Moody’s keeps ‘positive’ outlook on Irish banks after weeks of turmoil

The failure of Silicon Valley Bank this month set off a crisis in the sector

Jon Ihle

Moody’s has maintained its positive outlook on Irish banks, endorsing the system’s capital strength and ample liquidity after weeks of turmoil and uncertainty following the failures of Silicon Valley Bank and Credit Suisse.

The ratings agency said profitability was set to keep improving as European Central Bank interest rates continued to rise. This would allow the banks to reprice variable rate loans while keeping deposit costs low, improving margins.

The economic backdrop is set to remain supportive, too, Moody’s said, with rising real GDP growth, declining inflation and historically low unemployment. The system is also “resilient” to a tightening monetary policy backdrop, with a surplus of deposits and strong balance sheet structures.

While loan quality is expected to deteriorate somewhat, the agency said loan loss reserves at the banks will be able to absorb impairments while loan book growth – mainly from the acquisition of portfolios from Ulster Bank and KBC – should offset any hit to the bottom line.

The significant improvement in profits will therefore support increased cash payouts to shareholders, including the Government, which owns majority stakes in AIB and Permanent TSB.

The bullish report should reassure investor concerns about the impact of financial system instability on the Irish banking sector.

Irish bank shares have been on a rollercoaster ride this month after a string of high-profile bank failures rocked confidence in the global financial system in recent weeks.

Bank of Ireland, AIB and PTSB all had days in March where the share prices lost as much as 5pc or more in a single session.

The stocks are moderately lower in the year to date after stellar gains in 2022 on the back of substantial growth in profitability.

But volatility has been high, with prices swinging from euphoria to despair, sometimes in a single day.

Irish banks were hit by waves of selling as the market digested the collapses of SVB and Credit Suisse, followed by worries about the stability of Deutsche Bank last Friday.

However, equity and fixed income analysts alike have continued to endorse the strength of the sector here despite problems in the global system.

Last week Davy raised its profit forecasts and price targets for all three Irish banks on the strength of recent results, even as investors dumped the stocks in a “risk-off” strategy.