Financial sector’s profits will be hit

THE exposure of Irish banks to the life insurance sector and the adoption of new accounting guidelines will hit the profits of the financial sector in the coming years.

Moody’s, the credit ratings agency, said given the volatility of stock markets, which impacts on insurance firms, the sector will have to face ups and downs in profitability.

Moody’s said it will be a challenge for institutions that need to “manage the earnings accruing from their respective life insurance operations, given the impact of volatility in global equity markets on embedded values and asset management fees”.

The ratings agency says the adoption of International Financial Reporting Standards (IFRS) by Irish banks is also likely to result in income volatility.

The firm’s analyst Fidelma Mannion said the banks were still enjoying high profit growth despite a weaker economic environment than the late 1990s.

“Nevertheless, profitability remains robust, despite the overall contraction in net interest margins and upward wage pressure,” she said.

Though there are concerns of overheating in the housing market Ms Mannion said it would take a sizeable increase in unemployment and interest rates before any crash would occur.

“However, Moody’s cautions that rapid loan growth occurring during a comparatively benign economic period has resulted in relatively unseasoned loan portfolios,” the report said.

If there were a bursting of the property bubble it said the commercial end would be more at risk.

In terms of corporate lending exposure, Moody’s said it notes positively that Irish banking institutions are continuing to avoid significant exposure to particularly troubled global sectors.

On the downside, the agency said competition in the sector had not increased dramatically in the past few years.