Moody's demotes 12 banks based in Ireland

RATINGS AGENCY Moody’s has downgraded 12 banks operating in Ireland due to concern at the deterioration of commercial property prices and the weakening of residential loans.

Ross Abercromby, lead Moody’s analyst on Irish banks, said losses from mortgage defaults and company failures “are likely to significantly weaken the capital positions of most Irish banks and building societies over the next two years”.

The banks downgraded by Moody’s were AIB, Bank of Ireland, ICS Building Society, EBS Building Society, Irish Life Permanent, Ulster Bank Limited, Ulster Bank Ireland, First Active, Bank of Scotland (Ireland), KBC Bank Ireland, Zurich Bank and Irish Nationwide Building Society.

Moody’s said the main beneficiaries of the proposed National Asset Management Agency (Nama), announced in Tuesday’s Budget, would be AIB and Bank of Ireland, although it noted other banks will be eligible.

Under this plan the State will set up a management agency to buy up to €90 billion of property and development loans from Irish banks in an effort to try to get Irish financial institutions to resume lending.

Moody’s said its ratings decision was independent of the Budget, although the impact of the Nama had been incorporated.

The agency downgraded the bank financial strength ratings (BFSR) – an indication of financial strength and a company’s ability to repay its borrowings – of Bank of Ireland and AIB to D.

Lower ratings usually mean lenders must pay higher interest rates for their borrowings.

Shares in Bank of Ireland and AIB plunged over 30 per cent in early trading yesterday, but later recovered most of these losses. Bank of Ireland closed down 7 per cent, while AIB ended off 5.4 per cent.

For Bank of Ireland, AIB and EBS, the downgrade to “D with a developing outlook” reflects Moody’s increased loan loss expectations.

The downgrade of Irish Life Permanent (ILP) to D and KBC Bank Ireland to D-, both with a negative outlook, was based on the heavy exposure of both to the buy-to-let mortgage market which accounts for around a quarter of Irish residential lending, Moody’s said.

Irish Nationwide Building Society was downgraded to E+, one of the lowest ratings, with the ratings agency saying “it will be difficult for the society to generate enough capital to cover the expected increased loan losses”.