Ratings agency predicts Irish banks will pass next set of stress tests

The Irish banks are unlikely to need new capital following the next stress tests, but they still face significant risks and challenges in returning to profitability, according to a report by the ratings agency, Fitch.

“Although the Irish banks still appear broadly on track to meet the assumptions behind the 2011 stress test, these were framed on a Basel II basis,” Fitch said.

Since then capital expectations of market participants have crept steadily upwards, in terms of both quantity and quality.

“As Irish banks’ capital ratios continue to be eroded and a convincing return to profitability only appears feasible in the longer term, further capital may be required before the banks can contemplate a future independent of State support,” said Fitch.

New international banking regulations, known as Basel III, are being phased in for 2019.

The four Irish banks included in the Fitch report — Bank of Ireland, AIB, Permanent TSB, and Ulster Bank — will need to raise more capital over the medium term to meet these new requirements, it said.

Permanent TSB is awaiting approval from the European Commission for its restructuring plan, which would see its distressed assets hived off balance sheet.

Fitch expects the bank to breach its minimum capital requirements unless it receives approval for its restructuring plan.

Ulster Bank is not included in the forthcoming stress tests because it is owned by Royal Bank of Scotland.

However, the three domestic banks will have to undergo stress tests of their asset quality, most likely in either September or October of this year.

Fitch notes that all four banks reported losses in 2012. Moreover it will be 2014 before loan arrears peak.

Consequently the ratings agency expects profitability in the sector to remain muted until 2016 at the earliest.

The banks are struggling to repair their net interest margins because they still have a high concentrations of tracker mortgages, which are mostly loss-making.

There have been a number of positive developments, however. The funding position has improved over the past few years as the banks have been able to attract a higher volume of deposits.

The removal of the Government’s eligible liabilities guarantee will have limited impact on the funding position, said Fitch.

The continued deleveraging programme across Bank of Ireland and AIB was completed at lower loss levels than expected.

“Fitch considers that the significant sales of problem commercial real estate assets to the National Asset Management Agency and strong progress by the major banks on deleveraging their non-core portfolios have significantly reduced tail risk in the Irish banking sector, even though asset quality is weak,” Fitch added.