S&P upgrades outlook for largest Irish banks’ credit ratings

Agency optimistic Irish lenders can manage fallout from pandemic and Ukraine war

Standard & Poor's has raised its outlook for the credit ratings of Bank of Ireland and AIB as the lenders are poised to benefit from ongoing consolidation of the industry in Ireland and continuing declines in the levels of problem loans.

S&P, which has raised its outlook for the two banks to stable from negative, added that “potential asset quality problems” that may yet emerge from the pandemic and Ukraine war should be “manageable”, given the Republic’s “solid” growth prospects, low private sector indebtedness and the stricter lending standards that have been applied since the financial crisis.

The firm continues to rate the creditworthiness of AIB and Bank of Ireland at BBB-, which is the lowest in what it considers investment grade levels.

“The Russia-Ukraine conflict’s impact on the economy and some residual tail risks from the pandemic result in some risk to our base-case scenario,” S&P said. “However, we think economic growth will continue in Ireland and any potential negative impact on the banking system will be manageable.

“We forecast that the underlying domestic economy will grow by about 4 per cent over the next two years.”

Bank of Ireland, AIB and smaller rival Permanent TSB are poised to carve up the loan books of Ulster Bank and KBC Bank Ireland between them as the two overseas-owned lenders retreat from the market, boosting the profit returns of the remaining players in the market as loan growth and official interest rates remain low.

Focus on costs

S&P also highlighted that Irish banks’ costs remain elevated, at about 70 per cent of income, compared with European rivals. A cost-income ratio of about 50 per cent is seen as the holy grail for banks.

“We think Irish banks will remain focused on operational improvement and further digital transformation, aiming to bring efficiency metrics in line with European peers,” S&P said. “We also think Irish banks are on track to grow their revenue streams after widening their product offering and diversifying revenue sources over the past year by co-operating more closely with insurance companies and stockbrokers.”

AIB acquired Goodbody Stockbrokers last year and is working on a life and pensions joint venture with Canada Life. Bank of Ireland agreed last year to buy stockbroking firm Davy.