S&P lowers outlook on Irish banks’ ratings to negative

Standard & Poor's (S&P) moved on Tuesday to lower its outlook on the credit ratings of AIB, Bank of Ireland and Permanent TSB to "negative" as it eyes a rise in bad loan losses as economies grapple globally with the effects of the coronavirus crisis.

S&P, one of the world’s three main credit ratings firms, said that even though its “base case” is that an economic recovery will begin in the third quarter of this year, “we expect Irish banks’ earnings, asset quality and, in some cases, capitalisation, to weaken meaningfully through year-end 2020 and into 2021”.

“We expect the Irish economy to contract in 2020 and recover only gradually starting from 2021. However, despite the anticipated recovery, we believe that there will be significant pressure on Irish banks’ operating environment and earnings prospects over the next two to three years,” S&P said.

S&P said it expects Irish lenders’ bad loan losses to increase after the industry had seen its profitability boosted in recent years as it released some provisions that had been taken following the financial crisis.

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‘Key themes’

“Until the start of March, Irish banks were fully engaged with the same two key themes that have been paramount in recent years: harmonising balance sheet strength with solid investor returns, and identifying how to refine business and operating models in the face of the looming risks and opportunities of the digital era,” S&P said.

Even under this base case, the effects of Covid-19 will be evident long after the crisis subsides

"For the short term at least, the Covid-19 pandemic has changed (almost) everything. In addition to the human cost, large parts of economic activity in Ireland and much of the rest of Europe have ground to a halt. With isolation strategies still very much in force, our economists expect a sharp economic contraction in second-quarter 2020, followed by a rebound starting in the third quarter."

S&P sees 5.5 per cent economic contraction this year being followed by 5.5 per cent growth in 2021. “Even under this base case, the effects of Covid-19 will be evident long after the crisis subsides,” it said.

The ratings firm has a BBB- rating on the holding companies of AIB and Bank of Ireland, which is the lowest level of what it considers investment grade. Its Permanent TSB rating is three notches lower. It previously had “stable” outlooks on its ratings for the lenders.

Well positioned

Analysts in Irish stockbroking firms have highlighted that the banks are well positioned to cope with even worst-case bad loan scenarios, as they have three to four times the level of equity capital sitting on their balance sheets to absorb shock losses compared to their position before the financial crisis.

“However, while we expect banks in Ireland and across Europe to remain resilient in the face of this short-term cyclical shock, we expect that it will have a meaningful impact on asset quality, revenue, profitability and, potentially, capitalisation,” said S&P.

“We expect very few of these negative trends to be strongly evident in Irish banks’ first-quarter results, but consider that they would become increasingly evident through the course of 2020 and persist into 2021. Banks’ asset quality will be key to this outcome.”