According to debt ratings firm, DBRS Morningstar, increasingly rigid capital requirements may have led to the exit of Ulster Bank and KBC from the Irish market. To elaborate, foreign banking groups are faced with higher capital requirements for Irish banks in comparison to European banks, which leads to a push for these foreign banks to exit the Irish market. Many lenders themselves complain about these strict requirements because they raise the cost of mortgages and of doing business in Ireland more generally.
With these planned exits by Ulster Bank and KBC, the Irish market will be left with only three banks- the Bank of Ireland, Allied Irish Banks (AIB), and Permanent TSB. On the positive side, DBRS Morningstar has reported that a more concentrated sector may strengthen the surviving banks’ market positions, client diversification, and revenue generation.
It is also important to note that the long-term effects of the pandemic are still largely unknown. Though Irish banks have considerable capital cushions, there were still indications that credit was deteriorating in 2020 as a result of the pandemic. An evaluation of the full impact of the pandemic on banks’ asset quality will be challenging to make until government support measures are ended.
AIB has signed a Memorandum of Understanding for the procurement of about 4 billion euros of Ulster Bank’s corporate and commercial loan book. Additionally, the Bank of Ireland is in discussion to receive the complete performing loan portfolio of KBC Bank Ireland.
According to DBRS Morningstar, the Irish banking arena is presently dominated by the two largest banking groups, Bank of Ireland and AIB. The Bank of Ireland reported leading market shares in new mortgage lending at 25.5 percent and AIB reported 28.4 percent at the end of 2020. These two bank lenders accounted for 57 percent of total household mortgage loans amongst five retail and commercial banks that are active in Ireland. They also accounted for 88 percent of all SME and corporate loans.
Ulster Bank is the third biggest bank in Ireland and possesses about 15 percent market share in mortgages and 20 percent in SMEs. The fourth largest bank is Permanent TSB, which holds 17.9 percent of the market share but only has minimal exposure to SMEs and consumers. KBC Bank Ireland comes in fifth and holds 8 percent of the market share in retail banking.
As the pandemic and government interventions that came along with it begin to recede, it will be interesting to see which banks bounce back the quickest and if there will be any disturbances to the balance of market share among the remaining banks active in Ireland.
Burke-Kennedy, Eoin. “Ulster Bank and KBC May Have Exited Because of Higher Capital Requirements.” The Irish Times, 24 May 2021, https://www.irishtimes.com/business/financial-services/ulster-bank-and-kbc-may-have-exited-because-of-higher-capital-requirements-1.4573452.