Banks on property safe track

Ian Guider

The report says that though Irish banks are increasingly reliant on the property market (both home loans and commercial real estate) the rise in indebtedness would not see their profits tumble if the market declined.

Based on its analysis of the major banks and their exposure to property lending, it found that if the institutions were to double their provision for bad debts in the event of credit quality, the decline in profits would still be in single digits.

It estimates that profits at Anglo Irish Bank would slip by 5%, AIB would lose 7% of its pre-tax profits and Permanent TSB would also see a 7% decline (its parent Irish Life & Permanent would be down 3% at group level). The hardest hit would be Bank of Ireland, which would see 9% shaved off annual profits.

“Rising unemployment and a sharp increase in interest rates are the two obvious threats to the Irish banking system, but neither looks likely in the short to medium term,” Davys said.

The broker also looked at the impact of a recession, similar to that in Britain in the early 1990s, on banks and homeowners.

“We estimate that it would take a price fall of a little over 20% before a typical [first time buyer] mortgage issued in 2003 on a new house (based on the national average) would be in negative equity. Moreover it would take a fall of over 30% before those issued in 2002 would be in negative equity.”

The Davy analysis said though Ireland is becoming more indebted, with the third highest level of borrowing in the Europe and credit still growing at 26% a month, it believes that, with low interest rates and high employment, homeowners are not overly burdened.

“Mortgage affordability models do not suggest we have an imminent problem either. This is particularly so given that interest rates and unemployment look like staying low for the foreseeable future.”

Davys said although personal debt is now approaching 140% of income (up from 68% a decade ago), around 80% of the borrowing has been to purchase property, further insulating the banks.

The report also played down fears that giving 100% mortgages to first-time buyers would cause serious problems for the housing market.

“In the mortgage market, two new trends have supported affordability-increased availability of interest only loans and term extension in particular. But given that perhaps 80% of [first-time buyers] are taking out loans with terms of 30 years or more, we think the former will be a less powerful driver of loan demand in the future,” the report said.