Tuesday, January 29 10:50:16
The outlook for Ireland's banking system remains negative, according to Moody's Investors Service in a new Banking System Outlook published today.
This is unchanged since 2008 and principally reflects the rating agency's view that the Irish banking system has not yet fully stabilised.
This is despite the removal of large property 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 the ratings agency expects 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.
This, it says, is due to ongoing asset-quality deterioration, more recently stemming from poor residential mortgage loan performance and their continued, albeit reducing, dependence on central bank funding as well as weak profitability and internal capital generation.
Moody's expects the Irish economy to grow at a slower pace in 2012 and 2013 (at 0.2pc and 1.1pc respectively), following GDP growth of 1.4pc in 2011.
It said Ireland'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, the report said.
Ongoing liquidity support from the ECB remains vital for the banks, it added.
"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 (1) sustained high levels of provisions; (2) high funding costs; (3) lower top-line revenues due to muted demand and low interest rates; and (4) the high proportion of low yielding "tracker mortgages" tied to ECB rates."