Ratings agency Moody’s has downgraded the Irish banking system to ‘stable’ from ‘positive', citing pressure on earnings even as asset risks decline.
But the agency also added that while the UK’s exit from the European Union next month creates economic uncertainty for Ireland, the impact on Irish banks is likely to be “modest”.
“Irish banks’ problem loan burden has fallen, but remains sizeable,” noted Moody’s vice president and senior analyst Arif Bekiroglu in a report published this morning.
Irish banks’ problem loans had fallen to 8pc of their gross loans at end-June 2019 from 17.5pc at the end of 2015, but were still above the euro area average of 4.5pc, he noted.
“We expect further de-risking as economic growth and low rates support borrowers’ finances, and as banks continue to sell and restructure problem loans,” Mr Bekiroglu added. “Enhanced risk management and stricter Central Bank of Ireland affordability guidelines should hold back new problem loan formation,” he added.
Mortgage lending rules imposed by the Central Bank have been criticised by Taoiseach Leo Varadkar, who said they are “very tough” on first time buyers who are paying high rents while simultaneously trying to save a deposit.
AIB chief executive Colin Hunt has also said the rules should be eased.
But last week, new Central Bank governor Gabriel Makhlouf resisted pressure to relax the rules, saying they would not be adjusted.
The Central Bank said the rules – which put a limit on mortgages of 3.5 times’ borrowers' income, and mean first-time buyers must have a 10pc deposit, and movers 20pc – have been “effective in strengthening borrower and lender resilience and limiting the potential for an adverse credit-house price spiral to emerge”.
The Irish household sector's debt-to-disposable income ratio was 123pc as of year-end 2018, down significantly from 154pc in 2015, but still above the euro area average of 94pc, noted Moody’s.
The agency also said this morning that it expects Ireland’s real GDP (Gross Domestic Product) growth to hit 5.9pc this year. It predicted the growth rate will fall to 3.2pc in 2020, and 3pc in 2021.
“This will contain the risk of overheating in the domestic economy, where unemployment has fallen below 5pc and wage growth has picked up in the last year, despite modest inflationary pressure,” said Mr Bekiroglu in his report.
He added: “The Irish economy remains small, open, and closely integrated into multinational corporations’ global value chains. This makes it susceptible to global growth fluctuations, and to rapid asset price inflation. However, private sector indebtedness has significantly declined, increasing the economy's resilience against external shocks.”
Shares in AIB were down 0.3pc this morning, while Bank of Ireland is 1.8pc lower. Shares in Permanent TSB are 1.5pc lower.