Banks must ‘tread carefully’ on bad loan write-backs

Irish banks must tread carefully before they begin to write back provisions on bad loans as a result of a recovering property market and not bow to demands to bolster profits, a senior official at the Central Bank said yesterday.

Property prices are recovering and are now 40% below a 2007 high versus the 55% peak-to-trough assumption banks have provided for, prompting some to raise the prospect of write-backs.

However, Sharon Donnery, director of credit institutions supervision at the Central Bank, said banks should remember that an appropriate level of provisions was critical to stabilising a sector that had been brought to the verge of collapse.

“While there have been improvements in certain key parameters such as house prices, there are still unreliably low levels of activity to have high levels of confidence in changing assumptions,” Ms Donnery told a banking conference.

“The ability to write back provisions must be reflective of a conservative view and therefore the timing and extent of any write-backs must be balanced extremely carefully.”

AIB, which said on Monday it had taken an overall net provision write-back in the first nine months of the year, became the first bank to revise its peak-to-trough assumption to 52% in July.

AIB chief executive David Duffy said Ms Donnery’s was “absolutely right” that its write-backs came from individual restructurings where excess value had been recovered and that it would remain extremely conservative on property prices.

Permanent TSB, the only Irish lender to fail last month’s European stress tests, said it had also reduced the amount of money set aside to cover losses on bad loans in the third quarter, though it has kept the original price assumptions.

Ms Donnery also defended Central Bank proposals to restrict mortgage lending above 80% of the value of a home to no more than 15% of the aggregate value of all home loans, describing them as “proportionate limits”.

Mr Duffy said the deposits required as a result of the loan-to-value rates “might be a little bit high to start with”, suggesting a phasing-in to avoid pricing out some buyers.


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