S&P hints at upgrade as Irish banks return to normality
Irish banks could be in for a ratings upgrade this year as they move from recovery to normality, Standard & Poor's has signalled.
The ratings giant said the prospects for Irish bank ratings could be positive.
"In many ways, we consider that the banking system has reached an inflection point as it transitions from post-crisis recovery to a phase where the sustainability of its recovery, and the resilience of banks' underlying business models, will be put to the test," S&P said.
The agency said the economy's strong rebound over the past two years supported a significant improvement in the Government's fiscal position and debt burden. But Irish bank ratings have improved more gradually, reflecting the view, S&P said, that they remain constrained by ongoing risks to the banking system.
The ratings giant said these include a still high private sector debt burden and a high stock of non-performing loans.
"Notwithstanding rising downside risks to the global economy, these factors may lessen over the course of 2016 and could potentially support higher ratings on Irish banks," S&P said.
"That said, our ratings will continue to recognise that Irish banks operate in a small, open economy that is susceptible to cyclical downturns due to both external risks and domestic factors."
It added that there were four key credit issues for Irish bank ratings in 2016. First, the pace and extent of continued private sector deleveraging, as well as the underlying trend in system wide credit losses, excluding the impact of write-backs.
It also highlighted the sell-down of the Government's stake in the banks, and "clarity on the resolution strategies of the systemic domestic banking groups." The report comes just days after a more downbeat assessment from Fitch which said its recent upgrade of Ireland's credit rating does not automatically mean Irish banks will get one as well.
The banks' asset quality is a hindrance to an upgrade in the short-term, Fitch said. "The ratings gap between the sovereign (A/Stable) and the banks is considerable: four notches for BOI (BBB-/Positive) and five for AIB (BB+/Positive)," Fitch said.
"Asset quality is the key vulnerability for these banks and working through the €30bn backlog of impaired loans will take time. In the meantime, this vulnerability constrains their fundamental creditworthiness."
But it argued the banks have made good progress in reducing bad loans.