Financial Stability Note: Irish retail bank profitability 2003 – 2018

A Financial Stability Note by Ciarán Nevin explores trends in the profitability of the Irish retail banking system over the past 15 years, with comparison to a sample of other European Union banks. Specifically, the research considers changes in the net interest margin (NIM) of banks, the ratio of net interest income to average interest earning assets.

The key findings of the Financial Stability Note are:

• In the post-crisis years, the NIM of Irish banks has increased significantly while the NIM for the sample of other EU banks declined. This may be a result of greater competition for deposits in the rest of the euro area, pushing deposit rates up and as a result reducing the positive contribution of liabilities in the low-interest rate environment.
• On the other hand, faced with historically low levels of competition, Irish banks were in a position to capitalise on low funding costs and increase their margins substantially over the period, although these benefits appear to be diminishing in recent years.
• The concentrated nature of the Irish banking sector, where market power allows for wider margins and greater profits, may attract market entrants in the future and increased competition may place downward pressure on margins. In a more competitive market, banks would be forced to make efficiencies in order to increase returns. In turn, greater competition in the market may benefit Irish consumers through reduced costs and increased choice.

The views expressed in this Note are those of the author alone and do not represent the official views of the Central Bank of Ireland.

Library of Financial Stability Notes