Commonplace & Poor’s (S&P) moved on Tuesday to decrease its outlook on the credit score scores of AIB, Financial institution of Eire and Everlasting TSB to “negative” because it eyes an increase in unhealthy loan losses as economies grapple globally with the results of the coronavirus disaster.
S&P, one of many world’s three fundamental credit score scores corporations, mentioned that regardless that its “base case” is that an financial restoration will start within the third quarter of this yr, “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 mentioned.
S&P mentioned it expects Irish lenders’ unhealthy loan losses to extend after the trade had seen its profitability boosted in recent times because it launched some provisions that had been taken following the monetary disaster.
‘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 mentioned.
Even underneath this base case, the results of Covid-19 shall be evident lengthy after the disaster 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 financial contraction this yr being adopted by 5.5 per cent progress in 2021. “Even under this base case, the effects of Covid-19 will be evident long after the crisis subsides,” it mentioned.
The scores agency has a BBB- ranking on the holding firms of AIB and Financial institution of Eire, which is the bottom degree of what it considers funding grade. Its Everlasting TSB ranking is three notches decrease. It beforehand had “stable” outlooks on its scores for the lenders.
Properly positionedAnalysts in Irish stockbroking corporations have highlighted that the banks are properly positioned to deal with even worst-case unhealthy loan situations, as they’ve three to 4 instances the extent of fairness capital sitting on their steadiness sheets to soak up shock losses in comparison with their place earlier than the monetary disaster.
“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,” mentioned 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.”
