Big Irish banks may be forced to cut wages and jobs

The hiring and salary freezes within Ireland's two biggest banks may not be reducing staff costs aggressively enough, and they may be forced to make possibly deep cuts if things don't pick up soon.

This is the rather stark assessment from analysts at Irish broker Davy. Inflated salaries and vigorous recruitment in recent years have meant that staff now account for around 56-65% of the total cost base at Bank of Ireland and Allied Irish Bank.

Something has to change, says Davy:

"As declining revenues look set to take a heavy toll, we look at the option of more aggressive action on costs against the backdrop of what is happening in the Irish private sector generally and peers' average staff costs."

Emer Lang, analyst at Davy, says: "Current pay negotiations that centre on pay freezes do not appear to go far enough."

Both banks say they're focused on reducing costs, but employee numbers have remained relatively stable. Bank of Ireland, for example, only cut staff costs by a total of 8% over the 12 months ending 31 March 2009. AIB actually increased this spend across the group in 2008 by 16%.

Rather scarily, Davy is drawing parallels with the Nordic crisis of the 1990s, when branches and staff numbers fell by an average of 30%.

"Increased use of technology was a factor, but shrinking activity was the key driver," it said.

These comments echo those of the Irish Bank Officials' Association, which said in June that consolidation in the Irish banking sector would lead to large job losses.

Brian Lucey, finance professor at Trinity College, says that the big Irish banks have already been trimming headcount.

"I'm not talking about brutal cuts, but a decent number of people will have already gone from the big Irish banks," he says. "When you employ 5,000 people, it's relatively easy to reduce that figure by a couple of hundred just by natural attrition."