ANOTHER DAY, ANOTHER billion, as the old saying goes.

It’s a pretty good time to be an Irish bank. Or, more accurately, a surviving Irish bank. Whereas before there were a host of lenders in the state, now we’re down to just three of note – AIB, Bank of Ireland, and Permanent TSB.

Bank of Ireland yesterday reported pre-tax profits of €1.02 billion for the first six months of the year. Last week AIB updated its guidance after a surge in income, and now expects profits of about €1.2 billion for the first half of 2023. Permanent TSB’s figures will also show a major jump when its turn to report comes.

After the withdrawal of KBC and Ulster Bank from the Irish market, these three lenders gobbled up most of their former loan books and customers. They now have a stranglehold on consumer banking, with AIB and Bank of Ireland (BOI) dominating.

That’s one reason for the mega-profits. The other, more important one, is interest rates. Both BOI and AIB estimate for every one percentage point interest rates go up, they get an extra €300 million. With the European Central Bank (ECB) raising its deposit rate from zero to almost 4% over the last year, it doesn’t take a genius to work out where the phenomenal results are coming from.

This is likely to have been cheered by officials in government buildings. While Bank of Ireland has returned to fully private ownership, the State still owns around 50% of the shares in both AIB and Permanent TSB. As the share price of the banks has soared over the past year – AIB’s has roughly doubled – so has the value of the State’s holding in the lenders.

The government has been taking advantage of this by steadily selling down its remaining shares. In June it offloaded a 5% stake in Permanent TSB for €55 million. Later in the month it also sold a 5% stake in AIB for €480 million, bringing its shareholding in the lender below 50%.

Every indication is that the government will steadily continue down this path, until both lenders are fully returned to private ownership. But the question does not seem to have been seriously considered in government buildings – should it?

The options

The State has been an uneasy shareholder ever since the taxpayer-funded bailout during the financial crisis. Various governments have signalled they want nothing to do with the running of the banks. The plan was always to just recover as much money for the taxpayer as possible, ensure the banks were stable, and get out quickly.

There’s little question that a return to private ownership would likely be better for bank investor returns. More liquidity for buyers means shares can be bought and sold more easily. It also significantly reduces the risk of political interference, something which could be a concern with a change in government.

There’s also the question of maximising taxpayer returns. Just because bank shares are high now, doesn’t mean that will always be the case – in Ireland, there’s plenty of painful reminders of that. If the government retained its shareholding and the values suffered a major drop, there would likely be plenty of questions about why it didn’t get out while the going was good.

But before it continues with its privatisation plan, it could be at least worth taking a beat. A study from ECB researchers last year argued there is a strong case for the banking sector to be a mix of public and private ownership.

The gist was that, while private banks tend to do well when the economy is performing, they are more likely to scale back lending during a financial crisis. By contrast, those that were publicly-owned were more likely to keep lending, something which could boost the economy when times are tough. The paper argued that State bodies should “concentrate on maintaining a mixed-ownership structure of the banking sector”.

Of the three potential candidates, BOI can be ruled out straight away. It received a much smaller bailout, the state always held a relatively small stake, and it only went back to private ownership last year. It’s unlikely to return anytime soon.

AIB is also unlikely. The state’s shareholding has just dropped below the 50% threshold, and a large commercial alternative to Bank of Ireland is needed.

That would leave Permanent TSB, where the state still has a shareholding of just under 60%. The lender would likely be the most logical choice. While it has sometimes struggled to distinguish itself in a market dominated by the other two main players, it has recently been bolstered after acquiring a big chunk of Ulster Bank’s former loanbook.

A state-owned Permanent TSB could provide a real alternative to AIB and BOI, something which is desperately needed in Irish banking.

The logic of privatising the banking sector, as well as other industries, is to foster healthy private competition and provide a good market to consumers. But Irish banking is one of the least competitive sectors in Europe. This creates all sorts of issues, such as uncompetitive pricing, which analysts would argue can already be seen in Ireland given how slow banks have been to increase deposit rates for savers, despite enjoying massive profits.

This is something the government itself clearly recognises is a problem. After Ulster Bank announced its withdrawal from the Irish market, then-Tánaiste Leo Varadkar said the government would “support” the creation of a “third force” in Irish banking. Opposition figures called on the state to establish a third pillar bank.

The state already has a major role in many industries, from energy with the ESB, to transport with the likes of Irish Rail and DAA. The state also already owns a bank with the possibility to grow and provide desperately-needed competition in an uncompetitive market.

If, as ECB researchers argue, a mix of State and private owned lenders would be better overall, it could be at least worth considering. If the government is truly serious about creating a long-talked about ‘third force’ in Irish banking, the answer could be staring it in the face.