Standard&Poor’s retains positive view of Irish banks despite Brexit

Global ratings agency Standard & Poor's has said the UK's decision to leave the European Union will "likely be negative" for the Irish economy but has nonetheless retained its "positive" rating on both AIB and Bank of Ireland.

“This reflects our base-case scenario that Brexit may slow the pace of recovery and result in an uptick in credit losses in 2017, but will not fundamentally alter the banking system’s path to a more sustainable credit profile,” S&P said.

S&P affirmed its outlook on AIB and Bank of Ireland as "positive" with Permanent TSB, which is 75 per cent State owned, as "stable".

The agency said the affirmations reflected its expectation that Ireland’s macroeconomic recovery would remain “largely supportive” of banking system profitability despite the uncertainty over Brexit, a prolonged low interest rate environment, and the overhang of legacy issues.

“Absent Brexit, our baseline expectation was that Ireland would record real GDP growth of 3 to 4 per cent annually over the next three years and unemployment would decline further to around 7.5 per cent by 2017,” it said.

“Although the negative effects of Brexit are uncertain at this early stage, in our view, it is reasonable to assume that real GDP growth will be modestly lower than our central expectation before the referendum.”

Following the referendum, S&P revised down its 2017 growth forecast to 3.2 per cent from 3.8 per cent.

House prices

In terms of house prices, S&P noted that nationally they rose by 6.6 per cent in the 12 months to the end of June 2016. “Although house price increases have moderated in the past few months, in part due to the central bank’s macroprudential measures, we expect the gap between demand and supply of new housing to persist.

“Against this favourable backdrop, we expect credit losses to remain exceptionally low. This will be due to a combination of further provision releases (albeit not to the same extent as in 2015) and declining inflows into new defaults. Low interest rates will also support affordability.”

Notwithstanding low loan losses, S&P said the structural supply shortages in the housing market due to low building activity, low levels of mortgage demand, and overall muted credit growth suggest that the unwinding of pre-crisis economic imbalances was still a “work-in-progress”.