Credit ratings agency S&P upgraded its view of the creditworthiness of the Republic’s three remaining banks on Thursday, saying the impact of high inflation and rising interest rates on households and businesses is unlikely to trigger a spike in problem loans across the lenders.
The agency also said Irish banks’ profits would be supported by a gradual raising of interest rates on loans, and as they earn interest on excess deposits stored with the central bank, even as most customers earn nothing on savings with the lenders.
S&P said it expects additional non-performing loans (NPLs) to emerge across the sector, mostly among small to medium-sized enterprises (SMEs).
However, it sees NPLs stabilising at about 3 per cent across the industry as the banks’ mortgage books will remain resilient, thanks to the high levels of employment, a growing economy, a “low average” loan-to-value ratios across the system, of 51 per cent, and fact that many borrowers moved in the past year to fix rates on their loans.
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S&P noted that some 60 per cent of residential home loans are now on fixed rates, compared with 40 per cent a year ago.
The agency said it expected banks to also manage NPL ratios through ongoing “limited” loan portfolio sales.
AIB and Bank of Ireland both had NPL ratios of 3.4 per cent at the end of March, compared with almost 22 per cent and 11.4 per cent, respectively, in 2016. PTSB’s ratio had fallen to 3.3 per cent from 27.5 per cent over the same period, driven by loan sales and restructuring.
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“We note the downside risk attached to our macroeconomic forecast, but under our current base-case scenario, we expect the underlying Irish economy as measured by GNI* to expand by about 2 per cent in 2023 versus the stagnation we anticipate for the euro-zone economy,” said S&P.
“The slowdown in Ireland’s economic activity will spill over into the labour market, leading to moderate unemployment growth, peaking at only 5 per cent in 2023, compared with 4.5 per cent in 2022. The largest risk we therefore see for Irish banks is from inflation, anticipated to remain high in 2023 at 5.3 per cent – down from 8.1 per cent in 2022 – weighing on both operating costs and borrowers’ debt-servicing capacity.”
S&P upgraded the stand-alone credit profiles of AIB and Bank of Ireland by one level to BBB+, which remains seven rungs below its top-notch AAA rating. It raised its stance on Permanent TSB by one level to BBB-.
