ECONOMY:Can Irish banks avoid receiving 'jingle mail' - letters from homeowners posting them the keys to their homes?

AMERICAN BANKERS call it "jingle mail". They're letters containing house keys that homeowners have posted to their banks because they cannot - or simply don't see the point - keeping up repayments on mortgages that are far higher than their homes are worth.

During the early 1990s in Britain, when negative equity (where a mortgage is greater than the value of the property) was at its worst, it was not unusual for heavily-indebted mortgage holders to lock the doors behind them and drop the keys in the letterbox.

Two factors, or what Irish bankers describe as "fundamentals", are keeping Ireland from slipping into a similar situation - unemployment remains relatively low and the population is growing.

However, the substantial increase in the number of people on the Live Register in March is a major worry. The unemployment rate jumped from 5.2 per cent to 5.5 per cent - the highest rate since June 1999 and the biggest monthly percentage rise since 1983.

Despite this, while fewer people want to buy, there is still demand among tenants. In some cases sellers have become landlords and are willing to sit and wait for activity to return to the market in the hope of getting a better price for their property.

For these reasons, the Irish banks feel they can weather the domestic storm and keep growing profits, albeit at a much slower rate than before.

The international financial typhoon is a different matter. Funding costs remain high because there is a fear among investors and investment banks about buying and ending up with some exposure to the so-called toxic assets linked to the US subprime meltdown. This has heightened suspicions and driven up the cost of money.

This in turn has made Irish banks much more cautious on their lending because their margins have been reduced.

"We haven't seen the magnitude of what's happening out there for a long, long time," says banking analyst Emer Lang at the research unit in Davy Stockbrokers.

"There is no doubt that credit growth will slow and property-related lending is slowing quite fast. The banks will be hoping businesses will continue to have a need for credit and that they will be able to afford it."

Property-related loans account for between 53 per cent (AIB) and 95 per cent (Anglo Irish Bank) of the loans books of Irish banks, so concerns about their future prospects are well-placed in a property slowdown.

NCB Stockbrokers says lending growth will slow to 8 per cent this year from 18 per cent in 2007. This has tightened the purse-strings of many borrowers.

Banks acknowledge there is a staring contest going on in the property market. Whoever blinks first wins. Buyers know this and are waiting for developers and vendors to cut their prices.

This trend is reflected in the international funding markets. Cash-rich buyers are willing to buy but will not move until they believe the market has bottomed out.

Irish property prices fell 7 per cent last year and dropped a further 1.5 per cent in the first two months of the year.

Senior bank chiefs, including AIB's Eugene Sheehy and Ulster Bank's Cormac McCarthy, believe prices will fall around 5 per cent this year.

The European Central Bank is expected to have cut the base rate by 0.5 per cent to 3.5 per cent by the end of the year. Bankers are hoping this will generate activity and improve conditions for 2009.

But international concerns still linger. Merrion Capital analyst Sebastian Orsi believes part of the catalyst for global markets improving will be US house prices hitting bottom.

"When that happens, the downside risk to a lot of securities exposed to them will go and people will be willing to spend. It also puts a floor on the losses on asset-backed securities that are driven by them.

"It brings back an interest among borrowers to pay mortgages because the value of their homes is going up again," he says.

For the time being, it's about damage control. As property lending slows and funding costs remain high, banks will go back to basics by seeking deposits and relying more heavily on business customers to keep borrowing.

Banks have been aggressively expanding their business and corporate banking products.

The deposit market also remains strong. Between 7 per cent and 9 per cent of household income is saved and banks recognise that the SSIAs have helped savers keep up the habit.

Wealth management is fast becoming a boom area. It is a high margin business, generates substantial fee income and requires little credit, which is appealing when banks have funding difficulties and loans are slowing.

Ireland's new millionaires are being targeted with services by domestic and international banks and by growing private client businesses within the stockbroking firms.

Analyst David Odlum at NCB says: "Ireland experienced the baby boom much later than many European countries.

"The average age here is in the mid-30s and we have found that the high income years for most people are between the mid-30s and mid-40s," he says. "People will be encouraged to save for retirement and the pensions could grow by 20 per cent per annum."

Mortgage deals dominated bank advertising during the 10-year property boom. Now, the campaigns are for depositors, new current account holders and mortgage switchers.

This last area will be particularly hard-fought, as borrowers with low mortgages and valuable properties are considered low risk, compared to high-value mortgage lending in a falling property market.

A bearish property market means record bank profits will become a phenomenon of the mid-2000s. Davy Research believes the big four banking groups - AIB, Bank of Ireland, Anglo Irish Bank and Irish Life and Permanent, which owns Permanent TSB - will enjoy earnings growth of around 1 per cent in 2008, down from 14 per cent last year, but the broker sees the market improving in 2009 when it forecasts profit growth of 3 per cent.

Davy believes the Irish interest-earning assets of AIB, the country's largest bank, will fall from 22 per cent growth in 2007 to 13 per cent this year and 6 per cent in 2009.

"This is due to the big slowdown in volume growth and pick-up in bad debt," says Lang.

Analysts believe the banks will have to look to tightening their belts to keep profit margins up. AIB and Bank of Ireland have already curtailed the recruitment of new staff in the worsening market.

"As volume growth slows, they are going to clamp down more on the cost side. If they are going to see modest growth, they will have to watch costs," says Lang.

Until the markets settle down, Irish banks will, like property buyers eyeing possible bargains, sit tight and wait for more certain times. In the meantime, bankers will be praying that their post doesn't start jingling.

DO IRISH BANKS FACE RISING BAD DEBTS?

THE SHORT answer is yes. However, senior bankers would claim that they are rising from historically low levels and that they will increase to a level that will not cost them sleepless nights.

Davy Stockbrokers estimates that the money that Irish banks set aside for bad debts will rise from 0.15 per cent of all their loans in 2007 to 0.2 per cent this year and 0.32 per cent in 2009. This amounts to total bad debts of around €1.4 billion next year.

However, bad debts usually take between nine months and a year to materialise, as the US downturn proved.

The US housing market started to turn in early 2006, yet it wasn't until the autumn before borrowings by US housebuilders fell into the "non-performing" category.

Irish banks have been busy hand-holding some of their smaller property clients who bought development land at the peak of the price cycle.

AIB said it was "actively managing" about €700 million of loans to property developers to contain anticipated losses from borrowers defaulting.

The bank said that the loans represented only about 8 per cent of loans to Irish housebuilders.

It was the first material indication that property developers were encountering financial difficulties.

Davy expects AIB's bad debts to reach 0.35 per cent of all loans in 2009, while Anglo Irish Bank, which has a heavier exposure to the property market, will be around 0.4-0.45 per cent of loans.

Most banks have been prepared to help their builder customers, though there is much anecdotal evidence that banks are no longer allowing developers to roll up interest and encouraging them to reduce prices in an effort to sell properties.

Davy analyst Emer Lang says: "If the housing market doesn't stabilise by the end of the year, you will see some small builders go bust."