S&P downgrades Irish banking system again

THE ANGLO Irish Bank directors’ loans affair has prompted credit ratings agency Standard&Poor’s (S&P) to downgrade the Irish banking system for the second time in four months.

SP yesterday dropped Irish banks from its second-ranked group of countries to its third, citing in particular the “reputational fallout from the events at Anglo Irish Bank” and “weakened investor confidence in the framework of bank regulation”. It said the risks to the Irish banking system had increased in recent months as a result.

The ratings agency previously lowered Ireland’s Banking Industry Country Risk Assessment (Bicra) from group one, the highest rated group, to group two in December, citing the weak property market and deteriorating economic outlook.

However, yesterday it decided to downgrade Ireland to group three following the Anglo scandal, in which former chairman Seán FitzPatrick concealed loans of up to €122 million by transferring them temporarily off the books.

Other countries with banking systems in S&P’s group three include Portugal, Austria and Japan.

The agency said a further downgrading would “most likely be driven by significantly weaker long-term prospects for the Irish economy and could pressure our ratings on the individual Irish banks”.

Countries with banking systems in group four include Greece, Israel, the Czech Republic, Slovakia and Slovenia.

“In our opinion, the reputation of Irish banking with the public and the investor community has suffered in recent months,” said S&P analysts. “Overall, we consider that the regulator has shown some reluctance to intervene, particularly in Anglo’s case.”

The analysts said they considered the dominant market positions of AIB and Bank of Ireland to be “maintained and perhaps even strengthened” despite reduced public confidence in the banking sector.

“We expect some competitors, particularly those that are foreign owned, will likely reduce their lending over the coming year and that AIB and Bank of Ireland could grasp this opportunity by refocusing their lending capacity from their overseas to their domestic franchises.”

However, SP concluded that all Irish banks faced “major near-term challenges” from the economic downturn, which will lead to higher percentages of bad loans and low or even negative net lending. Public and Government expectations of the banks “leave only modest flexibility to materially reduce headcount if . . . needed”, it added.

The ratings agency said it considered Government plans to create a new central banking commission with increased powers a “positive development”, but that it would take time to take effect.

It is a year since Anglo’s share price plunged as a result of rumours that commercial depositors and institutional investors were making largescale withdrawals. On St Patrick’s Day 2008, its share price fell 15 per cent, leading to an investigation into “unusual trading patterns” by the Financial Regulator.