Banks wary of Covid-19 impact on non-performing loan levels

Requests for debt moratoriums make lenders uneasy due to effect on balance sheets

Central Bank of Ireland governor Gabriel Makhlouf: the measures announced by the ECB governing council will  allow for the “smooth provision” of credit throughout the disruption to the economy caused by Covid-19.  Photograph: Nick Bradshaw

Central Bank of Ireland governor Gabriel Makhlouf: the measures announced by the ECB governing council will allow for the “smooth provision” of credit throughout the disruption to the economy caused by Covid-19. Photograph: Nick Bradshaw

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Irish lenders are closely watching the impact of coronavirus on their levels of non-performing loans amid an increase in contacts from customers potentially facing difficulties.

There is also uncertainty over how European regulators will handle an upswing in bad debt arising from the crisis.

In a statement, AIB said it had “seen an increase in calls from businesses in the wake of coronavirus but many of these calls are exploratory in nature”. It said customers are asking for advice about solutions that may be available to them

Other lenders confirmed to The Irish Times that they are fielding inquiries from customers and requests for working capital from businesses, as well as some requests for moratoriums on loans.

Companies in the hospitality and retail sectors particularly are prominent, sources said.

If loans are reclassified as non-performing, there is a knock-on effect on how much capital lenders have to carry on their balance sheets to compensate for the burden. Irish banks have been under pressure from regulators in recent years to bring their non-performing loan levels down.

Slowing economy

Industry sources said a Europe-wide response was needed on the issue, with many companies and households across the euro zone expected to fall behind on their loan repayments as the public health crisis impacts repayment capacity and slows down the real economy.

The European Banking Federation, a pan-European lobbying organisation, has written to the European Central Bank (ECB), asking for the introduction of a “moratorium tool” for what it describes as “sound borrowers facing challenges related to Covid-19 effects”.

Such a tool would allow banks restructure the payment schedule of borrowers in difficulty, “without detriment to their prudential evaluation”. Multiple Irish sources expressed the hope that the ECB and the single supervisory mechanism (SSM) would show flexibility in the days and weeks ahead.

It comes after the Central Bank told Irish lenders that they must only use funds released by the relaxing of required capital and liquidity buffers to support households and businesses during the coronavirus crisis, not to ramp up dividends or bonuses.

Governor Gabriel Makhlouf said the series of measures announced by the ECB governing council would allow for the “smooth provision” of credit throughout the disruption to the economy caused by the spread of Covid-19.

“The Central Bank of Ireland expects banks to use the positive effects of these measures to support the economy and not increase dividend distributions or variable remunerations,” he said in a statement on Friday.

‘Policy tool’

The bank governor described the pandemic as “a major shock” to economic growth prospects across the world.

Fiscal measures, such as those announced recently by the Government, will be “the primary policy tool” to deal with this type of shock, he added.

But this will be backed up by the monetary policy measures outlined on Thursday by ECB president Christine Lagarde, as well as decisions made by the ECB’s supervisory board that will enable banks to “fully use” their capital and liquidity buffers to cope with the crisis.

However, Mr Makhlouf made no reference to the counter-cyclical buffers in his statement.

The Minister for Finance, Paschal Donohoe, welcomed the Central Bank’s statement as well as separate remarks by the Revenue Commissioners, which he said sought to give “clarity and reassurance” to businesses and households affected by the outbreak of Covid-19.

“I welcome the statements by the Central Bank of Ireland and the Revenue Commissioners this morning outlining the measures that are being introduced at a national and international level to ensure that the negative impact of the fallout from this disease is minimised,” Mr Donohoe said.