Bank profits to 'stay robust'

A new report suggests that Irish banks will continue to make robust profits with increased competition from overseas financial institutions expected to have a limited impact.

Moody's senior analyst and author of the report, Edward Vincent, says Irish banks' profitability remains robust despite an overall contraction in net interest margins and upward wage pressure.

"Moreover, asset quality is sound, with a low level of non-performing loans and write-offs, while liquidity and capitalisation levels are generally good."

While Moody's does not anticipate any major alterations to the current, highly consolidated market configuration, the relative attractiveness of the Irish market has led to an increase in overseas competition for domestic market shares, mainly in mortgages.

Although this remains limited, Moody's said it will closely monitor the impact this trend has on Irish banks' market shares, margins and asset quality.

The rating agency also cautions that asset quality may deteriorate following the rapid loan growth of recent years, which has resulted in a large proportion of Irish banks' overall loan book being as yet unseasoned.

"The rapid growth in loans, which has been outstripping growth in deposits, has also placed additional pressure on banks' funding bases," he says .

"Irish banks will need to continue to diversify funding sources to counter this," Mr Vincent says.

The report also highlights risks faced by institutions with life insurance operations in view of the impact of volatility in global equity markets on embedded values and asset management fees.

It also notes the impact of the switch to an European Union International Financial Reporting Standards (IFRS), which will result in a measure of earnings volatility.

"We expect the implementation of IFRS to enhance the transparency of reporting overall and, notably, to facilitate comparisons with European peers, but it will also increase volatility in both shareholders' equity and Irish banks' profit and loss accounts," Mr Vincent says in the report.

It goes on to caution that as a member of the eurozone, Ireland may be subject to interest rate movements that are inappropriate for the domestic economy.

"A significant increase in interest rates would threaten the credit quality of mortgage lenders generally, as would a large rise in unemployment," it says but does not anticipate major increases in interest or unemployment rates.

And while the Irish housing market has undergone rapid price appreciation in a relatively short period of time, supply and demand are now showing signs of reaching equilibrium, with an attendant easing on prices generally, according to the report.