Outlook for banking sector ‘stable’

THE outlook for the Irish banking sector remains stable, though there is a risk that a serious fall in house prices could hit its profitability, a leading credit ratings agency said yesterday.

Moody’s Investors Services says that although Irish banks are heavily reliant on mortgage lending, they will continue to see strong profitability unless the housing marker deteriorates.

It said while loan-loss provisions are likely to increase by year-end, the underlying asset quality of Irish banks remains relatively robust.

Moody’s analyst Edward Vincent warns that the biggest threat to the financial sector is the overvaluation of the housing market, which could lead to a “correction” in prices.

It adds: “While the Irish property market may be overvalued to some extent and a correction or levelling-off of prices may be experienced, the most important factors affecting the level of arrears are unemployment

levels and interest rates. At present, the unemployment rate in Ireland remains contained and interest rates low.

“A significant increase in either measure would , in our view, be the biggest threat to the mortgage lenders. But such an increase is not forecast. Thus, while problem loan measures may deteriorate to a small extent over the next year to 18 months, we do not expect any deterioration to threaten the ratings of mortgage institutions,” he said.

It says Irish banks continue to enjoy higher profitability than European peers and asset quality remains robust.

Hopes of a boost to competition from the takeover of First Active by Royal Bank of Scotland are unlikely to break the strength of Bank of Ireland and AIB, the largest players with 80% of current accounts.

In the commercial lending market, Moody’s says Irish banks do not appear to be experiencing any notable difficulties and have minimal exposure to troubled sectors overseas such as high-tech, telecoms and aviation.

On the outlook for individual banks, it said the proposed joint venture by Bank of Ireland and the British Post Office to sell financial services products early in 2004 through the Post Office branch network has the potential to provide an additional strong income stream to existing Bank of Ireland revenues.