Funding costs and trackers will hit bank profits, warns Moody’s

THE profitability of Irish banks is set to decline in coming years as their funding costs rise and lending to SMEs remains constrained, ratings agency Moody’s has warned.

It said that a remaining and “sizeable” exposure to tracker mortgages will also continue to weigh on their bottom lines.

The report from Moody’s is bad news for the State, which retains big shares in the banks. It has a 71pc stake in AIB after offloading a 28pc portion in 2017, a 75pc stake in Permanent TSB, and a 14pc share of Bank of Ireland.

“We believe the government will continue to play an important role in the Irish banking system, although we expect that it will seek to sell some of its holding in the three banks if market conditions allow,” noted Moody’s yesterday.

The agency has also downgraded the Irish banking system to ‘stable’ from ‘positive’, citing the pressure on earnings even as asset risks decline.

Moody’s said that the UK’s exit from the European Union next month creates economic uncertainty for Ireland, but that the impact on Irish banks is likely to be “modest”.

“Irish banks’ problem loan burden has fallen, but remains sizeable,” noted Moody’s vice president and senior analyst Arif Bekiroglu in his report.

Irish banks’ problem loans had fallen to 8pc of their gross loans at end of June 2019 from 17.5pc at the end of 2015, but were still above the euro area average of 4.5pc, he noted.

“We expect further de-risking as economic growth and low rates support borrowers’ finances, and as banks continue to sell and restructure problem loans,” Mr Bekiroglu said. “Enhanced risk management and stricter Central Bank of Ireland affordability guidelines should hold back new problem loan formation.”

Last week, the Central Bank said it’s not changing current mortgage lending rules.

The rules put a limit on mortgages of 3.5 times’ borrowers’ income, while firsttime buyers must have a 10pc deposit, and movers 20pc.

The Central Bank, led by governor Gabriel Makhlouf, said the rules have been “effective in strengthening borrower and lender resilience and limiting the potential for an adverse credit-house price spiral to emerge”.

The Irish household sector’s debt-to-disposable income ratio was 123pc as of year-end 2018, down significantly from 154pc in 2015, but still above the euro area average of 94pc, noted Moody’s.

Moody’s has predicted that Ireland’s real gross domestic product (GDP) will rise by 5.9pc this year. Mr Bekiroglu added that slower GDP growth over the next two years – at 3.2pc next year and 3pc in 2021 – will help prevent the domestic economy from overheating.

“This will contain the risk of overheating in the domestic economy, where unemployment has fallen below 5pc and wage growth has picked up in the last year, despite modest inflationary pressure,” said Mr Bekiroglu.

The agency has also downgraded the Irish banking system to ‘stable’ from ‘positive’