Irish banks face 'very substantial arrears and losses', warns debt rating agency

THE BURSTING of the property bubble and the weak economic environment will continue to lead to “very substantial arrears and losses” for the Irish banks, according to international debt rating agency Moody’s.

The credit outlook for the banks remains negative, the agency said in a note, “reflecting that the domestic operating environment will remain very challenging as a result of the large economic adjustments that are taking place”.

The banks would “continue to face many challenges to fully cleanse their balance sheets” after €77 billion in loans are moved to the National Asset Management Agency (Nama), Moody’s claimed, as the State agency “does not capture all of their impaired assets”.

The profitability of the banks was “likely to reduce as a result of lower volumes and the higher costs of wholesale and retail funding”, the agency added.

However, Moody’s said it expected “fewer rating actions” over the next 12 to 18 months as pressure on earnings due to high bad debts and low levels of capital were incorporated into its ratings.

Commercial property values had halved, while residential property values had fallen by more than a quarter, the agency said.

Nama has not led to any changes in the ratings of the banks but Moody’s acknowledged that the transfer of the loans from the banks to the agency would crystallise a loss and have a negative impact on the banks’ capital bases.

“Importantly, we understand that the Government does remain committed to providing further capital to the sector if required,” Moody’s continued.

“Certainly, for small institutions, we believe that the Government is the only potential source of capital.”

The agency said that it expected the Government and regulatory intervention “to remain a key driver” for developments across the banking sector over the coming years.

“EU requirements have the potential to lead to changes in the franchises of the large banks that receive State aid.

“As a result of these factors, we believe that the Irish banking system will continue to undergo substantial changes in 2010, with consolidation likely amongst the smaller players as the sector needs to shrink,” the agency said.