Business Irish

Wednesday 20 November 2019

S&P warns toxic mortgages threaten economy and weigh on bank profits

Gretchen Friemann

Ratings agency Standard & Poor's has warned the toxic residential mortgage books of the Irish banks continue to pose a threat to the economy - despite a recent surge in house prices.

In a report published yesterday, S&P detailed the obstacles still facing lenders as they attempt to reduce the volume of non-performing loans weighing on the balance sheet.

While the agency predicted the banks will accelerate efforts to clean up impaired mortgages on the back of a more restrictive regulatory environment, it argued Ireland's "slow judicial system, which tends to discourage foreclosure" presents an impediment to a speedy resolution.

It also cited the large portion of mortgages still in negative equity, the weaker quality of legacy buy-to-let mortgages, which account for 15pc of all mortgage accounts and "the tendency of Irish banks to find forbearance solutions to restructure accounts" as factors prolonging the problem.

S&P argued toxic loans will "continue to weigh on banks' profits" and concluded the "work out progress will take several years".

Despite rising house prices and the resurgent economy - S&P has pencilled in 7.1pc in cumulative real GDP growth for Ireland in 2017 - the banks' soured debt books "represent a tail risk, especially if economic momentum were to reverse".

In a report earlier this month, the agency described the Irish banks as virtually recovered from the 2008-2011 crisis.

But it claimed the sector remains some distance from the "creditworthiness of most other Western European banking systems".

In this latest paper, entitled "Significant NPA Reduction Will Be A Long Haul For Some Peripheral European Banks", the agency examined the toxic loan problems facing banks in Ireland, Spain, Italy and Portugal.

The agency noted the impaired debts clogging the balance sheets of lenders in these four countries account for half of the entire volume of non-performing assets in Europe.

Ireland was also singled out for the concentration of impaired loans in the residential mortgage sector. S&P pointed out that in the southern European countries the deterioration in home loans was "more contained" despite the unemployment spike in the region after the crisis.

While the agency argued the creation of an EU bad bank could help clear the backlog of toxic debt, it warned this would not be a "rapid process".

It also stressed the development of a "secondary market of distressed assets and legal reform could help banks work-out impaired loans, but the benefits would be visible only in the medium-to-long term".

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