Banks’ non-performing loans ‘level out’

Ratings agency Fitch believes that the number of non-performing loans at the two main Irish banks has finally levelled out.

Analysing Bank of Ireland and AIB’s annual results the ratings agency believes that the main Irish banks are well positioned to pass the European Central Bank asset quality review.

“Non-performing loans are likely to have plateaued at the two large Irish banks at end-2013 ahead of the ECB’s comprehensive review,” Fitch Ratings says.

The banks’ latest annual results incorporate some of the observations from the recent Central Bank’s balance sheet assessment on loan impairment provisions and risk-weighted assets, “leaving them better positioned for the ECB review and well-placed to return to sustainable profitability,” the review stated.

The ratings agency believes that non-performing loans, loans where the borrower is missing their repayments, will peak later on this year in both banks.

The agency made this assessment despite both banks posting a slight increase in non-performing loan ratios this year. Bank of Ireland reported a 1% rise to 17% while AIB reported a 2% increase to 35%. However, this was due to the banks’ deleveraging plans.

While the note is broadly positive, Fitch warns that there could still be a jump in non-performing loans if there is a change in the broader economy hitting consumers. “There is still downside risk from the ECB’s comprehensive assessment.

“The recovery in asset quality is fragile even though it is stabilising. Forbearance levels are still high even after the Central Bank of Ireland’s review.

“BoI’s forborne loans were around 12% of gross loans with a large 88% not classified as impaired. Forbearance at AIB’s residential mortgages was also at 12%, although over half were impaired.”