Central Bank cautions banks writing back problem loans

The Central Bank has urged banks to adopt caution when writing back problem loans due to the improving property market, as it also warns that the forthcoming maturity of a large proportion of bank debt could impact negatively on bank profitability.

At the publication of the Central Bank’s second Macro Financial Review for 2014, the Central Bank urged banks “to be cautious” when it comes to releasing loss provisions.

While the regulator is not prescriptive on the approach that banks should take to provisioning, it would like them to take a cautious approach when drawing conclusions on the basis of house prices.

Earlier this year for example Ulster Bank released provisions of the order of £300m, and noted that the potential exists for future releases in future.

Another risk to the banking sector identified in the report is the fact that “a large proportion” of bank debt is due to mature in the first quarter of 2015.

“A rise in the cost of funding could impact negatively on net-interest margins and on bank profitability,” the report states, although the regulator noted that it “wouldn’t overplay” the extent of this risk.

The level of debt maturing is also a factor of the maturity profile of domestic bank’s funding which remains weighted heavily to the short term, with over half of all funding having a maturity of less than one month. While this reflects the growing relative share of customer deposits, it nonetheless “leaves institutions susceptible to refinancing risk and changes in sentiment”, the Central Bank said, adding that lengthening the term of loans “remains a key challenge for the domestic banks”.

Of “particular concern” to the Central Bank, was the lack of progress on imparied buy-to-let mortgage loans and the continuing growth in very long-term mortgage arrears (of 720 days and over).

Property market

On the residential property market, the report notes that the Central Bank’s proposed tools on mortgage lending are not designed to target house prices, but rather to strengthen the resilience of the economy and to prevent a future house price spiral. In its report, the Central Bank noted that the proportion of lending at loan-to-values of between 80-95 per cent is “high” when compared with the beginning of the last decade and with international and regulatory standards. The Central Bank noted that the proportion of lending at loan-to-values of between 80-95 per cent is “high” when compared with the beginning of the last decade and with international and regulatory standards.

About half of residential property transactions continue to be financed with cash, although the Central Bank expects this to diminish as the level of activity in the market increases.

Consumer finance

The report also signals that the downwards trend in deposits may be abating, with the Central Bank noting that "the rate of change in deposit rates" has slowed.

“This could be a timing issue or a sign that banks are finding it difficult to increase their deposit base at lower interest rates”.

The number of credit unions operating in Ireland continues to decrease, and the regulator would expect to see this trend of consolidation continue into 2015.