The outlook for the Irish banking sector has been downgraded from positive to stable because of the potential impact of Brexit by one of the three main credit ratings agencies.
Fitch made a marginal downward revision to its 2017 outlook because “the UK’s vote to leave the EU increases uncertainty for the operating environment”.
“Ireland’s economic recovery should remain strong in the short term, underpinning the stable sector outlook. The rating outlook on Irish banks is positive, reflecting our expectation that improving bank credit fundamentals should outweigh these challenges,” Fitch said in a report released yesterday.
The Irish banks fell to sub-investment status in the aftermath of the financial crisis. Bank of Ireland, AIB and Ulster Bank are covered in the report. Fitch’s ratings remained positive for Bank of Ireland and AIB and stable for Ulster Bank.
Fitch said Brexit would be negative for Ireland’s long-term economic and political prospects, putting pressure on GDP growth and creating uncertainty around relations with Northern Ireland. The extent of any weakening of the bank operating environment, triggered by a slowdown of GDP growth in the UK, sterling depreciation or potential trade barriers, would become clear only as EU-UK negotiations developed, the agency said.
“A deterioration in the operating environment could slow any improvements in the asset quality and capitalisation of Irish banks,” the report said.
The three Irish banks returned to profitability in 2014 as the property market rebounded after a 60 per cent drop in residential property prices between 2008 and 2012.
Fitch noted that the asset quality of Irish banks was linked to the performance of the real-estate sector.
“House prices have increased in recent years, although the introduction of loan-to-value and loan-to-income limits by the Central Bank in 2015 did slow the market. We expect residential property prices to grow [between] 3 per cent [and] 4 per cent for 2017, supported by continued housing shortages and an improving economy.”
Strong demand from investors for Irish commercial property and increasing asset prices have enabled banks to swiftly dispose of large amounts of their problem loans, Fitch said.
“We expect asset quality to continue to improve in 2017 due to deleveraging and restructuring and a low inflow of new impaired loans; this will be supported by low interest rates, falling unemployment and tight underwriting standards.”
Bank of Ireland and AIB were ranked close to last among Eurozone banks in the ECB’s stress tests in the summer, although both banks are holding sufficient regulatory capital.
Fitch warned that “large, albeit reducing, stocks of unreserved problem assets . . . leave Irish banks’ capitalisation more exposed if the operating environment deteriorates”.
“Further improvements in asset quality and capitalisation would improve the banks’ risk profiles and may result in ratings upgrades; this is why the ratings outlook for Irish banks is positive. Although uncertainty as regards the operating environment has increased, we believe credit fundamentals will improve in 2017 as the sector continues to work through its backlog of impaired loans.”