Irish banks have returned to financial health but non-performing mortgage loans will drag on their credit scores for some time, according to S&P Global Ratings.
Its report, Irish Banks: Getting back to where they once belonged, is one of the most upbeat by a credit rating firm on Irish lenders.
The review includes AIB but makes no mention of the Government’s plans to sell a 25% stake in the bank in the coming months, if market conditions allow.
It will nonetheless likely provide reassurance to potential investors in AIB that the outlook for Irish banks as a whole is on the up.
S&P projects GDP growth will be pegged at 3% this year and that house prices will rise 7%.
A low level of new lending is weighing on the banks, though it projects that credit growth across all lenders will finally turn positive next year.
“We believe that the gradual recovery in bank creditworthiness has principally been supported by the recovery in the Irish economy and the related rise in employment levels and property prices, as opposed to significant improvements by the banks,” states S&P.
“Domestic loan books continued to contract in 2016. According to CBI (Central Bank of Ireland) data, annual credit growth rates remain negative for residential mortgages and commercial lending, albeit positive for the relatively small consumer credit portfolios.”
With 16% of all domestic loans on the Irish banks non-performing, S&P says the problem of asset quality across the industry is “stark”. The position is made worse because so many mortgages are underwater and home loans account for a significant share of all loans at AIB, at 60%, and at Bank of Ireland, where 50% of all its gross loans are home loans.
S&P states: “Having peaked in 2013, reported industry mortgage arrears continued to fall in 2016. Significantly, a large proportion of Irish mortgages, 13%, has been restructured but are not currently in arrears.
“Comparing these metrics to the UK arrears industry average of 1%, for example, shows starkly why we expect the Irish mortgage book to remain a drag on banks’ creditworthiness for several years.”
Profitability will be constrained as a number of factors weigh on the lenders.
Amid low interest rates, growth in net interest margin — a key measure of profitability — will likely be “modest”, made worse by the fact Irish banks carry so many low-yielding tracker mortgages.
Political pressure on the banks to cut their standard variable mortgages may also constrain expansion in net interest margin, says the report. Rules dictating minimum requirements for European banks to hold certain types of financial instruments, known as MREL, will also weigh on profitability, while writeback of loan-loss provisions which helped bolster profits in recent years will play less of a role.
Other risks for the banks include the heavy requirements for investment in information technology and the potential for “exceptional” costs that may arise from the Central Bank probe into tracker mortgages.
The S&P report does not refer to the AIB shares sale. However, S&P analyst Sadat Preteni told the Irish Examiner last month that AIB was in sufficiently good financial health for the Government to sell shares in the bank and that AIB’s still elevated level of non-performing loans should not stand in the way.
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