Irish banks must "not rest on their laurels" and should prepare for less buoyant market conditions, according to a new analysis from rating agency, Standard & Poor's. Banks also need to be cautious about the "current ebullient state" of the property and construction sectors, the agency warns.
In a generally positive review of the sector, the agency says the banks need to invest in product innovation, customer service, operations and risk management if they are to manage "the impact of growing competition".
"The influence of foreign-owned banks is accelerating," said Standard & Poor's credit analyst Nigel Greenwood yesterday.
Mr Greenwood noted, however, that there should be "no marked changes" in the market positions of domestic banks because "there are sufficient new business opportunities for most participants for the foreseeable future".
Standard & Poor's judges that the impact of increased competition could become obvious when banks "move down the credit curve" to sustain volume growth.
The agency points to the rise of the 100 per cent mortgage for first-time buyers as an example of this.
It also suggests that more mainstream lenders are now becoming interested in lending to customers with poor credit histories, or "sub-prime" clients.
"Any relaxation in credit standards warrants caution when credit growth is so high," the agency warns.
Michelle Brennan, another Standard & Poor's credit analyst, said that while much of the credit growth over the past decade could be explained by demographic and macroeconomic improvements, the economy had largely come through its "catch-up" phase.
"The continuation of high credit growth rates into the medium term would be a cause for concern," she said.
Standard & Poor's finds some comfort, however, in the relatively low current rates of credit card usage and sub-prime lending in the Republic.
"The evolution of these market segments will likely be of increasing importance to bank ratings," says the agency.
In general, the analysis finds that the banking system is healthy and has good prospects.
Ratings on Irish banks compare well with those on the top 50 banks across Europe and with those on larger US regional banks, according to the report. Standard & Poor's also expects ratings to remain "robust".
"Profitability compares very favourably on an international basis. Efficiency is improving, asset-quality indicators are still very healthy, and the banks have enhanced the roles of risk management and compliance," said Mr Greenwood.
