Friday 15 November 2019

Moody's raises credit outlook for Irish banks

Action: ECB rules have cut the number of problem loans
Action: ECB rules have cut the number of problem loans

David Chance

Strong economic growth and falling levels of bad loans have prompted Moody's to lift its outlook for Ireland's banks from 'stable' to 'positive' - although it said profit growth would come under pressure.

Despite the risks from Brexit, the credit rating agency forecast Ireland's economy would grow by 3.5pc in 2019 after a projected 5pc this year. That's due to rising levels of employment and investment following the end of the credit-driven boom in 2008 that forced Ireland to seek bailouts from the EU and IMF to recapitalise its banking sector.

"The change in the outlook on the Irish banking system to 'positive' is driven by our expectation that asset quality will improve as the economy continues to grow, and banks restructure and dispose of problem loans," Moody's analyst Roland Auquier wrote in a report on the sector.

Moody's rates five banks operating in Ireland - Bank of Ireland, AIB, Ulster Bank Ireland, Permanent TSB and KBC - accounting for 80pc of banking system assets.

While problem loans are still among the highest in Europe, they have fallen sharply since the crisis and will continue to do so under pressure from European Central Bank rules.

At the end of June, Moody's estimated non-performing loan (NPL) exposure at 13.9pc of loans, which it forecast would drop to 10pc by the year end as NPL sales from the likes of KBC, Permanent TSB and Ulster Bank are completed.

Units of distressed debt firms Lone Star, Cerberus and Link Financial have been among the buyers, as well as Goldman Sachs. The involvement of so-called 'vulture funds' has triggered concerns Ireland could move into a new era of home repossessions.

Mortgages remain the largest portion of non-performing loan portfolios at 61pc of the total, according to Moody's and even now around 11pc of them are worth more than the value of the property on which they are secured.

Despite their improving credit outlook, profits are expected to remain under pressure due to lower margins, in part due to the smaller scope for drops in industry funding costs.

Profits could also be hit by a tracker mortgage scandal, although Moody's said that it believed most of the affected customers had been identified.

While new EU rules have shifted the onus for recapitalising banks onto shareholders and creditors, Moody's said it still expected the Government to intervene in the case of Bank of Ireland and AIB.

It expects the Government to sell down its majority stakes in AIB and Permanent TSB as well as its much smaller Bank of Ireland holding.

Irish Independent

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