Ireland's bank system downgraded by S&P

IRELAND’S BANKING system has been downgraded by international credit rating agency Standard & Poor (SP) over concerns that continued weakness in the economy will push up the number of problem loans.

Little more than 12 months ago, Ireland was ranked alongside Canada and Sweden in group one, which includes those countries considered by S&P to have the strongest banking systems in the world.

However, the agency downgraded Ireland’s Banking Industry Country Risk Assessment (Bicra) rating yesterday for the third time since late 2008, leaving Ireland languishing in group four.

This means that the strength of Ireland’s banking system is now ranked on a par with that of Greece. Other countries in group four include Korea, the Czech Republic and Slovakia.

The credit ratings of four individual Irish banks – AIB, Bank of Ireland, Anglo Irish Bank and Ulster Bank – were also cut yesterday by S&P.

Fine Gael’s finance spokesman Richard Bruton claimed the rating cuts reinforced recent reports that the banks’ loan books were “much worse” than the Government suggested when it passed the National Asset Management Agency (Nama) legislation.

“The message from this latest downgrade is that Irish banks will remain in a difficult condition for a long time to come,” Mr Bruton said. Banks would be under pressure to “hoard” their capital and reduce lending.

Yesterday’s downgrade to Ireland’s Bicra rating reflected the fact that the agency expects the economic environment in the banking sector to remain difficult into 2011, which in turn will put pressure on the performance of loans, and will depress the banks’ earnings prospects.

It now estimates that the number of problem loans could reach 15 to 30 per cent of total Irish loans, compared to its previous forecast of 10 to 20 per cent.

If the economic downturn proves deeper or more prolonged than expected, Ireland could find itself in the company of countries such as South Africa and Kuwait in group five, according to S&P’s predictions.

However, Ireland’s ability to borrow is unlikely to be affected by yesterday’s downgrade of its Bicra ranking, according to a spokesman for the National Treasury Management Agency, which manages the State’s debt.

“At this early stage we have completed about one-third of our borrowing programme for the year,” he said.

Ireland’s 10-year bond yield spread relative to the German bund remained stable yesterday at 141 basis points, indicating that the cost of borrowing for Ireland was not affected by the downgrade.

In terms of individual financial institutions, AIB saw its long-term counterparty credit rating lowered by one notch from ‘A’ to ‘A-’. This reflected S&P’s revised view of economic and industry risk in Ireland. More specifically it factored in the expectation that the bank will have to recapitalise as a result of its participation in Nama.

Similarly, Bank of Ireland’s (BoI) credit rating was also lowered from ‘A’ to ‘A-’.

“We have lowered the ratings due to our view that the environment will remain challenging over the medium term, and BoI’s financial profile will be weaker than we had previously expected,” S&P said.

Ulster Bank’s long-term credit rating was downgraded from ‘A+’ to ‘A’, due to expectations that its parent, Royal Bank of Scotland, will remain in a “state of flux” in the medium term. Anglo’s rating was cut from ‘BBB+’ to ‘BBB’.

The ratings of Irish Life & Permanent, KBC Ireland and Barclays Bank Ireland were left unchanged.

S&P also predicted that many of the Irish banks would undergo restructuring over the coming year.