Moody’s Investors Service (NYSE: MCO) have lowered the outlook for Ireland’s banking system from positive too stable.
The credit ratings agency said banks’ earnings will come under pressure from low interest rates, with asset risk continuing to fall.
Profitability will decline,” said Moody’s analyst Arif Bekiroglu. “Irish banks’ high reliance on net interest income makes them sensitive to the low interest rate environment. High exposure to low-margin tracker mortgages, rising costs due to increased debt issuance, revenue losses from sales of problem loans, and Brexit uncertainty are further headwinds for profitability.”
Expenses will remain high, as IT costs surge on a move towards digitalization, regulation and pending fines.
The operating environment should remain stable, Moody’s noted, forecasting real GDP growth of 3.2% in 2020 and 3% in 2021. The agency said growth should be supported by rising employment and investment.
Brexit could weigh on GDP, but Moody’s doesn’t expect an “economic shock”.
“Global economic uncertainty increases tail risk due to Ireland’s open economy, which hosts many multinational corporations,” Moody’s added.
The agency continued: “Meanwhile, banks’ asset risks are set to keep falling, as economic growth and low rates support borrowers’ finances, and as banks continue to sell and restructure problem loans. Enhanced risk management and stricter Central Bank of Ireland affordability guidelines should prevent excessive risk taking, holding back new problem-loan formation. Moody’s also expects capital ratios to hold steady, and funding and liquidity to remain strong.”
The performance from the Bank of Ireland (LON: BIRG) however seems to defy the change made on Tuesday.
Bank of Ireland recorded €1.5 billion of net lending growth in the nine-month period, which is 800 million higher than in the same period a year ago.
Bank of Ireland commented that the economic growth in its core markets of Ireland and UK remained “positive”, despite the “ongoing uncertainties” related to the UK’s decision to leave the EU.
Just one week ago, Moodys lowered the UK Banking Sector outlook from stable to negative. It seems that analysts at Moody’s still seem more optimistic on the Irish Banking sector compared to the UK one.
Certainly looking at the slow performance from FTSE100 listed HSBC (LON: HSBA) who have seen a slowdown in trading following an operational overhaul, neither the UK or Irish sector is looking too promising amid political and economic turmoil currently dominating news headlines.
