Outlook for Irish banking system still negative, says Moody’s

The credit ratings agency Moody’s has maintained a negative outlook for the Irish banking sector because the financial system has not yet stabilised, the agency stated in a report released yesterday.

The sector has had a negative outlook since 2008.

Moody’s acknowledged that there had been some positive developments over the past few years, including the transfer of most of the development loans to Nama.

Moreover, the economy has returned to very marginal growth levels.

However, Irish banks will continue to struggle over the next 12-18 months because of the poor quality of the residential mortgage books and the high level of mortgage arrears, the agency believes.

The reliance on Central Bank funding combined with weak profitability and internal capital generation is also weighing on the sector’s performance.

Moreover, it could take a number of years for the banks to resolve legacy issues from the crisis, it concludes.

The ratings agency notes that ongoing liquidity support for the banks remains vital.

However, the removal of the eligible liabilities guarantee scheme, which covers deposits over €100,000 and costs the banks roughly €1bn in fees every year, will be removed over the first six months of this year.

This could lead to an outflow of some deposits, but Moody’s “does not expect these to be substantial.”

“[However] profitability across the sector is likely to remain negative or low during the next few years, further supporting the negative outlook, due to (1) sustained high levels of provisions; (2) high funding costs; (3) lower top-line revenues due to muted demand and low interest rates; and (4) the high proportion of low yielding “tracker mortgages” tied to ECB rates.”

There was some good news for the Irish banks, however, when another credit ratings agency Fitch, announced a series of upgrades.

Fitch has upgraded the viability ratings for Bank of Ireland and AIB by one notch to B and B- respectively.

However, Permanent TSB’s viability rating was downgraded by one notch to ‘CC’.

“The upgrade of Bank of Ireland and AIB’s viability ratings reflect the significant recapitalisation of the banks and recognises the solid progress both banks have made in deleveraging their balance sheets since the Prudential Capital and Liquidity Assessment Reviews in March 2011.”

Bank of Ireland had to raise €5.2bn, and AIB had to raise €14.2bn following the review to buffer against future losses.

Moreover, both banks stayed well within the forecast losses expected as part of their deleveraging programmes.

Bank of Ireland and AIB have also successfully tapped the private markets over the past three months for the first time since 2010.

The ratings agency, in a more downbeat assessment of PTSB, expects it to breach its minimum capital requirements unless it receives approval for its restructuring plan.

“As this has not yet been received and its exact timing is unknown, Fitch has not factored the potential positive benefits of such a plan into its analysis.

“Fitch believes that the bank still needs to continue to add provisions against its impaired assets and that weak profitability continues to drag on capital. Deleveraging of low-yielding assets, therefore, is also a requirement before any improvement may be noted in the viability rating.”