Wednesday 13 December 2017

For Irish banks, there isn't any bottom, it's still getting worse


Laura Noonan

Laura Noonan

AFTER an horrendous 2009 and 2010, Irish banks came into this year thinking the only way was up.

How wrong they were. Over the last week, six institutions have reported cumulative losses of more than €6.5bn for the first half of the year.

All bar two -- Bank of Ireland and KBC -- suffered bigger losses in the first six months of 2011 than they had a year ago. And KBC has admitted that losses are likely to rise again.

Far from getting better, it would seem that the 'real' Irish banking crisis -- ie the part that hinges on people's ability to repay loans and banks' abilities to offload assets, rather than capital -- is getting worse -- again.

Commercial property loans, unsurprisingly, remain the costliest problem. Lloyds is still mopping up its failed Bank of Scotland (Ireland) adventure and has now classified 99pc of its property development book as 'impaired', along with 83pc of its property-investment book.

Those two troubled portfolios contributed a substantial whack to the £1.8bn (€2.05bn) worth of impairments that Lloyds booked for Ireland in the first half of the year, although the bank is also dealing with the run-off of SME and mortgage loans.

Over at Ulster's 'non-core' arm, 'commercial real-estate development' generated some £1.3bn of loan losses in the first half of the year, with 'commercial real estate investment' contributing another £384m.

National Irish Bank blamed commercial property for almost all of its €420m of loan losses in the first half of the year, while AIB took €1.4bn of provisions on its 'property and construction' loans for the same period.

Bankers have blamed the surge in property provisions on the sluggish market for commercial property transactions and deepening economic woes, which are already exerting downward pressure on rents and keeping vacancy levels problematically high.

What remains to be seen is whether there is worse to come, whether the latest global financial crisis will undermine consumer confidence and property prices even more and trigger another wave of write-offs.

Another pertinent uncertainty is whether individual banks have taken adequate levels of provisions to account for the calamities that have already occurred.

Certainly, Lloyds' 99pc impairment charge on its property-development book appears the most aggressive by a long shot and is likely linked to particular circumstances surrounding a small number of the banks' borrowers/projects.

But there is a gulf between the level of provisions the other banks have made.

Take Bank of Ireland and AIB, for example. BoI has taken impairments of just €1.2bn on its €18.6bn investment property book, implying an impairment rate of less than 7pc.

Meanwhile, impairments at AIB's property and construction book are running at 23pc of the €23.5bn portfolio.

BoI would argue that its portfolio is inherently healthier than AIB's, as witnessed by the two banks' disparate NAMA discounts -- but only time will truly tell.

National Irish Bank said this week that had it had seen a "strong" rise in arrears over June and July. BoI said yesterday that it had seen no such trend over that period.

Even if the acceleration isn't as sharp all-round, loan losses do appear to be on the rise for everyone.


Impairment charges at BoI's residential-mortgage book rose by 39pc in the first half of the year and are now running at €718m -- or about 2.5pc of the €38bn mortgage portfolio.

At AIB, mortgage impairments accelerated in the first half of the year and now stand at €863m, equalling some 3.2pc of the bank's €26.6bn mortgage loan book.

Irish Life & Permanent's result at the end of August will give further insight into how trends are developing and if there's worse to come.

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