Weak asset quality ‘key vulnerability’ for Irish banks - Fitch

Weak asset quality continues to be a concern for Irish banks, rating agency Fitch said on Monday, as it sounded a warning that AIB and Bank of Ireland may be vulnerable to a shock on the commercial property side.

However, it still has a positive outlook on the banks, noting that it may upgrade AIB and Bank of Ireland within two years if the banks continue to improve.

In a review of the two Irish banks, Fitch said that the banks’ weak asset quality is a hurdle in the path to upgrades and is the “key vulnerability” for Irish banks. The ratings agency pointed to 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”.

“It will take many years to work through all these problems, especially because many of them date back a long time,” Fitch said.

And while capital ratios at BOI and AIB strengthened significantly over the past six months, Fitch says that the banks could still be vulnerable to severe shocks.

“In particular, we are monitoring developments in Ireland’s commercial real estate market (CRE),” the ratings agency said, noting that the sector “could be vulnerable to changes in investor sentiment and significant expansion in CRE financing at BOI and AIB would therefore increase risks”.

Positive outlook

The bank did add however that it has a positive outlook for the banks, reflecting its expectations that the ratings may be upgraded over the next 12-24 months “if improvements in asset quality and capitalisation continue to feed through to the banks’ credit profiles”. Noting that both BOI and AIB have made good progress in reducing problem assets, Fitch said that nearly €6bn of bad loans were cut back in the first half of 2015, equivalent to 15 per cent of total bad loans at that date.

“However, asset quality is still fragile and working through the €30bn backlog of impaired loans at BOI and AIB will take time,” Fitch said.