S&P: Banks’ debts worse than thought

LEADING stockbroker NCB said after a chaotic 2009 the economy will both expand and contract in 2010, as rating agency Standard & Poor’s warned the Irish banks are facing much worse debts than previously thought.

As a result S&P has downgraded its risk to group three from group four.

“We are forecasting that GDP will expand by +0.6% and that GNP will decline by -0.5%,” said NCB.

They said the apparently contradictory figures reflects their view that exports will perform “robustly” in the face of global recovery while domestic demand will remain subdued.

They are expecting better things from the economy in 2011 and “are looking for GNP to expand by 2.8% and GDP by 3.3%”.

S&P says the downgrade reflects its view that losses at the banks will be substantially more than previously thought.

Ireland joins countries such as Korea, the Czech Republic and Slovakia, as a result of the re-rating.

“Overall, under our base case, we expect loan losses on bank lending to the Irish private sector to peak at about 4.6% or €15.9bn in 2010, and to total about 10.7% or €36.7bn over the period from 2009 to 2011.

The group’s “downside” or worst case scenario allows for “a steeper and more persistent deterioration in the economy and sharper falls in asset prices”.

That worst case scenario assumes peak losses of about 6.3% or €21.8bn in 2010, and total losses of about 14.6% or €50.1bn over 2009-2011”.

S&P also reduced its rating on Bank of Ireland to A- with a stable outlook, and cut Allied Irish Banks to A- with a negative outlook.

The net result of this latest analysis is that S&P has raised its forecast for “potential problem loans” at the Irish banks to between 15% and 30% of total loans, up from 10%-20% previously.

A reversing of the risk assessment back to Group 3 is “unlikely for the foreseeable future”, it concluded.

The brokers are forecasting much stronger growth in 2011 suggesting GNP to expand by 2.8% and GDP to expand by 3.3%.

“We expect price pressures to remain subdued in 2010, with the HICP (the EU measure of inflation) declining by -1.2%.

With prices declining, consumer confidence stabilising and consumer attitudes shifting towards value NCB expects the volume of retail sales to grow in 2010.

Retail sales represent approximately 45% of consumption with spending on transport, communications, professional services and housing making up most of the difference.