Ireland’s hopes of rating upgrade hit by negative European outlook from Moody’s

Ireland’s chances of an early upgrade from Moody’s to its sovereign rating appeared to recede yesterday after the international agency published a “mostly negative” outlook report on the European banking sector.

Moody’s Investors Service said European banks’ financial fundamentals would remain under pressure in the majority of countries in 2014 despite recent positive developments.

"European authorities are still addressing the fallout from the financial and sovereign crisis and more time is required to restore banks to full health," said Carola Schuler, managing director banking at Moody's.

“Economic conditions diverge across Europe, and against this backdrop pressures on key aspects of bank creditworthiness – asset quality, profitability and capital – will continue to weigh on the prospects of many European banks in 2014.”

Moody's cited banks in Ireland, Greece and Cyprus as being the "most vulnerable" to failing the euro-wide asset quality reviews and stress tests that will be undertaken next year.

It noted that these banks have a high volume of problem loans relative to capital and loan loss reserves based on figures for the year ended 2012.

Asset quality reviews
Sources in the banking industry here last night questioned this analysis given that the Central Bank of Ireland recently completed balance sheet assessments and asset quality reviews on AIB, Bank of Ireland and Permanent TSB. These were based on data to the end of June 2013, and determined that the three banks did not not need additional capital to meet regulatory buffers.

However, it emerged that the regulator believes that Bank of Ireland should take an additional provisioning charge of €1.3 billion, a finding with which the bank has disagreed.

On the sovereign rating, Ireland is currently ranked as non-investment grade by Moody's. The National Treasury Management Agency has said this makes it difficult to secure investors in Asia. It is hoping to secure a re-rating for Ireland as it plots a full re-entry to capital markets next year after the State's exit from the IMF-EU bailout this month.

Implications
No comment was available yesterday from either the NTMA or the Department of Finance on the implications to Ireland of Moody's latest report.

Moody’s expects GDP to contract in the euro zone in 2013 by 1 per cent and remains “cautiously optimistic” about next year, forecasting growth of 0.5-1.5 per cent.

“Overall, consumer and business confidence remains low,” Moody’s said, adding that the ECB’s recent interest rate cut to a record low of 0.25 per cent in November should offer “some modest support to economic activity”.

Moody’s said the European Central Bank’s single supervisory mechanism for banking union had the potential to be credit-positive for banks in the long run.

It said a better harmonised bank supervision regime with reduced national interference and discretion would foster the development of a more level regulatory playing field, which was conducive to strengthening banks’ fundamentals.