Irish banks’ profitability will stabilise at a higher level this year despite continued margin pressure, helped by lower loan loss provisions and a pick-up in new lending.
This is according to Moody's, which has maintained its outlook at A2 Stable on the Irish banking system in a new update.
The ratings agency said it expects asset risk to hold steady, with front-loaded provisions absorbing a likely increase in non-performing loans (NPLs) this year as the Government phases out pandemic-related supports.
“Positively, most borrowers on repayment holidays resumed servicing their debt in 2020, and banks will likely start selling NPL portfolios once again in 2021 after a coronavirus-related hiatus last year. Steady house prices, a drop in the number of mortgage loans that exceed the value of the property, and earlier regulatory measures designed to curb risky lending, are also supportive,” it said.
Moody’s expects the economy will grow 3 per cent this year, as against 2.8 per cent in 2020 and 5.9 per cent in 2019 before the pandemic took hold.
Domestic demand
It said domestic demand is likely to expand by 2.9 per cent after a 7.1 per cent contraction last year, which will drive higher lending growth but which will be tempered by an anticipated rise in unemployment as Government support measures end.
Irish banks’ stable and diversified customer deposits will remain their dominant funding source. However, market funding will increase as the banks resume issuing loss-absorbing debt to meet minimum regulatory thresholds, Moody’s said.
Fitch also recently forecast a rise in NPLs this year due to the end of Covid support measures but said the deterioration will be much less severe than in the aftermath of the 2008 crisis.
