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Third lockdown reverses improving outlook for banks’ balance sheets

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Warning: The ECB's Andrea Enria. Photo: Alex Kraus/Bloomberg

Warning: The ECB's Andrea Enria. Photo: Alex Kraus/Bloomberg

Warning: The ECB's Andrea Enria. Photo: Alex Kraus/Bloomberg

Lending to households and businesses is likely to be tighter in the first half of the year due to the expected negative impact of the third lockdown on bank balance sheets, according to Goodbody.

In a note to clients yesterday, the stockbroker said the benefit to Irish banks from last quarter’s economic recovery and a successful Brexit deal are set to be unwound due to the new restrictions.

That would probably lead to a reversal of the improving loan impairment trends experienced by Irish banks in recent months, meaning tougher credit conditions and reduced bank income.

“We’re back where we started in June with provisions – the upside expectation of Q3 and Q4 has receded,” said Eamonn Hughes, senior banking analyst with Goodbody. “If the lockdown goes to March or April, we would start to get nervous about revenue numbers for the banks.”

Irish banks made large provisions for losses in their interim reports last year when there was no end in sight for the pandemic and the Brexit outcome was highly uncertain.

Coming into the last two months of 2020 their outlook had improved as three positive factors converged: Irish economic growth turned positive, the prospects for a negotiated Brexit deal improved, and the second lockdown had affected repayment rates.

The change in mood was reflected in share prices, which surged by as much as 50pc after spending much of 2020 at long-term lows.

However, with the massive surge in coronavirus case numbers, the slow rollout of the vaccine in Ireland, and a harsh lockdown, Goodbody is being cautious on forecasts.

“It’s now a delayed recovery rather than a quick comeback,” said Mr Hughes. “We’re pushing out the timetable at least a quarter.”

Mr Hughes said a key factor in the Irish banks taking a conservative approach to provisions and lending this year was the European stress tests which are taking place in the first half.

Andrea Enria, the head of the European Central Bank’s Supervisory Board, has warned that the ECB will be challenging banks on provisions as part of this exercise.

“Banks adopting a wait and see approach will get scrutiny,” said Mr Hughes. “Those that want to pay dividends are better off over-providing.”

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