Credit outlook still bad for banks - Moody's

The credit outlook for the Irish banking system remains negative, according to a new report from ratings agency Moody's.

The agency said the credit outlook for the country's system reflected the fact the domestic operating environment remains challenging as a result of the economic adjustments taking place.

Moody's stressed its view is based on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months rather than a projection of rating upgrades versus downgrades.

The ratings agency said the collapse of the property market combined with the weak economic environment will continue to feed through into "very substantial arrears and losses."

"These developments have led to substantial downward changes in the weighted average Bank Financial Strength Rating (BFSR) of rated Irish banks to D from C over the past 12 months (or, on the alphanumeric BCA scale, by 5 notches to Ba2, from A3), with a further deterioration prevented by the support that some of these banks have already received in the form of capital injections or other measures," said Ross Abercromby, lead analyst for the Irish banks at Moody's.

Mr Abercromby said that post-Nama, banks will continue to face challenges to fully cleanse their balance sheets as the National Asset Management Agency does not capture all of the impaired assets held by financial institutions.

"As well as the remaining asset quality problems and pressure on capital, profitability is likely to reduce as a result of lower volumes and the higher costs of wholesale and retail funding," he added.

Mr Abercromby said Moody's expects regulation and Government intervention will remain a key driver for developments in the Irish banking sector over the coming years, and that EU requirements have the potential to lead to changes in the franchises of the banks that receive state aid.

Furthermore, Moody's said any explicit or implicit reduction of the currently extraordinarily high probability of state support, at a time when the intrinsic strength of banks is still low, may result in the agency further downgrading banks' senior debt and deposit ratings.