In late trading on Friday, AIB shares slumped around 4%, Bank of Ireland shares plummeted more than 6% and PTSB shares fell around 4%.

The banks have been rattled by movements in other markets which signal the days of pumped-up profits on the back of high interest rates may be coming to an end. European banking shares slid this week, leading to a sell-off.

Earlier this week, the Bank of England announced its first interest-rate cut since 2020 and the US Federal Reserve signalled it could start lowering rates in September. The European Central Bank (ECB) is also expected to announce at least one more rate reduction this year.

In June, the European banking regulator reduced rates for the first time since it began its aggressive campaign of hikes back in July 2022 in an effort to drive down stubborn inflation.

Diarmaid Sheridan, analyst with Davy Stockbrokers, said banks are “under pressure” due to the anticipated changes in monetary policy, resulting in falling shares.

AIB chief executive Colin Hunt predicted the lender’s profitability will ease next year as the ECB embarks on an interest-rate cut roadmap, albeit at a gradual pace.

“The bank will remain very strongly profitable, although we would expect profitability to ease as we move through 2025 and into 2026,” said Mr Hunt.

Mr Hunt added that the bank will enter this period from an “exceptionally strong position” as new lending continues to grow amid demand and customer acquisition following the exit of Ulster Bank from the Republic of Ireland.

Meanwhile, Irish lenders are now facing increased challenges in the market, which is likely to be a welcome development for customers.

AIB, Bank of Ireland, and PTSB all tapped a major uplift from the exits of rivals Ulster Bank and KBC from the retail banking market last year.

However, Spanish financial service provider Bankinter, which operates Avant Money, said it is applying for a full Irish banking licence and entering the deposit market. Meanwhile, Revolut is trying to grow its presence in the mortgage market.

Mr Sheridan said at this point, it’s “difficult to predict the impact they will have” on the market.

Some of the new entrants have some perks that the main lenders lack.

For example, Revolut is not subject to the banking levy that was introduced in 2014 to put responsibility on banks to help the economic recovery following the banking crisis of 2008.

The measure is set to be extended in the budget in October and Mr Hunt said he’s "interested in seeing an equal and fair application of the bank levy".

AIB, which has a mortgage market share of 36%, said the bank levy will cost the lender around €102m this year, which will fall due in October. This is up from €37m paid last year, but Mr Hunt said this sum is fully accounted for in its half-year earnings.

Despite some volatility on the horizon for banks, Irish lenders have fared extremely well amid a high interest-rate environment.

AIB posted an after-tax profit haul of €1.1bn for the first six months, fuelled by net interest income, and said it remained “confident” in its outlook for the rest of the year.

AIB forecasted net interest income, driven by monetary policy changes by the ECB, to reach around €4bn for the year.

Mr Hunt noted the expectation that ECB rates will be reduced further by 0.5% by the end of the year but maintained: “There’s no implicit assumptions there in relation to our own product pricing.” 

Industry brokers have told the Irish Examiner they are not optimistic that Irish banks will be as quick to pass on reductions to customers as they were slow to implement the increases.

Momentum waning

Elsewhere, Bank of Ireland posted €1.1bn in profits before tax in the first six months, but growth momentum may be waning as profits surged from €351m in the first six months of 2022 to €1bn at the halfway point of last year, underpinned by income coming from interest-rate hikes.

Net interest income increased by 2% so far this year and is expected to reach around €3.6bn for the full year.

Bank of Ireland chief executive Myles O’Grady said the lender is “meeting or beating” its targets and said it is “very well positioned to continue to deliver attractive returns for our shareholders".

Bank of Ireland acquired €8bn in mortgage loans from KBC, while AIB and PTSB carved out the Ulster Bank mortgage and commercial loan books between them. Bank of Ireland also acquired scandal-hit broker Davy around two years ago.

Separately, the self-proclaimed “challenger” bank PTSB also gave an optimistic outlook for the rest of the year following the disposal of non-performing loans, while it also predicted increased activity in the mortgage market.

The bank said competitive pricing during the latter stage of the first half of the year has contributed to a “strong” pipeline of mortgage activity for the second half, especially with fewer large competitors in the market.

“Where the market itself is contracting, we’re growing,” said PTSB chief executive Eamon Crowley.

However, Mr Crowley also noted the chronic lack of homes on the market and said: “We do see a need for more supply.” 

The lender said it is now in a position where it is able to generate capital after it sold a portfolio of non-performing loans in recent weeks, which has freed the bank to do around €2bn worth of new mortgage lending.

PTSB agreed the sale of the non-performing loan portfolio in a deal with Mars Capital and certain funds managed by US-based vulture fund Apollo Global Management.

“The legacy portfolio that we carried coming out of the crisis has been deleveraged,” said Mr Crowley.

In the past, unfortunately the way we generated capital was by deleveraging. That was the path we had to go through to ensure that this bank survived.

He added that he does “not envisage any further non-performing loan sales at this moment” and he is “happy” with the current level of the loans in arrears managed by the lender.

Mr Crowley said the bank also plans to pay out dividends to shareholders for the first time in around 15 years but added that the payout will likely be in 2026 based on 2025 profits.

In its interim statement, PTSB posted profits before tax of €75m, up €50m compared to the same period a year earlier.

However, a 20% rise in operating expenses led to a slip in underlying profits, which fell to €82m, down by €4m on the same period in 2023.

PTSB's operating expenses increased by €41m to €245m due to the transfer of assets and staff from Ulster Bank.

Mr Crowley said he expects these operating costs to decrease over time through the natural ebb and flow of staff numbers and added that the lender currently has no plans to implement a voluntary redundancy scheme.

PTSB’s slice of the mortgage market in the Republic of Ireland is now 13.5% and it serves around 1.2m customers, a large chunk of which were transferred to PTSB from Ulster Bank.