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Irish banks face make or break 6 months

Thursday, November 01 10:17:45

Irish banking faces a crucial period over the coming six months with the expected publication of the next round of stress tests (PCAR 2013) and the beginning of the new insolvency laws, according to a new report from Goodbody.

The report, entitled Stand and Delever, looks at these issues in the context of Ireland's ongoing household deleveraging and its impact on the economy and the banks.

In the report, written by Dermot O'Leary, Chief Economist and Eamonn Hughes, Head of Research at the brokers it says that mortgage arrears will peak in the first half of 2013 but the banks must now enact viable solutions for distressed borrowers beyond the short-term forbearance techniques used to date.

They say banks must end the 'extend and pretend' period and debt write-off must be part of the solution.

"The faster this occurs, the faster the debt burden on the whole economy can be reduced."

The report says that personal Insolvency Arrangements (PIAs) have taken too long to come into effect but should act as an incentive for constructive engagement with distressed borrowers, providing the opportunity to move on from the policy of forbearance and speed up the process of crystallising the losses that the banks have already provisioned for and have been capitalised to deal with.

"However, there is the threat of 'unknown behavioural changes' it may bring. In this regard, the process may encourage a "gaming" of the system by under-reporting of income or assets. We would also have fears about the speed at which the whole process and the resources within the banks to deal with it."

Goodbody estimates that the covered banks will incur domestic mortgage losses of 9.2pc over 2011-13 but mortgage loan losses will only peter out slowly after 2013. Goodbody also says that the banks will incur the adverse PCAR loan loss estimates over 2011-2013 period but continued mortgage losses beyond 2013 are less of a risk to capital ratios and Goodbody does not anticipate that there will be further capital calls following the release of PCAR 2013 stress tests. However Basel III will be a bigger medium term problem for the pillar banks, likely requiring regulatory forbearance to meet currently scheduled timeframes.

Irish household debt remains over 200pc of disposable income (high by international standards) and the sustainability of this debt burden will depend on the evolution of ECB interest rates. As a comparison, the US, the UK and Spain, which have all had housing market booms and busts in recent years, have significantly lower household debt levels. With household net wealth of 740pc of disposable income in 2006, Irish households were among the wealthiest in the developed world. However, 60pc of household assets at that time were residential property. As a result of the anticipated 60pc fall in property prices, property wealth is forecast to fall by E270bn, and lead to a decline in net household wealth to 456pc of disposable income by the end of 2013.

"This puts Ireland closer to the bottom of the household net wealth league table. Irish households will remain vulnerable to rate rises & coupled with austerity measures, consumer spending to remain under pressure."