Banks face new woes as restructuring still weighs

BREXIT, persistently low interest rates and comparatively lacklustre borrowing rates continue to hamper the growth prospects of the Irish banks, according to Standard & Poor’s.

While the loan books of both AIB and Bank of Ireland are expected to expand this year, after almost a decade of contraction, S&P claimed the time spent on addressing the past has left the sector facing new challenges.

In a report headlined ‘Merely a win, no grand slam glory for Irish banks’ – a reference to Ireland’s Six Nations victory – S&P said the State’s lenders need to “adapt to the changed world of banking that has emerged while they were tied up dealing with their past mistakes”.

According to S&P, these challenges include “more demanding requirements from customers and regulators, and the need for an enhanced digital capacity”.

It added that the persistent squeeze on margins means banks will “have to work extra hard to better adapt their cost base”.

Earlier this month, Permanent TSB reported its first profit in a decade – but S&P predicts the shrivelled balance sheets across the sector make a “material improvement in earnings” for all Irish lenders “difficult to achieve”.

The bearish stance comes as AIB and PTSB ramp up efforts to reduce their stacks of non-performing loans with both banks in the midst of large-scale loan portfolio sales.

The agency claimed net interest margins have risen since 2012 across the sector, largely on the back of “sharp reductions in the cost of funds”.

But S&P expects sparse net-interest-margin growth over the next few years given the need for MREL (minimum requirement for own funds and eligible liabilities) issuance and the likely absence of any strong “pick-up in interest earnings assets”.