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Irish banks' provisions for bad loans biggest in Europe

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The full impact of the coronavirus on banks' balance sheets probably won't be known for some months. Stock image

The full impact of the coronavirus on banks' balance sheets probably won't be known for some months. Stock image

The full impact of the coronavirus on banks' balance sheets probably won't be known for some months. Stock image

Irish banks have set aside bigger buffers for potential loan losses due to the pandemic fallout than those in a swathe of European countries including the UK, France, Spain, Italy and Portugal.

An analysis from ratings agency DBRS Morningstar shows Ireland had the highest increase in loan loss provisions as a percentage of net loans in the first quarter as banks fret about the potential economic impact of the coronavirus.

Bank of Ireland shouldered a €266m loan impairment provision in the first quarter, while AIB set aside €210m. Both expect to incur deeper impairments provisions, while the banks here have also offered customers mortgage payment holidays.

The full impact of the coronavirus on banks' balance sheets probably won't be known for some months.

Elisabeth Rudman, a managing director at DBRS Morningstar and head of its European Financial Institutions Group, said that while banks in countries including Ireland, Spain, Portugal and Italy had made significant progress in recent years in reducing their levels of non-performing loans, that work could well be undone due to Covid-19.

She pointed out that Ireland's non-performing loans as a percentage of the overall loan book had tumbled to just 3.3pc last year compared to 22pc in 2014.

In Italy, the figure had fallen to 6.7pc from 17pc, and in Spain, from 8.1pc to 3.2pc.

"Unfortunately, it would look as if much of that progress could also be reversed," she said, adding that provisions are now increasing. "On one side, we've got the Irish banks, who've made the biggest increase in provisioning," she said, pointing out that in countries such as Italy and Portugal there has been a very small increase compared to that seen here.

"That also begs the question, why is there such a variation at this point?" she said. "I do think that by the time we get to the second quarter, we'll see perhaps a more consistent pattern.

"Some big banks that have got stronger earnings have taken a more conservative approach and taken larger provisions and most have updated their economic forecasts," Ms Rudman added.

"But we've seen some banks where they have taken the ECB guidance very firmly and avoided excessive provisioning. By Q2, I think we'll see much higher provisioning across the board in Europe."

The agency pointed out that two existing securitised Irish mortgage loan books - one with loans originated from Irish Nationwide and the other with loans from Permanent TSB - had seen gross collections recorded fall 25pc between February and April as the country went into lockdown.

But DBRS Morningstar's Christian Aufsatz, its head of structured finance, said the decline had to be taken with a "grain of salt", with one of the vehicles having previously contained an element of performing loans that have  been hived off.

Irish Independent