The resolution of non-performing loans (NPLs) by Irish banks needs to "regain momentum" while plans to give the Central Bank powers to cap mortgage interest rates could prevent lenders from generating "sustainable profits" and deter new entrants to the market, the European Commission has warned.
In its latest unpublished post-bailout surveillance report on Ireland, seen by The Irish Times, the commission stated that while much work has been done by the banks to reduce their NPLs, the stock "remains high and shows signs of stickiness".
It noted that the NPL ratio of the Irish domestic banks was 14.2 per cent in September 2016, down from a peak level of 27.1 per cent at the end of 2013. But this is well above the EU average of 5.4 per cent and the “pace of NPL reduction has slowed somewhat”.
It suggested off balance sheet options to incentivise “more durable” resolution strategies. “Options such as formulating a set of derecognition, or write-off, rules to facilitate the timely removal of NPLs from banks’ balance sheets could be explored,” it said.
The commission said long-term mortgage arrears accounted for about 70 per cent of the total balance of loans in default, with “reduced chances of recovery”.
Some 23 per cent of loans that defaulted at some point between 2010 and 2015 have never been restructured, it added.
Restructured loans
It also noted nearly 23 per cent of all restructured loans subject to an arrears capitalisation solution had redefaulted while the comparable figure for split mortgages was just 5 per cent.
The commission said that apart from sales and restructurings, the use of alternative NPL strategies had been limited while the number of repossessions – about 300 per quarter – was “low”.
“This not only postpones a more definite NPL resolution for the banks but also blocks a significant portion of the real estate market in an environment of chronic undersupply,” the report stated.
It also flagged concerns about the “substantial” level of NPLs for commercial real estate (CRE) and SMEs. The banks still hold €23 billion of CRE loans, of which 33 per cent are not performing.
For SMEs, the NPL ratio was 11.8 per cent at the end of September, often with household mortgages attached.
In terms of moves by opposition political parties to legislate to give the Central Bank the power to cap interest rates, the commission noted that the European Central Bank was opposed to such a move.
The commission welcomed the entry of specialised non-bank lenders – Finance Ireland, Pepper, Bluestone Asset Finance and others – into the Irish market. “Their presence is welcome in the context of the diversification of credit supply and because of their tailored sectoral knowledge,” it said.
