Irish bank shares posted gains despite continuing fears about the health of Italian lenders and a cautionary report from Fitch Ratings on the outlook for Irish lenders after Brexit.
Bank of Ireland rose almost 2% to 24 cent, as reports about the imminent rescue of Monte dei Paschi, the worst of the Italian lenders, by the Italian government helped drive European stocks higher.
Monte dei Paschi soared by 11% in Milan, while UniCredit also rose strongly and an index of Italian bank shares rose over 4% to its highest level since June.
Italian sovereign bond yields responded by falling to a near three-week low, following reports that the government is preparing to rescue the ailing lender as hopes of a private recapitalisation fade.
Sources told Reuters Italy’s government was preparing to take a €2bn controlling stake in the bank by buying junior bonds held by ordinary Italians.
The government is already the bank’s single largest shareholder with a 4% share. Buying junior bonds, which would be converted into shares, would take that to 40%.
The newspaper La Stampa reported Italy was set to ask the ESM eurozone bailout fund for a €15bn loan for Monte dei Paschi and other struggling lenders. An Italian Treasury spokesman denied the newspaper report. The Italian parliament also gave its final approval to the government’s 2017 budget — which has irked the EU.
Hopes that the ECB will deliver a fresh dose of monetary stimulus to the eurozone later today were also feeding investor demand for the bloc’s debt, analysts said.
Back home, Fitch, in its latest report, struck a slightly downbeat note on Irish lenders, saying it had cut its 2017 outlook to “stable” from “positive” because of the uncertainty facing lenders here as the UK’s divorce talks with the EU draw nearer.
And though Brexit was “negative for Ireland’s long-term economic and political prospects, putting pressure on GDP growth and creating uncertainty around relations with Northern Ireland” it said that the effect on the Irish lenders from the UK divorce will only become clear in time.
Amid continuing shortages, Fitch forecasts house prices will rise by up to 4% next year. The forecast takes account of the loosening by the Central Bank of its mortgage lending rules. Noting that “the asset quality of Irish banks is sensitive to the performance of the real-estate sector”, lenders will continue to benefit from demand for commercial properties, it said.
“Strong demand from investors for Irish commercial property and increasing asset prices have enabled banks to swiftly dispose of large amounts of their problem loans.
"We expect asset quality to continue to improve in 2017, due to deleveraging and restructuring and a low inflow of new impaired loans; this will be supported by low-interest rates, falling unemployment and tight underwriting standards,” Fitch said.
Overall, Irish banks’ capital ratios will increase, “despite pressure from volatility in pension fund deficits and foreign exchange markets”, it said.
Stephen Hall, bank analyst at Cantor Fitzgerald Ireland, said Bank of Ireland had benefited from a capital announcement that may help it to pay out its first dividend since the financial crisis, sometime in 2017.
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