Moody’s says Irish banks’ outlook ‘positive’ amid market turmoil

Ratings agency expects Irish GDP to grow by 4.5% this year and by 4% in 2024

Moody’s said on Wednesday that the outlook for Irish banks is “positive” as the domestic economy and lenders’ capital cushions remain strong, even as investors remain wary of the sector globally after the recent implosions on both sides of the Atlantic.

The ratings agency said Irish banks’ balance sheets are “broadly resilient to implications” of rising interest rates, which contributed to the collapse of Silicon Valley Bank in the US this month. The bank succumbed to a deposits run as bond investments it had spent $127 billion (€117 billion) on had slumped in value amid rising interest rates.

Fellow US mid-sized lenders Signature Bank and Silvergate Bank also collapsed this month, while Credit Suisse, which had been in the midst of a restructuring programme following a series of scandals, was forced to agree to a shotgun merger with rival UBS 10 days ago.

While European banking stocks have rallied close to 4 per cent so far this week, amid hopes that the banking crisis is easing, they remain down more than 15 per cent over the past four weeks. The Iseq Financial index has declined by 6 per cent over the same four-week period.


“We expect sound operating conditions as real GDP (gross domestic product) grows strongly, inflation subsides and unemployment stays at historical lows,” Moody’s said in a report on Irish banks. “Asset risk will remain stable overall, with loan book growth, the acquisition of performing loans, and low unemployment offsetting a moderate deterioration in loan quality.”

Moody’s sees Irish GDP expanding by 4.5 per cent this year and 4 per cent in 2024. It expects inflation, exacerbated by the Ukraine conflict and related energy cost pressures, will moderate from 10 per cent in 2022 to 4.2 per cent in this year and 2 per cent in 2024 as interest rate increases accelerate.

It said that Irish banks’ loan loss reserves will allow them to absorb an expected “slight” increase in problems loans across the industry from 3.4 per cent of gross loans at the end of last year.

“Capital ratios will remain strong, in line with banks’ medium-term targets,” the report said. “Profitability will improve strongly as interest rate increases allow banks to reprice their floating rate loans, while the cost of deposits, their main funding source, stays low.”

Moody’s said that Irish lenders’ “ample and growing customer deposit bases and sizeable stocks of liquid assets will sustain” their strong funding profiles.

Unlike many smaller US banks now in focus, Irish banks did not participate in the so-called carry trade of using cheap excess deposits to buy higher-yielding bonds. Instead, they stored excess cash with the ECB. While they did incur losses when negative central bank rates prevailed, the €67 billion of surplus cash that the three surviving Irish lenders had on their balance sheets as of December is now hugely profitable.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times