Banks face ‘hectic’ loan restructuring as payment breaks end, Goodbody warns

Irish banks face a “hectic” period in the final three months of the year as distressed borrowers start to come off extended coronavirus payment breaks in the coming weeks, according to one of the State’s largest stockbroking firms.

The European Banking Authority said on Monday that a blanket offering of loan payment breaks by EU lenders since March should be phased out on schedule at the end of this month, and banks should return to offering relief on a "case-by-case" basis.

"It is likely to make for a hectic [fourth quarter] in the restructuring units of the banks, but also why the banks guided a significant uplift in impairments for the full year at [their half-year] results," said Goodbody Stockbrokers analysts Eamonn Hughes and Barry Egan in a note to clients on Tuesday.

Breaks

The Central Bank said last week that there were 90,539 active payment breaks across Irish households and businesses as of early September, down 40 per cent from data for the end of June, just before initial three-month payment holidays came to an end.

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The level of mortgages subject to payment moratoria dropped from 11.1 per cent of the total value of Irish home loans to 6.1 per cent during the period, while the ratio for small- to medium-sized businesses declined from 22.9 per cent 17.6 per cent, it said.

“The usage of breaks should reduce as break extensions are due to expire soon, but customers on the extended [payment breaks] are likely to require more restructuring solutions than those that only utilised the initial break,” the Goodbody analysts said.

The phasing out of the relief comes at a time when the Government has tightened coronavirus restrictions in Dublin in recent days and is said to be waiting to see if further action needs to be taken in the capital and elsewhere to try to stem a recent surge of virus cases.

Although there had been speculation earlier this month that banks may offer an extension to payment breaks at industry-level for particularly vulnerable business sectors, this has gained little traction. Borrowers can continue to apply for a first time to avail of as long as six-month payment breaks until the end of September.

"Lenders still have the discretion to extend payment breaks under their normal toolkit [for problem loans], but I think we're now probably getting to the point where it's starting to become more than a payment break," Central Bank governor Gabriel Makhlouf told The Irish Times in an interview last week, adding that banks need to focus now on restructuring problem loans that have little chance of returning to normal payments to "avoid repeating the problems of the past".

Provisions

The State’s five retail banks set aside a combined €2.6 billion of provisions in the first half of the year to absorb an expected surge in bad loan losses as a result of the economic shock caused by the pandemic. It pushed the industry into loss-making territory for the first time since 2013.

Guidance from the sector suggests that the five lenders will end up taking as much as €3.6 billion of impairment charges for 2020 as a whole.

Goodbody estimates that an average of 9 per cent of mortgages across AIB and Bank of Ireland will be categories as impaired by the end of next year, including loans that were already in trouble before the coronavirus crisis. Almost 14 per cent of SME loans will likely be in the same category, it said.