Banks’ problem loans remain ‘crucial issue’, Moodys warns

The large stock of problem loans that remain to be worked through by Irish banks remains the “most critical issue” for the sector here and will continue to slow their recovery, ratings agency Moody’s has said.

It also expects the Government to dispose of its stakes in Irish banks later in 2017 or in 2018. The State owns 99.9 per cent of AIB, 75 per cent of Permanent TSB and 14 per cent of Bank of Ireland.

In a report on Irish banks published on Monday, Moody’s noted that problem loans for rated Irish banks totalled €41.5 billion as the end of 2015, down from €67 billion a year earlier.

Loans

“We expect the stock of bad loans to decrease further over the next two years, aided by the favourable operating environment, but we believe that the pace of decline will be slower compared to previous years, since banks have already carried out most of the restructuring and sales of non-performing loan portfolios,” Moody’s said.

The agency added that the increase in property prices, while slower than last year, continued to help the reduction of loans in negative equity. “The commercial real estate sector is improving rapidly, but it is now dominated by foreign players who are likely to be more susceptible to changes in sentiment, thus making the CRE [commercial real estate] recovery less solid,” it added.

Moody’s said the high solvency ratios of the Irish banks were necessary to compensate for downside risks. “Irish banks now have solid capital ratios and we expect them to continue to strengthen their loss-absorption buffers. However, we believe that such ratios are necessary to compensate for the risks emanating from the large stock of problem loans and weaker profitability.”

It said write-backs of loan loss provisions would be lower this year, reducing profitability, but the quality of earnings is expected to improve.

Economy “Pre-provision profitability should continue to benefit from low funding costs, a favourable competitive environment and increasing demand for new lending and other banking services. At the same time, there are several factors that will continue to negatively affect the system’s profitability, such as the large stock of non-earning and low-yielding assets

held on the banks’ balance sheets and the large proportion of legacy tracker mortgages.”

Moody’s also said that while the UK’s Brexit vote leaves the Irish economy exposed, the uncertainty should be “manageable” as the strength of the domestic economy would support further improvements in the quality of lenders’ earnings and in their asset quality.

“Ireland could benefit from additional foreign direct investment inflows and possibly the relocation of financial services firms from the UK.”

Moody’s has forecast real GDP growth in Ireland of 3.4 per cent in 2016 and 3.1 per cent in 2017 and retained its “positive” outlook for the Irish financial system, having changed the rating last December from stable.