It was reported in the Sunday Independent yesterday that An Post (the Irish Post Office) is to look to create a joint venture and enter the mortgage market, pledging to cut market rates by c.1%.
According to the report, An Post’s board has approved a new financial services strategy in which it will look to choose a JV partner by spring 2019, pilot loans by end 2019 and be ready for the spring 2020 selling season for its full banking offering. It will also seek partners for fintech services and lending to small and medium sized businesses.
Goodbody Stockbrokers estimate ROEs for the main Irish banks range from 13-20% on new business (with RWA densities of c.40%). However, cutting rates by 100bps would bring ROEs down to just 7- 10%. As such, Goodbody struggle with the pricing point of An Post’s proposal unless RWA density was closer to 20-30%, which would imply it may need to write only very low LTV product (which has low risk weights), which would limit its potential market penetration, in their view.
For context, Bank of Ireland has a JV with the UK Post Office, a business that delivers low ROEs to BOI and only has a market share in low-single digit levels.
Having said that, the price point of the Irish post office proposal looks to be pitched well below current market rates, so may be more of a potential threat to the incumbents.
According to Goodbody Stockbrokers, "At this stage, the proposal is still some time into the future and execution of the plan will undoubtedly bring its own difficulties, not least, delivery of attractive ROEs to the post office, but the story will undoubtedly keep a focus on mortgage rates, competition and bank NIMs."