POSSIBLE INTEREST RATE cuts. A long muttered about recession which never quite seems to arrive. Are the billions in profits Ireland’s pillar banks are raking in at risk?

In a word – no. At least, not for this year.

An indication of how solid things are looking came during the week, when AIB published a trading update.

The bank estimates it will bring in €3.65 billion in net interest income in 2024.

For context – last year, AIB had net interest income of €3.84 billion in 2023. 

This accounted for the vast majority of the company’s income. 

All ‘other’ non-interest income, mainly consisting of money from “fees and commissions”, came in at €900 million for the year.

After all expenses and operating costs were added up, AIB finished up with a profit of just over €2 billion.

This was a record for the lender, a staggering increase compared to the €765m profit recorded the previous year.

Was the cause of this rapid rise some new innovation, some ground breaking idea from the lender’s top-ranking executives?

Again in a word – no. The rapid rise in European interest rates was the main reason, with customer apathy being another key factor.

The European Central Bank’s deposit rate rose from minus 0.5 per cent to 4 per cent between 2022 and 2023. AIB had just over €33 billion of customer deposits as of the end of 2023. 

Record profits

The interest income the lender is making from these deposits is what has largely fuelled its surge in profits.

Irish bank customers tend to keep their money in on-demand accounts, where the typical interest being paid out is a derisory 0.13% per year.

Across all lenders as of the end of 2023, Irish consumers had €153 billion on deposit.

Almost all of this, some €141 billion, was in on-demand accounts paying almost nothing in interest.

With the 4% rate available, lenders largely pocket the difference, leading to their massive profits.

As previously covered by The Journal, despite the fact that Irish consumers could get far better returns on their money elsewhere, they still tend not to move it. 

This is a key point in favour of the banks, with AIB highlighting its “stable deposit base” in its trading update.

But there’s a possible cloud on the horizon for AIB – interest rate cuts. 

Inflation

Interest rates were hiked by central banks to get inflation under control following a surge in prices – particularly energy costs – after Russia’s invasion of Ukraine in early 2022.

The logic is that higher interest rates make people less likely to borrow. Less borrowing power drives down demand for buying various goods and services. Prices eventually fall, or at least, stop rising as fast as before.

EU inflation peaked at 11.5% in October 2022. To get price spikes under control, EU officials wanted to get this down to 2%. As of April, EU inflation was at 2.4%.

With inflation now relatively under control, analysts have widely predicted interest rate cuts. So, party time is over for the banks, right?

Not quite. First off, interest rates are unlikely to be cut as quickly as expected.

While some investors had been betting on cuts as early as April, this didn’t happen. June now looks more likely for the first move.

On top of that, recent data shows US inflation has proved to be a bit stickier than expected, unexpectedly rising slightly to 3.5% in March. While analysts had expected US interest rates to fall by as much as 1.5% over 2024, most now think it will be closer to 0.5%.

Given the US impact on world finance, expectations have similarly changed in Europe. While previously analysts had predicted 2024 rate cuts of as much as 1.5%, now 0.75% is about the average prediction.

Going back to AIB, this means the lender will continue to benefit from high interest rates for a while yet feeding into its bottom line.

Interest rates

But wait, there’s more! Remember at the start of this article, when we talked about how AIB is predicting net interest income of €3.65 billion for 2024?

Well, that number was based on a key assumption – that European interest rates would fall by 1.25% this year.

Given that now looks unlikely to happen, AIB will almost certainly take in more than predicted. The consensus from analysts is that it will end up at just under €3.8 billion, roughly on a par compared to 2024.

While the bank’s costs are set to rise by about 7% during the year, it is still on course to make another massive profit.

2025 could be a different story. But the level of net interest income predicted by AIB when it expected European interest rates to fall significantly in 2024 indicates the bank will likely continue to make good money once rates are somewhere around 2% or higher.

And as long as its customers continue to sit on their hands and take the meagre interest payouts offered to them, rather than move their deposits elsewhere.

It’s something which AIB is betting on and a prediction which has – so far – been largely correct.