Fitch lowers Bank of Ireland and AIB outlooks to negative

Fitch, a leading credit ratings agency, has lowered its outlook for creditworthiness of AIB and Bank of Ireland to negative amid fears that temporary payment breaks being offered by lenders to customers affected by Covid-19 will create bigger problems further down the road.

Fitch previously had a ‘stable’ outlook on both banks.

“While the ultimate economic and financial market implications of the coronavirus pandemic are unclear, Fitch considers the risks to the banks’ credit profiles to be clearly skewed to the downside, which has driven today’s rating actions,” it said.

Fitch's downside scenario for the euro zone is a sharp economic contraction this year, with a drop in gross domestic product (GDP) "also highly likely" in Ireland, before recovering in 2021.

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“Mortgage loan relief programmes will have negative first-order implications for banks unless temporary in nature, but compensation by the state for direct Covid-19 related losses appears to be approved by EU state-aid authorities, so it is probable that the full financial impact for banks will ultimately be mitigated,” Fitch said.

“Nonetheless, we expect asset quality to weaken relative to our previous expectations and for earnings challenges to intensify due to weaker business volumes and rising loan impairment charges.”

Fitch says the large Irish banks are more vulnerable to small- to medium-sized businesses (SMEs) experiencing distress and drawing down on overdrafts and credit facilities. The banks are also sensitive to a more permanent rise in unemployment levels, it said.