S&P downgrades country risk assessment of Irish banks

Credit rating agency Standard & Poor's (S&P) has downgraded its country risk assessment on the Irish banking industry, citing reputational damage caused by events at Anglo Irish Bank and the impact of the economic deterioration on the banks.

The agency reduced Ireland's banking industry country risk assessment from group two to three on a scale of 10, giving the State the same ranking as Portugal, Austria and Japan.

S&P said the change reflects its changed view of industry risk in Ireland and described the revelations of an alleged manipulation of directors’ loans and the alleged misstatement of the strength of Anglo’s customer deposit base has seen the reputation of Irish banking suffer.

The agency said in a statement today that the “regulator has shown some reluctance to intervene, particularly in Anglo’s case”.

S&P said while the State was planning a new central banking commission with increased powers, the establishment of such an agency would take time.

It added that although the Government had provided significant support to the banking sector such assistance came with the “prospect of rising interference or direction”.

“We consider that all Irish banks face major near-term challenges from the economic downturn. In our view, the adverse economic environment has led to a very weak outlook for asset quality.”

S&P expects revenues at Irish banks to be pressured by a combination of low interest rates, “an inability to fully pass on higher funding costs to borrowers (particularly mortgagees), much lower transaction volumes, rising prevalence of nonperforming loans, and low (or even negative) net lending.”

The agency said it would consider a further downward revision if the long-term prospects for the Irish economy weaken significantly. An upgrade to group two is seen as “unlikely in the medium term”.

Among the countries in group one are Canada,Sweden, Switzerland and the Netherlands. Those listed in group four include Greece, Slovenia, Slovak Republic, Kuwait and Korea.