Moody’s holds negative outlook for Irish banks

CREDIT rating agency Moody’s has retained its negative outlook for Ireland’s banks, as it said state recapitalisation only partly offset weak funding and liquidity profiles and a challenging business environment.

The Government has put almost €63 billion into Irish banks following the disastrous property binge and believes its latest recapitalisation drive, following fresh stress tests in March, drew a line under the banking crisis.

However, Irish banks are still reliant on the Central Bank for almost €50 billion of emergency funding and on the European Central Bank for over twice that, due to tens of billions of euro in deposit outflows and their inability to raise money on the interbank lending markets.

“The capital is obviously positive, but there are still big concerns around the funding profile, the challenging operating environment and obviously the impact that’s going to have on profitability,” Ross Abercromby, senior analyst at Moody’s, told Reuters.

“Through its support for the troubled banking sector in recent years, the Government has significantly weakened its own credit profile,” he said.

“The banks now have to deal with the implications of this as the Government aims to reduce its debt burden and restore its financial flexibility.”

Moody’s, whose outlook reflects its expectations for the sector over the next 12-18 months, said the Irish Government’s target of €12.4bn in fresh austerity measures over the next four years would place considerable pressure on the country’s recovery prospects.

It said this, in turn, would have a significant impact on banks’ profitability, impair pre-provision earnings and is already leading to a weakening of poor asset quality.

Mr Abercromby said Irish lenders had enough capital to cope with loan losses under Moody’s stress-case scenario and while he expected the banks’ emergency funding to remain relatively high, it should fall as the banks’ deleveraging process continued.

Under the country’s EU-IMF bailout, lenders have to shrink their balance sheets by €73bn by the end of 2013 and Mr Abercromby said, with Europe-wide deleveraging about to begin, the location of assets could dictate whether Irish lenders can stay on target.

“It’s when the banks start to sell their Irish assets that it is going to prove most problematic. Our assumption would be they are saved for later on in the process.”

* Reuters