The outlook for Ireland's banking system
remains negative, Moody's Investors Service said in a new Banking System
Outlook published today. The outlook is unchanged since 2008 and
principally reflects the rating agency's view that the Irish banking
system has not yet fully stabilised, despite the removal of large
real-estate portfolios from the banks' balance sheets into the National
Asset Management Agency (NAMA) in 2010 and 2011; and the marginally
positive, but still weak, GDP growth that we expect to continue in 2013.
The system outlook also captures Moody's view that Irish banks will
remain under pressure over the next 12 to 18 months due to ongoing
asset-quality deterioration, more recently stemming from poor
residential mortgage loan performance; their continued, albeit
reducing, dependence on central bank funding; and weak profitability
and internal capital generation.
As noted in "Credit Analysis: Ireland, Government of" (November 14, 2012)
Moody's expects the Irish economy to grow at a slower pace in 2012 and
2013 (at 0.2% and 1.1% respectively), following GDP growth of 1.4% in
2011 [Source: Moody's Sovereign Risk Group]. The country's growth
prospects remain weak due to the fiscal consolidation process, the
ongoing deleveraging in the private sector, and subdued external demand.
Additional factors that will exacerbate the banks' challenging operating
environment and constrain a return to banking stability are the uncertain
economic outlook for key trading partners (especially the UK and the euro
area), and the ongoing euro area crisis.
Moody's expects bank asset quality to remain weak, because it will likely
take the banks several more years to fully resolve the legacy issues from
the crisis. Although the vast bulk of the land and development loans were
transferred to NAMA, arrears remain high on the remaining property
exposures. The asset quality of the banks' residential mortgage books
will also remain very weak, although Moody's recognises that increases in
arrears are beginning to slow.
Ongoing liquidity support from the ECB remains vital for the banks. The
removal of the extraordinary guarantee (ELG) for deposits over EUR100,000,
expected in H1 2013, will provide further evidence of the system's
recovery process and although the removal of the ELG could lead to some
deposit outflows, Moody's does not expect that these will be
substantial. In addition, Moody's says that profitability across the
sector is likely to remain negative or low during the next few years,
further supporting the negative outlook, due to sustained high levels
of provisions; high funding costs; lower top-line revenues due to
muted demand and low interest rates; and the high proportion of low
yielding "tracker mortgages" tied to ECB rates.
