable if you can close the branches while keeping the customers. As to why the banks need that extra profitability right now...well, they've had some losses recently...

cordially,
Scofflaw

mariaalice

mariaalice wrote: »

But with the ending of free banking they are charging for the use of a bank account, so money is coming in from that plus they have my and every other customers money on deposit yet its still not a profitable business ( retail banking )

Banks pay for deposits - you lend them the money and they pay you interest, that costs them money.

Banks make money on loans - they lend you money, you pay them interest.

However, banks have to fund loans (through deposits or wholesale funding) so you have to subtract the cost of funding from the rates that you pay them for loans. Deposits are also guaranteed, the banks pay a fee for this (no choice on their behalf).

Now, loans are risky assets, so the banks have to keep capital stocks in the event of people not paying their loans back - capital costs money to source.

So at the end of the day, the banks take the interest that you give them and subtract their funding costs, capital costs, guarantee fees, employment costs and operating costs. What is left is called the Net Interest Margin.

Banks need a reasonably high NIM to make money and profit. Things like tracker mortgages, low demand, high deposit rates and high arrears all have negative effects on the NIM. Positive NIM alone won't do it as banks have other fees, costs and provisions which also need to be covered before profit is made.

From my understanding, both BOI and AIB are starting to make inroads into a reasonable NIM, the faster they do that, the faster they can start paying back what they were leant by the tax payer.

Lantus

mariaalice wrote: »

The retail bank I use is closing nearly all its branches and is opening a few Large customer centers and they are pushing everyone in to on line banking, other banks seem to doing the same and in a way I understand why its happening.

My point even with all this and the ending of free banking they still don't seem to be able to make a profit on retail banking ( not talking about investment and or mortgage banking ).

How come retail banking in Ireland ( and maybe the rest of the world ) has become a fundamentally unprofitable business.

banks only make money by selling debt or providing loans/credit and charging interest which when repaid provides profit. In a declining or stagnant economy the credit expansion required for banks to make money slows or even stops.

There are a fair few politicians now who use the phrase credit expansion rather than the somewhat misleading term growth (which implies that people or business generate money from hard work.)

creedp

Deleted User wrote: »

Banks need a reasonably high NIM to make money and profit. Things like tracker mortgages, low demand, high deposit rates and high arrears all have negative effects on the NIM. Positive NIM alone won't do it as banks have other fees, costs and provisions which also need to be covered before profit is made.

From my understanding, both BOI and AIB are starting to make inroads into a reasonable NIM, the faster they do that, the faster they can start paying back what they were leant by the tax payer.

What Im not fully clear on is why there has not been greater moves to reduce deposit rates. If all banks are struggling for a reasonable NIM then why keep going to the variable interest mortgage holder to shore up their NIM. I understand that lowering deposit rates risks losing deposit customers but at some point I wold have thought that the competitive market pressures would result in lowering of these rates by all banks in order to improve profitability. Its funny that both AIB and BOI announced variable mortgage interest rates on the same day .. what a coincidence! ... now imagine if they announced a small reduction in thier deposit rates .. coincidentially on the same day also.

I would also have thought that the banks distressed mortgage loans position can only disimprove in line with interest rate increases so why focus exclusively on pushing mortgate holder into/further into arrears? Reducing deposit interest rates won't push people out of their homes but I suppose decision makers in the main are more likely to be deposit holders that mortgate holders... as good an objective and sound business case as any I suppose.

bbam

mariaalice wrote: »

The retail bank I use is closing nearly all its branches and is opening a few Large customer centers and they are pushing everyone in to on line banking, other banks seem to doing the same and in a way I understand why its happening.

My point even with all this and the ending of free banking they still don't seem to be able to make a profit on retail banking ( not talking about investment and or mortgage banking ).

How come retail banking in Ireland ( and maybe the rest of the world ) has become a fundamentally unprofitable business.

Be careful what you wish for...
One of the reasons they are unprofitable is that they aren't charging enough interest on mortgages compared to what they are borrowing money themselves at.... The margin they have isnt sufficient to cover the costs of administering their systems and leave any profit...

Chances are that the only move for success will be to lower deposit rates further and raise mortgage rates to 7-8%. Obviously they would like to do this, however many feel that the following spate of bad debts created through mortgage arrears wouldn't make it a good move..

So chances are you'll see more tinkering with the organisation set up's and the like but no real impact on profitability.

Head The Wall

It's a lot easier for the deposit holders to just take their money and go elsewhere or do something else with it. They are a lot more liquid then people stuck in a house with a mortgage twice what the house is worth.

creedp

creedp wrote: »

What Im not fully clear on is why there has not been greater moves to reduce deposit rates. If all banks are struggling for a reasonable NIM then why keep going to the variable interest mortgage holder to shore up their NIM. I understand that lowering deposit rates risks losing deposit customers but at some point I wold have thought that the competitive market pressures would result in lowering of these rates by all banks in order to improve profitability.

Banks, under local and European regulation are required to shore up their retail deposit bases as this is stable funding. Metrics such as the loan-to-deposit ratio and the forthcoming LCR and NSFR reward banks for holding such deposits. Therefore, banks are paying up to get their deposits back to reasonable levels. However, you are right in that rates are very high at the moment and can't be sustained in the long run at current levels.

Anecdotally, I heard that in one bank, deposit rates were actually higher then its SVR, which is an anathema to functional banking. Rhetoric from the banks over the last few months seems to suggest that they are all moving to address these imbalances. However, this will be a slow process as no one (including the Central Bank) wants large flows of rate sensitive deposits bouncing between local institutions (personally, I don't really see this happening as rate sensitive money would probably have already left this jurisdiction).

Its funny that both AIB and BOI announced variable mortgage interest rates on the same day .. what a coincidence! ... now imagine if they announced a small reduction in thier deposit rates .. coincidentially on the same day also.

These rate changes may be coordinated by the Central Bank. Rates have to come down, its easier if they move in tandem. More likely, once one bank makes a move, others will follow it down. This isn't a stable Nash equilibrium, but it must happen which may provide sufficient short term stability.

I would also have thought that the banks distressed mortgage loans position can only disimprove in line with interest rate increases so why focus exclusively on pushing mortgate holder into/further into arrears? Reducing deposit interest rates won't push people out of their homes but I suppose decision makers in the main are more likely to be deposit holders that mortgate holders... as good an objective and sound business case as any I suppose.

Back of envelope calculations would put a 'target' SVR in the 5-6% region for a profitable bank with a 12 month depo AER at 2-3% for a term product. This assumes no deposit guarantee fee over the standard European one.

Banks will be trying to raise their SVRs and lower depo rates over the next while and depo rates have been falling over the last while, mortgage rates will have to start to rise. If a reasonable NIM can be restored, then capital should become easier to source and credit can be returned to the economy. Meaningful economic growth is dependent upon new credit being made available for both individuals and businesses.

Farmer Pudsey

Listen lads wake up it is AIB we are talking about. This is only the third time that it has gone bust and that the state has bailed it out the last two times. However this time it made a serious error of judgement the state went bust as well.

It cried wolf once too often.

woof woof