International credit rating agency, Moody's, gave an upbeat assessment of the credit quality of Irish banks in a report today which praised their "solid financial fundamentals" and "robust asset quality within the context of a slowing economy."
"Irish banks' profit growth and lending growth, although still strong, slowed down in 2002 and the first half of 2003," said Mr Edward Vincent, Moody's analyst and author of this report. While loan-loss provisions are likely to increase by year-end, the underlying asset quality of Irish banks remains relatively robust.
The report goes on to note that Irish banks' domestic lending is heavily weighted towards residential mortgages. While the Irish property market may be overvalued to some extent and a correction or levelling-off of prices may be experienced, the unemployment rate in Ireland remains contained and interest rates low.
A significant increase in the either measure would, in Moody's view, be the biggest threat to the mortgage lenders - a threat which, at least for the moment, appears contained.
Furthermore, Irish mortgage lenders are continuing to focus more on net disposable income than on cruder income multiples - another factor that underpins the rating agency's sanguine view of the residential mortgage market.
In the commercial lending market, Moody's comments that Irish banks do not appear to be experiencing any notable difficulties and have minimal exposure to troubled sectors overseas such as high-tech, telecoms and aviation.
While the proposed acquisition of First Active by RBS, could herald further overseas investment in the Irish banking system there is little expectation on Moody's part of significant changes in the actual shape of the system in the medium term: the two major banks (AIB and Bank of Ireland) continue to command a very high share of banking business and are likely to continue to do so. The remaining medium and smaller players all also likely to continue to enjoy good market shares in their key products.
Moody's added that the First Active / RBS transaction has the potential to benefit First Active as the bank's strength in mortgages and savings and investment products within the Republic of Ireland compliments Ulster Bank's broader range of banking products for personal and business customers.
Further there would be the scope for cost savings and revenue benefits over time as the two franchises drew closer together while maintaining their distinctive brands. The rating agency also noted that the proposed joint venture by Bank of Ireland Group and the UK Post Office to sell financial services products early in 2004 through the Post Office branch network has the potential to provide an additional strong income stream to existing Bank of Ireland's UK revenues.