A new report on the future of the banking industry finds Ireland's retail banks are at a "considerable and growing disadvantage" compared to other lenders and companies because of restrictions on variable pay.

Remuneration limits on bank employees are among the most restrictive in the EU, making these workers a "clear outlier" when compared with those in financial services and a range of other sectors, the study by the Banking and Payments Federation Ireland (BPFI) and consultants EY says.

"A normalisation of pay and employment conditions at Ireland’s retail banks – to allow the banks compete for people on a level playing field with other corporates – is needed if they are to attract the skills and employees that are necessary for their future and for the provision of services expected by Irish consumers," the Future of Retail Banking in Ireland report claims.

Earlier this week, Bank of Ireland announced its chief financial officer was leaving the lender for a similar position in Musgraves, with the bank blaming the Government imposed bankers' pay cap for his decision.

The report says the skills composition within banks is evolving rapidly, with the retail banks needing a range, including IT and digital skills, to meet evolving consumer and regulatory demands.

"The ever increasing demand for talent is a challenge for all businesses, including the retail banks in Ireland, who compete for people with the large international financial services sector, multinational technology companies, the fast-growing FinTech sector, and other corporates nationally and internationally," it states.

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The 66-page analysis also says the future profitability and viability of Irish retail banks is critical to their ability to generate organic capital that in turn is lent back into the wider economy.

Their performance is also key to returning the remainder of the €29.5 billion of bailout money injected into AIB, Bank of Ireland and Permanent TSB by the State during the financial crisis, it claims, 17% of which remains outstanding.

But it finds that a combination of low interest rates, one of the lowest levels of customer loan to deposit ratios in the EU and negative net lending growth has negatively impacted Irish retail banks' profitability, leaving it among the lowest in Europe.

"The sheer scale and weight of the operating costs for Irish retail banks including regulation, innovation/IT and labour costs relative to the size of the market in which Irish retail banks operate are having major impacts on the profitability of Irish banks, an impact deemed to have influenced the decision of two retail banks in early 2021 to depart the retail banking market," it says.

In particular, the report points the finger at Ireland’s high capital requirements, particularly for mortgages, which are three times the European average.

"Irish retail banks must hold back an estimated €2.5 billion in additional capital for mortgages, impacting price of products and impacting adversely the share valuation of retail banks," it states.

The report says it remains extremely costly and takes a disproportionately long time to repossess a property in Ireland where borrowers have not met their contractual obligations.

Recent research by the European Banking Authority found Ireland has one of the lowest rates in Europe for the recovery of security for mortgages under judicial processes, at just 11% compared to a European average of 46%, the study notes.

"The combination of legal costs, time to recover repossessed properties, and lack of success in securing collateral plays a key role in driving up the level of capital required for unexpected losses in the Irish mortgage pool," it says.

"This ultimately drives up the cost of Irish mortgages for both the banks who supply mortgages and the borrowers."

The report finds that Irish banks have to deal with competing stakeholder demands, with regulators on the one hand placing a strong emphasis on strength and stability, but shareholders focusing on sustainable profitability.

"These demands and expectations are not necessarily mutually exclusive however there is a need to acknowledge and seek a means to achieve balance between stakeholder demands," it says.

It says in the future regulation will arise across an increasingly diverse range of priorities.

"Juggling these competing priorities while striving to achieve committed cost reductions and operating model enhancements will require a fine balancing act," it claims.

The banks will also play a leadership role in Ireland's green transition, the analysis finds.

It also says continued investment in culture and trust remains a strategic priority within the banks, who fully support the introduction of an individual accountability framework.

The research concludes that the banking sector is undergoing a period of unprecedented transformation, with accelerated digitalisation, changing customer trends and increasing competition from fintech and non-bank competitors all contributing to the disruption of the traditional retail banking model.

Over the counter transactions in retail bank branches have fallen by over 45% in the past three years, while overall digital payments have risen by 65% during the same period.

It finds customers no longer uses just one institution for all their financial requirements and that there is now competition from around 20 providers in the mortgage, personal loan, overdrafts, SME lending and payments markets.

Banks must therefore continue to adapt rapidly, including enhancing online and mobile banking services, while also continuing to be of systemic importance to the economy, it claims.

But despite the move to digital, banks here have not reduced their staff levels at the same rate as lenders across the EU, the report states.

"The reduction in the number of branches has also been below the European average during the same period. In Ireland, the number of branches reduced by 11%, while in Europe the average was just under 20%," the research paper details.

In total, Irish retail banks employ around 22,000 people and the wider banking sector contributes €1.6bn directly to the Exchequer and a further €11.64bn to the economy each year.

Retail banks hold €270 billion in deposits for Irish households and businesses and provide loans totalling €152 billion, including over 822,500 mortgages to homeowners in Ireland.

The Financial Services Union (FSU) said the report is an important document that deserves attention and it shares the concerns about some of the challenges identified in the report.

"The idea of a Banking Forum has now been endorsed by a wide range of stakeholders including the Taoiseach, Michael Martin TD and has cross party support in the Dail," said John O'Connell, General Secretary of the FSU.

"The Minister for Finance announced recently that he has instructed his officials to examine proposals for such a review. We look forward to the publication of the terms of reference for the review and to the debate that will follow."

"Today’s publication by the BPFI feeds into this process and acknowledges some of the challenges facing the sector over the coming years."