Irish banks likely to sell off more loans, says S&P

Irish banks will likely dispose of many more of their non-performing loans to meet targets of the European regulators, S&P Global Ratings has predicted.

In a new report, the ratings firm predicts the share of non-performing loans on the loan books of Irish banks will fall to 8.8% this year and then to 7.4% in 2020, but that more work will need to be done to satisfy regulators.

Helped by the booming economy, Irish banks have reduced their non-performing loan exposures (NPE) from a peak of 40% in 2014, it said.

And it said Irish lenders “have made remarkable progress” in reducing non-performing loans but that “the ECB is strongly encouraging Irish banks to reduce their NPE ratios further, preferably to around 5% by year-end 2019.

“We, therefore, assume that the banks will need to make some further NPE portfolio sales in order to meet this target, although such transactions are not part of our base-case forecast,” it said

Despite the huge progress of banks in Ireland and elsewhere, “several banks are still far from announcing mission accomplished”.

S&P said that as the economic cycle turns, “we consider that the clock is ticking for those banks as legacy issues could leave them more vulnerable to the next downturn if they are not tackled in time,” in the report called, ‘Several Eurozone Peripheral Banks Are Racing To Resolve Problem Loans’.

Irish banks have faced controversy in recent times as under ECB pressure they increasingly sold off mortgage loans of households who were plunged into arrears following the property and economic crash.

Speaking at an industry event, Central Bank governor Philip Lane reiterated that the Irish financial system is in much better shape to resist shocks such as the UK crashing out of the EU without a deal at the end of next month. And “the immediate cliff-edge risks of a hard Brexit have been largely addressed” for the financial system, he said, even though every part of the economy, and agricultural and foods, in particular, would be badly hit.

In terms of financial stability risks, our assessment is that the improvements in the resilience of the financial system over the last decade provide a vitally-important buffer.

“Taken together, the more balanced macroeconomic profile, the restructuring of the Irish banking system, the much-higher capital and liquidity ratios, the decline in the non-performing loan ratio and the more intrusive supervisory regime mean the capacity to absorb negative shocks is much greater than in the past”, he said.

In an update on Ireland, ratings firm Moody’s Investors Service said that the Government had taken steps to prevent a return to a “boom-bust fiscal policy”. Brexit and US corporate tax cuts potentially affecting the levels of investments into Ireland were the main risks facing the economy.

“Brexit remains the single-largest risk for the Irish economy over the long term. Our base case remains that the UK and the EU will eventually reach an agreement to preserve many — but not all — of their current trading arrangements, particularly covering trade in goods.

“However, the rejection of the draft withdrawal agreement prolongs uncertainty over the UK’s future relationship with the EU, raising the risks of a no-deal Brexit”