Standard & Poor's (S&P) has reaffirmed its "negative" credit rating for the State's three main banks: AIB, Bank of Ireland and Permanent TSB.
“Despite Ireland’s anticipated economic recovery, banks’ earnings and profitability remain under pressure due to modest growth opportunities, significant cost bases, high capital requirements, in particular for mortgage loans, and still low revenue diversification,” the firm said.
S&P, one of the world's three main credit rating agencies, said the planned exit of international players like NatWest Group and KBC Group from the Irish market, announced earlier this year, underscored the tough operating environment and weak profitability prospects for lenders here.
“Generally, our negative outlooks indicate that we could lower our ratings if Irish banks are unable to resolve current weaknesses in profitability,” it said.
The ratings firm has a BBB- rating on the holding companies of AIB and Bank of Ireland, which is the lowest level of what it considers investment grade. Its Permanent TSB rating is three notches lower. It previously had "stable" outlooks on its ratings for the lenders.
Current crisis
It said Irish banks entered the current crisis with healthy capitalisations and robust liquidity profiles, owing to large savings, which allowed them to set aside large provisions in 2020 for future defaults. However, it noted that this also led to reported losses.
On non-performing loans (NPLs), the firm said it had not observed significant deterioration of asset quality, “but we expect NPLs to rise over 2021-2022 as government support to households and businesses unwinds.”
Overall S&P said banks’ cost-to-income ratios remain stubbornly high, surpassing 70 per cent.
It said while Irish banks have attempted to reduce the absolute amount of operating costs, such as staff and property expenses, “a significant reduction is hard to achieve amid rising regulatory costs and digital transformation plans that require large investments to improve profitability”.
“Therefore, we expect that cost discipline won’t completely offset revenue pressure over the coming years,” it said.
The agency also highlighted increasing risks for domestic banks from digital disruption, noting that the impact of Covid-19 had accelerated innovation and digitalisation in many banking markets, including Ireland.
“So far, we see limited offerings from fintech companies in Ireland. However, in the longer term, potential changes in digital technologies could have a profound impact on intermediation between savers and investors, which could further affect our view of competitive dynamics in the banking industry,” it said.
