Business Irish

Sunday 22 October 2017

Failure to get bank funding 'dents efforts at restoring confidence'

Ratings agency downgrades raft of bonds issued by lenders

Laura Noonan

Laura Noonan

TOP-tier ratings agency Fitch has warned that Ireland's failure to secure a funding package from the European Central Bank (ECB) could blunt efforts to "fully restore confidence" in our banks.

The comments came as Fitch yesterday downgraded a raft of bonds issued by Irish banks and also cut the 'individual rating' of Irish Life & Permanent (IL&P).

In a note to clients, Fitch described last week's decision to put another €24bn into four key banks as an "important step in restoring confidence in the Irish banking system".

But the note went on to draw attention to the "severity of the funding problems" at Ireland's banks and their "excessive reliance on short-term central bank funding".

Given this, Fitch believes a "medium-term funding solution might be required to fully restore market confidence in the Irish banking system and move it forward".

The Government had been trying to convince the ECB to announce such a medium-term funding package last Thursday, to coincide with the latest bailout announcement.

Legal difficulties and political differences prevented the ECB's governing council from agreeing the measures, however, and Ireland's Central Bank governor Patrick Honohan said a package was not "imminent".

Irish banks owe €160bn to the Central Bank of Ireland and the ECB, though some €56bn of this is accounted for by defunct Anglo Irish Bank and billions more is owed by soon-to-be-closed Irish Nationwide.

Despite being broadly supportive of the package, Fitch marked down debt instruments of AIB, Bank of Ireland and EBS, citing fears of "coercive" action to force holders of subordinate debt to take losses on their loans.

The debt issued by the institutions was also put on Ratings Watch Negative, implying further cuts may apply, mirroring the status of the Irish sovereign.

Davy's credit analyst Stephen Lyons said most subordinate bonds had been "weaker" since the announcement, with the exception of some Bank of Ireland bonds and a bond issued by Irish Life's insurance arm.

Attractive

Bank of Ireland is set to offer subordinate bondholders the chance to exchange their debt for equity, a prospect Mr Lyons said "could be attractive" for some investors.

"The Irish Life bond is holding up well because it will be attached to a profitable company that won't have to share its profits with a loss-making bank," he added, referencing IL&P's plans to float their life insurance business on the stock market this summer.

Fitch also lowered its individual rating for IL&P, to "reflect the likelihood that the Government will take a majority stake" in the company, given IL&P's €4bn capital target.

In a separate note, Fitch downgraded IL&P's life insurance subsidiary Irish Life Assurance, saying that even though the bank had been a "drag" on the insurer's ratings historically, it would not have a higher rating when it floated as the company's rating was "capped by the sovereign".

Irish Life Assurance reported profits of €160m last year.

Fitch says it expects profits to "remain under pressure" for a number of years.

Irish Independent

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