Outlook for Irish banks still negative, says Moody's

Global ratings agency Moody’s said the outlook for Irish banks would continue to be negative for the next 12 to 18 months.

In a note published yesterday, Moody’s Investors Service said this reflected its view that the Irish banking system had “not yet fully stabilised”. It also cited continued weaknesses in the domestic economy, the high rate of unemployment and uncertainty about demand from key trading partners, notably the UK and euro area.

The Moody’s negative outlook is in spite of the removal of large real-estate portfolios from the banks’ balance sheets into the National Asset Management Agency in 2010 and 2011, and the “marginally positive, but still weak, GDP growth that we expect to continue in 2013”.

It expects Irish GDP to grow by just 0.2 per cent this year.

Moody’s predicted Irish banks would remain “under pressure” due to ongoing asset-quality deterioration, more recently stemming from poor residential mortgage loan performance; their continued, albeit reducing, dependence on central bank funding; and weak profitability and internal capital generation.

Arrears remain high

Moody’s has predicted the Irish banks will take “several more years to fully resolve the legacy issues from the crisis”. Although a lot of development loans were transferred to Nama, it said arrears remain high on the remaining property exposures.

“The asset quality of the banks’ residential mortgage books will also remain very weak, although we recognise that increases in arrears are beginning to slow,” it said.

Moody’s said the new personal insolvency regime approved by the Oireachtas at the end of late 2012 was likely to provide an “efficient mechanism” to deal with the mortgage arrears in the long term.

“However, over the outlook period [to mid-2014], the insolvency regime may lead to an increase in arrears,” it added.

It also highlighted how exposure to Irish government debt at the main domestic banks was “sizeable”, at about €13.8 billion at the end of June 2012.

This was the equivalent of about 54 per cent of the banks’ combined Tier 1 capital (excluding Government-guaranteed Nama bonds).

Moody’s said profitability across the sector was likely to remain “negative or low” during the outlook period.

This would be due to sustained high levels of provisions; high funding costs; lower top-line revenue due to muted demand and low interest rates; and the high proportion of low-yielding tracker mortgages tied to ECB rates.

It said the ending of the eligible liabilities guarantee by the Government would boost the operating incomes at the banks.