Separate reports by the EU and Fitch Ratings published yesterday warned Irish banks will take some time to clean up their property loan books from the effects of the crash.
The EU, in its latest post-bailout report, said reducing the high level of so-called non-performing loans on Irish banks’ balance sheets and reducing mortgage arrears demand “more efforts”.
It said the elevated level of non-performing loans is “one reason for high lending rates” in Ireland.
Surveys by the ECB and the Irish Central Bank regularly show that despite rock-bottom ECB interest rates that the costs of borrowing for business and home owners here are higher than in many other eurozone countries.
“Research links high interest rates charged by domestic banks on new lending to the limited degree of competition in the banking sector, the high share of non-performing loans, legacy low-yielding assets and difficulties accessing collateral,” the EU said.
The report repeats its warning against banks writing back excessive amounts of bad loan provisions to boost profitability.
It believes, however, that, “in time”, banking profits will be boosted as more borrowers pay down low-yielding tracker mortgage loans.
The EU said events “bode well” for the Government to sell a 25% stake in Allied Irish Banks later this year.
The proceeds will go to reduce Ireland’s national debt load, it said.
Separately, a Fitch Ratings report said non-performing loans could leave Irish banks “vulnerable to severe shocks”.
Bank of Ireland and AIB between them hold €30bn of impaired loans and it will take them time to work through the “backlog” even as economic conditions improve, it said in a bulletin on the Irish lenders.
Claudia Nelson, senior director of banks at Fitch, also said that though continuing to fall that the large amounts of low-yielding tracker mortgages will weigh on profitability for some time.
BoI and AIB had made progress in selling down distressed loans as the economy improves.
“Our assessment of asset weaknesses includes a high proportion of forborne loans in the system, very low yielding loans, defaulted but not impaired loans, and restructured loans, all of which add up to a high proportion of the banks’ balance sheets,” Fitch said.
“It will take many years to work through all these problems, especially because many of them date back a long time,” the agency said, citing the significant balances across the mortgage loan books which are in long-term arrears.
The major analysis comes after Reuters reported over the weekend that the ECB is preparing to quiz a sample of eurozone lenders about the high-level of non-performing loans held on their loan books, a sign that the central bank is ramping up “efforts to tackle the region’s mountain of bad debt”.
Fitch said that BoI and AIB had boosted its capital ratios in recent months, and echoed some recent concerns by analysts about the high level of investments pouring into commercial real estate here.
The ratings firm said international and other funds are in large part driving the increase in commercial property lending, but that “significant expansion in commercial real estate financing at BoI and AIB would therefore increase risks”.
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