Moody: Banks survive Brexit

Irish banks, despite facing a drag on profitability from problem loans, will fare fairly well over the next couple of years mainly because the economy will survive the fallout from the Brexit shock, Moody’s Investors Service has predicted.

In an update to its banking review, the ratings firm left unchanged its “positive” credit outlook for the Irish lenders over an 18-month horizon, and projected their profitability and quality of their loans will improve, despite facing the “most critical issue” of €41.5bn problem loans that weigh on their balance sheets. 

The banks’ asset quality improves hand-in-hand with an economy which it forecasts will grow 3.4% and by 3.1% this year and in 2017, because it sees the concerns from Brexit to be “manageable”. 

Economic growth will help drive “demand for new loans and other banking products, as well as alleviating the pressure from the still high stock of problem loans”.

Noting the huge number of multinationals, Moody’s makes no reference to the victory of Donald Trump in the US presidential election, which many local analysts believe will have major consequences for the Irish economy should he follow through on his pledge to slash US corporate taxes, closer to the low Irish rate of 12.5%. Real risks exist, however, says Moody’s.

“Although we consider them manageable, any downside risk emanating from the Brexit vote could affect Ireland and Irish banks, especially for those entities that have material exposures to the UK,” wrote Moody’s Irish banking team. 

There is also the elevated level of €41.5bn problem loans, which Moody’s predicts will fall at a slower rate in the coming months. That justifies capital ratios for Irish lenders staying high, it says.

The ratings firm predicts that write-backs of provisions previously, which had in the past played a significant role in boosting lenders’ profits, will also slow, while low-yielding tracker mortgage loans will continue to weigh. 

Irish bank shares have fallen sharply even before the Brexit vote in June. 

Shares in Bank of Ireland, which has a large exposure to Britain through its venture with the British post office, have lost a third of their value since the start of the year. 

At 22 cent a share, the stock market values the lender at around €7.25bn.

Moody’s predicts that the Government will make a start in selling of its stakes in the banks “later in 2017 or in 2018”.

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