Irish backstop –
Moody’s, the debt ratings agency, has lowered its outlook on the Irish banking system to stable from positive, warning that lenders’ profits are set to decline amid ongoing ultra-low central bank interest rates.
While Irish lenders’ levels of non-performing loans have come down significantly in recent years, they remain “sizeable”, it said.
Moody’s noted that the UK’s planned departure from the EU created “economic uncertainty” for Ireland, but this should have a “modest” impact on the State’s banks as their capital reserves levels were solid and their general funding bases were largely based on deposits.
“Irish banks’ high reliance on net interest income makes them sensitive to low interest rates,” Moody’s said.
“High exposure to low-margin tracker mortgages, rising costs due to increased debt issuance, losses from [problem loan] sales and Brexit uncertainty are further headwinds. Expenses will remain high due to IT costs, regulation and pending fines.”
Irish banking shares have been volatile for much of 2019 as investors fret about the impact of lower-for-longer European Central Bank rates on their income and the expected fallout from Brexit on both the UK and Irish economies.
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The Iseq financials index is off 9.1 per cent so far this year, albeit having rallied from its lows in recent months on rising expectations that UK prime minister Boris Johnson, who is leading in the polls ahead of a general election on Thursday, will manage to get his EU withdrawal deal through parliament.
Irish lenders have cut their average non-performing loans ratio from a peak of 30 per cent in 2013 to around 7 per cent at the end of June, according to Central Bank data. However, the figure remains double the EU average of 3.5 per cent that regulators are pressing banks to achieve.
Moody’s sees the Irish economy, measured by gross domestic product, growing by 5.2 per cent this year, before decelerating to 3.2 per cent in 2020 and 3 per cent for following year.
“This will contain the risk of overheating in the domestic economy, where unemployment has fallen below 5 per cent and wage growth has picked up in the past year despite modest inflationary pressure.
“Ireland’s recent robust economic performance has been driven by growth in investment and private consumption. Export growth has also been strong, although this is now levelling off due to uncertainties over Brexit and global trade tension.”
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