Gavan Reilly

A GENERATION ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn.

– George Osborne
The Times
February 23, 2006

(context)

The front page of today’s Irish Examiner reports that AIB still offers to cover €2,500 per year in gym or golf club expenses on the part of its employees.

AIB is offering to pay employees’ golf club fees and leisure club memberships worth millions of euro every year despite being crippled with debt and facing massive job losses and a likely state takeover.

The crisis-ridden bank confirmed the generous staff perks scheme on the same day it raised interest rates for hard-pressed mortgage holders by half a percent – and just days after it announced record losses of €2 billion for the first half of the year. The interest rate hike will affect approximately 50,000 customers who hold standard variable mortgages. [more]

The piece goes on to say that the scheme is offered to each of the bank’s 12,500 employees in Ireland, as well as the 2,500 it employs in Britain. Up to €2,500, it says, is offered to each employee.

Meanwhile, the bank increased its variable mortgage interest rate from 2.75% to 3.25% yesterday, which will (it is reported) hit about 50,000 mortgage holders with a monthly repayments increase of about €27.

So this morning, after seeing the Examiner‘s lead, I decided to crunch some figures.

In the results it filed in March, for the year ending 31 December 2009, AIB said it had a residential mortgage book valued at about €27.1bn. In layman’s terms, that means that homeowners in Ireland collectively hold mortgages, from AIB, to the tune of €27,100,000,000.

How much of this €27.1bn is lent at a variable rate? Well, that depends on who you ask. This morning’s Irish Times estimates that about 30% of the bank’s mortgages are lent at a variable rate (thanks to Aaron Quigley for alerting me), while Karl Deeter from Irish Mortgage Brokers suggested to me that the variable portfolio amounts to about 20% of the total.

This is where it gets interesting. Yesterday’s Irish Times posited that the 0.5% increase in the interest rate would result in the monthly repayment increasing by €26.96 for every €100,000 outstanding on a borrower’s mortgage.

[Update, 2pm: I’ve crunched more numbers using slightly more mathematical formulae than those in the comments or, presumably, those used by The Irish Times. Using the c = (r / (1 − (1 + r) ^− N))P formula the monthly repayment works out at €26.96 for every €100,000 outstanding on a 30-year mortgage. The post previously stated an increase of €26.82.]

So, if 30% of AIB’s mortgages are lent at a variable rate (€8.13bn), then AIB stands to make an extra €2,191.848 a month from the increased interest rate – that’s €26.17 million a year. If as Karl suggests the rate is closer to 20% (€5.42bn), it will make €1,461,232 extra per month, or €17.44 a year.

Now let’s go back to the gym membership scheme. Though it’s unlikely, let’s suggest – as well most employees might want to – that every single employee claims their €2,500, there’s a chance that AIB is faced with 15,000 bills for €2,500 every year. That’s €37,500,000 a year for AIB employees to go to the gym or the golf club.

So, if 20% of AIB’s mortgages are at a variable rate, then the amount by which AIB is hitting mortgage holders – the vast majority of whom, we can guess, are in negative equity – doesn’t even cover half of its bill for sending its employees to the gym or golf club.

Let me repeat that. AIB is increasing its mortgage interest rates, when potentially more than double the amount it will make is being offered to send its employees to the gym every year.

It will take at the very least 17.10 months, and at most 25.66 months, for the increased mortgage rates to cover AIB’s annual cost for the scheme.

This is the bank that got a €3.5bn recapitalisation bailout from the taxpayer last year, will probably need another one to the same amount this year (according to JP Morgan, anyway) and which has been able to offload billions in loans to NAMA that it otherwise would probably never be able to get back.