Welcome to Banking News, the KPMG Ireland Quarterly Banking Newsletter, which has been designed to bring together useful insights and developments that are relevant to the banking and capital markets industry. 

Economic outlook

The Department of Finance’s Budget 2023 Economic and Fiscal Outlook report sees Irish domestic demand contracting 2.4% in Q3 2022, before expanding by 1.3% in the final quarter. The department projects inflation will average 8.5% this year (it is expected to peak at 10.4% in the final quarter) and over 7% next year.

The UK economy is likely already in a mild recession with growth expected to stay negative for the rest of 2022, KPMG’s latest Global Economic Outlook has found. Overall, UK growth is expected to average 3.2% this year, boosted by weak growth in 2021 due to pandemic-related restrictions. By August, domestic energy bills had risen by 73.2% compared to a year ago. Financial conditions have tightened as a result of recent policy announcements, with investors demanding a higher premium for financing UK debt.

The OECD published a worrying economic forecast for 2023 which suggests that Europe faces a difficult economic climate if the current energy crisis worsens, with winter temperatures likely to be a critical factor. The eurozone faces the largest downward revision in the world – with overall growth expected at 0.3% as opposed to the 1.6% forecast in June.

Geopolitical uncertainty and high inflation have also taken their toll on the global economy, according to KPMG International’s Global Economic Outlook report. The forecasted global GDP growth for 2023 of 1.9% is down from 2.7% in 2022. Weaker growth could moderate inflation to 4.7% in 2023, after averaging 7.6% in 2023.

Central Bank of Ireland news

Central Bank publishes research examining ATM withdrawals and use of cash before and after the pandemic: Prior to the pandemic, the average monthly value of ATM withdrawals was around €1.5 billion, but post-pandemic that average has dropped to about €1 billion. However, the value of withdrawals in June 2022 was 7% higher than in September 2021. The suggestion has been that consumers are withdrawing more cash in response to inflationary pressures. The change in the value and volume of monthly withdrawals appears to reflect the stringency of public health measures in place to contain the spread of Covid-19.

Central Bank publishes new data on bank account openings and closures: 24% of KBC Bank and Ulster Bank accounts have been closed since the start of 2022. 600,311 accounts were opened in the three main remaining banks in the first eight months of the year (AIB, BOI & PTSB). As part of its ongoing work to supervise the withdrawal of Ulster Bank and KBC Bank from the Irish market, the Central Bank of Ireland in September published the first in a new series of statistics on bank account migration, showing the trends in account closures and openings. 

Enforcement Action: Danske Bank A/S was fined €1,820,000 and reprimanded by the Central Bank of Ireland for transaction monitoring failures in respect of anti-money laundering and terrorist financing systems: The three relevant Criminal Justice Act breaches stem from the failure by Danske Bank to ensure that its automated transaction monitoring system monitored the transactions of certain categories of customers of its Irish branch, for a period of almost nine years, between 2010 and 2019. Some customers rated as high and medium risk were erroneously excluded from transaction monitoring as a consequence of inappropriate historic data filters being used by the Bank.

Interest rates and rising inflation

Ireland has enjoyed several years of back-to-back economic growth, but recent global geopolitical events are putting a strain on the global economy and the cost-of-living crisis is eroding disposable incomes. The combination of supply chain bottlenecks, generous government spending, tight labour markets and a commodity shock triggered by the Russian invasion of Ukraine, have together caused inflation to shoot well above central banks’ targets across many developed economies.

KPMG’s global economics experts expect inflation to moderate from the middle of 2023, as the energy shock is no longer reflected in the year-on-year inflation calculation. However, the new environment may be structurally more inflationary, as production costs – from materials to energy and labour – remain elevated. Faced with inflation well above targets, most central banks are concerned that inflation expectations are high while the public’s faith in central banks’ ability to fight inflation is falling. The need for fiscal support is likely to stoke more inflation in the medium term, placing fiscal policy actions at odds with the aims of central banks in meeting their mandates. 

The inherent uncertainty is driving central banks to be more hawkish in their response to what could be a relatively short-lived burst in inflation. However, if inflationary pressures become embedded, interest rates may stay at higher levels than levels seen in the past decade even after the current spike in inflation subsides. This would represent a significant shift in monetary policy in a relatively short space of time. KPMG is anticipating a relatively sharp rise in interest rates in the Eurozone, UK, and US by the middle of 2023, with a potential fall arising only in the US over the course of the year.  

ESG in banking

The ESG (Environmental, Social & Governance) agenda continues to be a major driver of change for financial services firms across the world. Not only are these changes beneficial for our environment and quality of life, but 84% of Irish CEOs surveyed in KPMG Ireland’s CEO Outlook Survey 2022 stated that they believe ESG programmes improve financial performance. In addition, 69% of Global CEOs surveyed see stakeholder demand for increased reporting and transparency on ESG issues and 72% believe stakeholder scrutiny of ESG will continue to accelerate. Significant progress has been made by Irish and European banks and public bodies in the “green lending” space. Green loans are loans which are used to fund environmentally sustainable projects. 

European governments, banks and businesses raised a record €311 billion of green finance last year, which is almost twice the amount reached in 2020. While Europe is well ahead of other regions with regards to green finance, there is a fear that it will need to increase its spending dramatically to achieve climate neutrality by 2050: the EU commission estimates it will need to reach an annual spend of €1 trillion. The trajectory for green finance in the coming years will quite clearly be massive increases at both public and private level.

Horizons Europe is a €95.5 billion EU research and innovation programme which aims to fund initiatives which tackle climate change. Among the first movers in relation to this initiative were ABN-AMRO: the Dutch bank offered customers a discount on their mortgage interest rate if they bought a home with a high energy efficiency rating. They have partnered with energy providers to streamline the process. ING aims to upgrade at least half of its mortgage portfolio to an energy rating of C. In order to achieve this, the bank is providing a Green Personal Loan for customers with existing mortgages. 

In 2021, more than a third of mortgages provided by Bank of Ireland was green. The group said that green mortgages and sustainable transport finance would enable its customers to create “sustainable, low pollution, built environments” with eligibility criteria for mortgages requiring borrowers to buy, build or upgrade properties with a BER of B3 or better. AIB announced in March 2022 that it would offer a discount of up to 10 basis points to developers who build to the new Irish Green Building Council (IGBC) building specification. 

How KPMG can help

KPMG has a large team of professionals with extensive knowledge and expertise in Financial Services, Banking, Aviation Finance, Insurance and Asset Management. KPMG Ireland can leverage a network of multidisciplinary professionals, stretching across Europe and beyond. Supported by this global network, KPMG Ireland can provide a broad range of support, advice and guidance on how to address the challenges you face.

If you have any queries on the topics covered in this issue of Banking News, please contact Owen Lewis, Head of Banking and Capital Markets. We'd be delighted to hear from you.

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