Bank shares advance after upgrades by Moody’s

Banks led advancing Irish shares in early trade after Moody’s upgraded its deposit ratings for the country’s three surviving bailed-out banks as the quality of their loans and earnings continue to improve.

Bank of Ireland rose 1.1 per cent to 18.8 cent, while Permanent TSB edged 0.2 per cent higher to €1.89. AIB, which is 99.8 per cent State-owned, advanced 7.2 per cent.

Three hours after European markets had closed, Moody’s upgraded its stance on Bank of Ireland’s deposits by one level to Baa1, which is seven levels below its top Aaa rating.

It also raised its view on AIB’s deposits by one notch, to Baa2 and gave its rating a positive outlook.

Moody’s moved its Permanent TSB rating by one level, to Ba3, which is considered sub-investment grade.

Ryan McGrath, head of fixed-income strategy at Cantor Fitzgerald in Dublin, described the development as "positive news for Irish banks".

Competitive prices

“The rating agency believes that Irish banks will continue to maintain their access to the market at competitive prices during 2016 and will potentially increase their debt issuance. It did note that private sector debt remains very high compared to other European countries but is declining rapidly.”

Philip O'Sullivan, an economist with Investec in Dublin, said he was not surprised by the upgrades "given the well documented progress the main lenders here have been marking, nonetheless they are a welcome development at the margin".

"The main driver for the rating actions is the improvement in credit conditions in the banking system following the rapid and material deleveraging of the private sector, as well as stronger funding conditions as most banks have regained the ability to issue different debt instruments," said Laurie Mayers, an associate managing director at Moody's.

Capital metrics

“The rating actions also incorporate the strengthening of the banks’ credit fundamentals, especially the progress they have made in reducing non-performing assets, improving the quality of earnings and strengthening their capital metrics.”

Moody’s, which took the dimmest view among major ratings agencies of the Irish sovereign during the financial crisis, upgraded its stance on Ireland’s long-term ratings in May to A3. It had cut its rating during the downturn to sub-investment grade or junk.

While Irish banks’ level of soured loans have been falling in recent years, they still remain among the highest in Europe. This was underscored by a report from the European Central Bank last week which showed that the country’s lenders had more than €50 billion of non-performing loans at the end of last year, equivalent to 19 per cent of total loans, and compared to an average of 7 per cent for banks regulated by the ECB’s bank supervisory arm.