The profitability of Irish banks is set to "improve significantly" as lenders benefit further when fixed-rate loans expire in the coming months, while the cost of their deposits stays low, Moody's Investors Service has predicted.
In its latest assessment of the Irish lenders, the ratings firm affirms their outlook as positive "as growth, profitability, and deposit funding supports banks".
The assessment comes after consumer advocates have in recent months highlighted the low rates that Irish banks pay depositors, even as the lenders have benefited from rate hikes by the European Central Bank since last summer.
Experts have also said AIB, Bank of Ireland, and Permanent TSB will benefit hugely after securing loan books and deposits from the exits of Ulster Bank and KBC Bank. Their departure has also led to a severe lessening of competition in the market.
In its assessment, Moody's said that Irish banks "will reap additional benefits in the months ahead as expiring fixed rate loans reprice in turn".
The departure of Ulster and KBC "will continue to drive fresh deposit flows" for the banks, although digital rivals may put up "some competition", it said.
"With the cost of deposits, the banks' main funding source, remaining low, their net interest income will increase significantly," Moody's said, and AIB's purchase of Goodbody and Bank of Ireland's Davy "will continue to support fee income".
The performance of the Irish economy will support the banks. "Our outlook for Ireland's (A1 positive) banking system is positive, unchanged from last year," Moody's said.
"We expect sound operating conditions as real GDP grows strongly, inflation subsides and unemployment stays at historical lows. Asset risk will remain stable overall, with loan book growth, the acquisition of performing loans, and low unemployment offsetting a moderate deterioration in loan quality," it said.
Meanwhile, European Central Bank chief economist Philip Lane said in an interview that interest rates will need to rise further if recent tensions in the financial system stay contained.
“If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up,” he told a German weekly newspaper.