Moderate growth for Irish banks

IRISH banks face a year of “moderate” profit growth in 2008 and lower levels of activity, according to ratings agency Standard & Poor’s (S&P) yesterday.

Reporting on the main Irish banks, S&P said lenders will see their provision for bad loans increase, but that it does not expect a major deterioration in credit quality.

The report also highlights that Irish banks, like those worldwide, will face higher funding costs.

S&P said the challenge for the banking sector will be to manage the slowing property and construction sectors, and it was concerned about exposure of AIB and Anglo Irish Bank to these sectors.

“Despite reports of increased failures of property developers in Ireland in 2007, this has not hit Irish bank’s [profit and loss accounts], nor has it hit asset-quality metrics.

“The potential for sharp deterioration in the quality of development lending, and a deterioration in the prospects for UK commercial real estate beyond our currently moderately negative expectations, are aspects which hold downside risks for banks overweight in these particularly sectors,” the S&P report said.

The agency said it also had concerns about mortgage holders with high loan-to-value ratios, particularly anyone with a 100% mortgage, who have seen the value of their home fall below the size of their loan. This “would likely increase banks’ loss rates, which are currently low,” S&P added.

S&P says the positive ratings outlooks on AIB and Bank of Ireland are “under some pressure” now, given the further deterioration in the operating environment in the first quarter of 2008.

“Early indications are that financial performance will remain good, and internal restructuring for both banks is well advanced.”

Irish Life & Permanent (IL&P) and Anglo Irish Bank were more “vulnerable” than AIB and Bank of Ireland.

But, S&P says the current rating on Anglo Irish has been supported by its strong asset quality, the geographic diversity of its loan book, and tight risk management.

“Retail-focused IL&P is currently tested by higher funding costs and, relative to the larger universal banks, more constrained re-pricing ability given its greater focus on Irish retail business, which will subdue financial performance in ‘08,&” it says.