Sunday 24 September 2017

Banks face €1bn bad loans hit due to slowing domestic property market

Irish banks face taking a €1bn bad loans hit between this year and 2009 as a slowing domestic property market leads to rising defaults among mortgage holders and commercial property and development borrowers, according to Swiss investment banking giant UBS.

This compares to a combined €380m bad loans charge for the Irish operations of listed banks over the past three years.

Rising bad loan charges should see pre-tax profit growth across the sector fall from 12pc this year to 5pc in 2008 and 4pc the following year, the broker said in a 32-page report on the Irish banking sector.

However, a worst-case scenario would see banks booking almost €700m of bad loans provisions on their mortgage books and a further €4.6bn charge on lending to the construction industry, it said.

It added, however, that it remains bullish on Irish banking stocks, given their "compelling valuations".

"In our (stress) test, we assume that Irish house prices fall 5pc a year for the next three years and grow 2pc in 2010, and the number of home movers falls by 32pc over the next three years," UBS said in the report.

The brokerage noted that falling house prices impact on employment in the construction sector.

Its worst case -- which, UBS highlights, is much more bearish than that the brokerage is actually currently forecasting -- sees unemployment rising 2.9pc across the country.


"Looking at the Irish mortgage market as a whole, we believe that in a downturn it is likely to be contained to high loan-to-value (LTV) loans. Accumulated equity in low LTV loans would cover banks in case of a default," UBS said.

"If we assume that 20pc of the Irish mortgage market has an LTV of greater than 85pc, it implies €25bn of at-risk loans on the banks' balance sheets."

The pessimistic hypothesis sees a 16pc default rate on these risky loans and the banks being forced to sell repossessed houses at a 20pc discount.

This points to a combined €682m bad loans charge for the three listed mortgage providers, Allied Irish Banks, Bank of Ireland and Irish Life & Permanent, UBS said.

UBS said the impact of a severe slowdown on Irish banks' €96bn outstanding commercial property and construction-related loans would be much greater.

"We have assumed a 40pc collapse in the value of commercial property would take commercial property prices back to 2002 levels.

"This, in turn, would cause 30pc of current commercial property and development lending to default, based on the information currently available," UBS said.

The brokerage said that this would result in an impairment charge of €4.6bn.


"To put this into perspective, the two main Irish banks (AIB and Bank of Ireland) and Anglo Irish Bank should generate €6bn in pre-tax profit in 2008.

"So, a fall of this magnitude, combined with losses on the housing book, would reduce earnings by 75pc if it were to occur over one year," UBS said.

UBS said that even its worst-case scenario would not eat into Irish banks' own capital.

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