Ratings agency boost: What’s good for the banks is good for all

Standard & Poor’s, one of the financial sector’s major credit ratings agencies, has raised its ratings on a number of Irish banks due to improved profitability within the industry.

The ratings agency has raised Bank of Ireland to investment grade, the first Irish bank to achieve such a rating since the financial crisis.

For Bank of Ireland, it is likely to mean a surge in its stock-market performance, with the return of institutional investors, many of whom are only permitted to invest in shares that have an investment rating.

AIB, Permanent TSB, and KBC also had their ratings increased, though to below investment grade, while Ulster Bank’s rating was maintained.

“We believe that improvements in banking system profitability and lower-risk appetite will prove enduring,” the agency said.

“We believe that the structure of the industry will remain broadly stable, with relatively few players and a primary focus on domestic retail and business banking.”

In lay person’s terms, that means that Irish banks are back in the business of prudent banking, and not before time.

The ratings equivalent of an A- in the Leaving Cert is not just good news for the banks, but also for the economy as a whole. According to Standard & Poor’s, the Irish economy is surging ahead, with the agency expecting Ireland to outperform most of its European neighbours in terms of economic growth in the coming two years.

Considering the latest export figures from the Central Statistic Office, we are already halfway there. The trade surplus grew significantly in May compared to the same month last year, according to preliminary CSO figures issued yesterday.

As exports rose, imports fell, resulting in a trade surplus of almost €4bn for the month.

What, however, does all this good news mean to the ordinary citizen and will any of it filter downwards?

The signs are that it will. S&P expects unemployment in Ireland to drop to 8% by the end of next year, a remarkable turnaround since the height of the financial crisis.

Last month, the agency upgraded the long-term sovereign credit rating of Ireland from A to A+, with a stable outlook, the third by S&P in the past 12 months and part of a steady upward trend in Ireland’s sovereign ratings. The move was welcomed by the National Treasury Management Agency and Finance Minister Michael Noonan.

However, let’s not lose the run of ourselves here. There are two caveats that must be taken into consideration.

Firstly, there is still a significant gap between the perceived stability of the economy as a whole and our banking sector. Banks have enduring legacy issues, among them ultra-low interest rates, the number of tracker mortgages, pressure to lower standard variable-rate mortgages, and remaining bad debts and non-performing loans.

Secondly, the agency warns that if the next budget is too much of a giveaway, things could still go belly-up, putting all the hard work and austerity suffered to waste.


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