Global ratings agency Moody’s says the outlook for Irish banks remains negative because of the “extremely high level” of problem loans.
In a report published yesterday, Moody’s Investors Service noted poor performing loans accounted for nearly 30 per cent of the rated banks’ total loans.
Ongoing asset-quality problems exposed Irish lenders to further valuation adjustments, it warned, despite growing signs of recovery in the wider economy.
On the upside, the agency predicted new loan impairments were likely to continue to decrease and profitability improve.
Expectation of recovery
In January, Moody's upgraded the country's sovereign rating to investment status for the first time since the financial crash, reflecting expectations of a sustained recovery in the Irish economy.
However, in its report yesterday, the agency said it believed the severity of the crisis on the credit fundamentals of the banks means their recovery will lag the economy as a whole: “The sheer scale of impaired assets in the system presents material credit risks for the banks, whose capital levels have weakened significantly since their recapitalisation in 2011.”
It said Ireland had among the worst problem loan metrics in western Europe and, while early arrears will continue to decline, it expects the improvement in asset quality ratios to be slow.
The report – Banking System Outlook: Ireland – also noted banks could be asked to set aside additional provisions for bad loans on the back of the European Central Bank's forthcoming stress tests.
The research feeds into economist Morgan Kelly’s warning that stress-testing of banks could further erode lending conditions, potentially wiping out many SMEs who are burdened with debts from the property boom.
Moody's said it expects the ECB will require Irish banks to cover capital shortfalls within a timeframe but, with the exception of Bank of Ireland, banks here may face challenges raising capital.
“As a result, any potential capital shortfalls are likely to either require parental or systemic support, or the bail-in of creditors,” it said.
The agency said it expected the operating environment to remain challenging over the next 12-18 months, while noting macroeconomic indicators such as house prices have started to rise, particularly in Dublin.
