Action by the government and the European Central Bank over the last 10 months may have pulled the banks back from the brink of disaster, but the earnings outlook remains bleak. A combination of high legacy costs from the boom years and tightening margins have made it extremely difficult for these big institutions to turn a euro.

Take Bank of Ireland for example. Less than two weeks ago outgoing chairman Richard Burrows told shareholders that although the bank had impairments under control, margin erosion would probably lead to lower operating profits this year.

Why should we care? After all, we're paying higher taxes and getting less for it since the government has put €11bn (and counting) into recapitalising AIB, Bank of Ireland and Anglo Irish Bank. Why not let the banks suffer for a while?

Well, because one way or another, as taxpayers or customers, we're going to end up paying the bill.

First of all, the banks are supposed to pay for the guarantee scheme, which protects the depositors and bondholders in the seven domestic financial institutions. Without profits, the banks' ability to pay the government (ie, the taxpayer) for this protection is compromised.

Secondly, the government is entitled to coupon payments on the 25% preference shareholding it took in the big two banks – AIB and Bank of Ireland – in exchange for the €3.5bn in emergency capital injections each received in the spring.

Finally, all the banks need to start relying on retained earnings to build up their balance sheets organically and stop relying on the taxpayer for support.

In other words, it is in our interest to have profitable banks again.

Increase margins

This probably comes as a surprise, but Irish banks have very thin margins. The average interest-rate margin for an Irish bank – the difference between what it charges on loans and what it pays for deposits – is just over 1%. That is around half of what UK banks make and an incredible 20% of the typical US bank margin. Recent ECB rate cuts have only made the situation worse as banks have been under enormous pressure to simultaneously cut standard variable mortgages. Meanwhile, the market for deposits remains very competitive and, therefore, costly.

Even the International Monetary Fund noted this in its recent country report on Ireland: "Irish interest margins were low by international standards. As the crisis has unfolded, margins have been under further pressure with the sharp decline in lending rates (especially for mortgages, which are predominantly on variable rate terms)." When lending volumes were high this was not a problem, but with less market activity, low margins are a killer.

Senior bankers have been grumbling about this for months, although most are reluctant to go on the record for fear of a public backlash. Bank of Ireland's recent agm update is the closest to a complaint yet seen in the market – it said interest margins had a significant negative impact on profitability – but all the banks are in the same situation. Privately, bankers are saying that regardless of what the ECB does in the coming months, interest-rate hikes are on the way.

"We want strong banks, profitable ones that don't go bust and don't require taxpayer bailouts, but we also don't want to pay standard margins on credit products," said Karl Deeter, operations managers with Irish Mortgage Brokers. "The Irish want a situation which is like the financial equivalent of Jesus feeding the multitudes on three loaves of bread and two fish. The problem is Jesus doesn't work in banking."

Cut costs

The other side of the earnings coin is costs. This is an area banks can more readily control with less fear of either consumer or political fall-out. Since the banks have carried boomtime levels of staff into the recession, this is an obvious place to look for efficiencies.

Ulster Bank bit this particular bullet early in the year when it announced it would be seeking 750 redundancies and closing its First Active branches. Irish Life & Permanent has offered paid 'career breaks' to staff who might want to disappear for two or three years – at about €10,000 per year per employee, it's cheaper than keeping them on the job. Bank of Ireland and AIB have not made any formal moves to limit staff numbers, but have allowed hundreds to go through attrition.

As up to 65% of a bank's cost base consists of staff costs, getting control of employee numbers is crucial.

Now that it's clear property lending and many aspects of retail banking are unlikely to return to Celtic Tiger volumes, there is little argument for retaining high levels of staffing.

According to a recent report by Davy, the Nordic banks, which went through a similar crisis in the early 1990s, had a 30% reduction in staff numbers before reaching equilibrium. In Finland, which Davy believes most closely mirrors the Irish situation, half of bank employees were ultimately made redundant.

Raise fees, charges and commissions

One way to avoid increasing interest rates is to add fees, charges and commissions to basic products. Competitive pressures over the last decade and a half forced banks to reduce or eliminate fees and charges on basic products, such as current acc­ounts, but the good times might not last forever.

Mortgage-application fees are standard in the UK and could migrate to our shores. Transaction fees are another way banks could quietly start to recoup costs for servicing current accounts. Americans, for instance, are very familiar with ATM charges for withdrawals and other basic transactions.

Already, though, we're seeing banks develop more commission-based products on the savings and investment side of the house. Tracker bond-type products are making a comeback as banks seek to capitalise on the slight softening in consumer sentiment. These products bring in deposits and raise commission income – a win-win for the bank.

Reduce competition

This is capitalist heresy, but less competition could result in better health for the banks which survive. Competition is already voluntarily withdrawing from the mortgage market, as previous players such as Ulster Bank and Bank of Scotland pull back from their previously aggressive lending. Irish Life & Permanent, the biggest mortgage bank in the country, is effectively out of the market for the moment, too.

This change has left the field clear for AIB, Bank of Ireland and EBS, all of which are increasing market share and taking their pick of the best – and most profitable – customers.

Since government intervention has already tilted the pitch, better the banks we are underwriting should have a larger share of the spoils.

If we want to get paid back, that is.