S&P downgrades banking system


Ratings agency Standard and Poor's (S&P) has downgraded the Irish banking system for this third time in just over a year.

S&P dropped Irish banks from its third-ranked group of countries to its fourth, citing a rising industry risk and the belief that the economic environment will remain challenging for most of 2010.

"We expect that a difficult economic environment for an extended period, in the context of the relatively high leverage in the Irish economy and rising industry risk, will exert significant pressure on Irish banks' asset quality and earnings," S&P said in a statement today.

Banking systems ranking similarly to Ireland in Group 4 include Korea, the Czech Republic, and Slovakia.

The agency lowered Ireland’s Banking Industry Country Risk Assessment (Bicra) from group one, the highest rated group, to group two in December 2008, and further downgraded the system in March last year.

It also reduced its rating on AIB to A- with a negative outlook. "The negative outlook reflects our view that the quantum and timing of equity raised through recapitalisation may not be sufficient to support an 'A-' rating, combined with our expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment," said S&P credit analyst Claire Curtin.

The agency said it expected the Irish government would remain "highly supportive" of AIB, and that its core Irish banking franchise would remain intact.

Bank of Ireland's rating was also lowered to A-, with a stable outlook. The agency said the bank would benefit materially from the government's Nama plan, under which it would transfer up to €16 billion of its higher risk property- and construction-related loans.

"We expect this move to reduce uncertainty about future credit losses and improve BOI's liquidity," S&P said in a statement. " However, it will likely also trigger substantial realised losses, impairing capital. We expect that BOI will subsequently raise equity capital. Potential sources include liability management exercises, existing shareholders, and the Irish government."

Ulster Bank was also downgraded to A, with a stable outlook, while Anglo Irish saw its long-term rating lowered to BBB. Anglo is unlikely to attain a BBB+ long-term counterparty credit rating due to a narrow business profile and modest financial profile, the agency said.