Davy says Irish banks’ bad loan charges may drop 85% in 2021

AIB, Bank of Ireland and Permanent TSB should see their combined loan-loss charges dropping by 85 per cent this year to about €400 million as the economic impact of extended lockdowns has been less than feared, according to Davy analysts.

The three State-backed banks set aside a combined €2.7 billion of loan impairment provisions last year, making them among the most cautious in Europe, as their loan-loss prediction models were skewed by experience of the financial crisis.

Changes to international accounting rules since the financial crisis have resulted in banks front-loading provisions as economic conditions deteriorate, rather than waiting for defaults to actually occur.

It has likely been difficult for the models to factor in the benefits to borrowers of the Government’s multibillion-euro Covid-19 supports, including wage subsidies, pandemic unemployment benefits, as well as temporary loan payment breaks from banks, the Davy analysts said in a report issued to clients on Wednesday.

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“Key aspects of the Irish economy, like economies elsewhere, have proven far more resilient than initially thought, aided by early intervention and State support,” the Davy analysts said as they reduced their loan-loss forecasts for the three banks for this year to €404 million from €659 million previously.

Defaults will rise

The analysts predict loan defaults will rise inevitably as a result of Covid-19. However, they added: “We expect a larger fallout in terms of increases in [non-performing loans] to come from the SME and corporate loan portfolios. Households have been shielded by the early implementation of payment breaks and the significant direct State supports.

“Areas which we monitor have, to date, yet to experience a significant change in activity levels with corporate insolvencies remaining at low levels.”

Davy said banks may eventually be able to free up some of the provisions taken last year, but will likely be cautious about making such releases in the near term.

The analysts expect AIB, Bank of Ireland and Permanent TSB to return to profit this year and to post a combined net surplus of €759 million.

The forecasts do not incorporate any benefits from the planned exits of Ulster Bank and KBC Bank Ireland from the market. The three remaining banks are currently in talks to buy various parts of the of the exiting lenders' loan books.