The days of Irish banks writing back large loan-loss provisions are coming to an end and it is “critical” for the lenders to hike fees and commissions to offset a squeeze on their profits, according to S&P Global Ratings.
In its ‘Irish Banks’ Recovery Phase Draws To A Close’ report, the credit rating firm says Irish lenders are in much better shape to survive Brexit and other shocks; predicts lenders will respond to pressure from regulators to cut non-performing loans further this year; but warns profit margins as measured by their net interest margins will likely be capped, as interest rates stay low and regulatory requirements rise.
“We will monitor the quality of the loan book, which is typically weaker than in many other EU countries due to the concentration of real estate and popularity of tracker mortgages. Previously, [a] reversal of provisions has supported profits; this is unlikely to continue,” says S&P.
And amid pressures on profits growth, “raising the currently modest proportion of fees and commissions in the mix is critical for Irish banks to offset interest margin pressure, especially for non-pillar banks”, it says.
Despite the strong growth in the Irish economy in recent years, Irish bank shares have for some time lagged behind the performance of many of their European peers.
Nonetheless, S&P says the Irish lenders have shown their strength “despite internal and external challenges”. However, the rating firm finds “improving profitability further remains a challenge” and that earnings will fail to improve this year by any significant amount.
That’s because the banks have high cost levels and need to invest in expensive digital projects at a time of low interest rates, it says.
It has good news for the quality of Bank of Ireland loans, in particular, and says “profitability at BoI and AIB is close to the European average, thanks to their pricing power, business diversity and scale” while “other Irish banks struggle to generate sufficient returns.”