The two largest Irish banks are likely to turn profitable in 2014 for the first time since 2009, Fitch Ratings says. However, capital ratios are likely to fall further for 2013 due to losses which could be exacerbated following the Central Bank's balance sheet assessment.
Initial indications from the central bank's review suggest that further impairment charges could be taken by the banks in 2013, so they are likely to report losses. Combined with higher risk weight requirements, the impact on capital ratios could be significant. However, this should place the banks in a better position to be sustainably profitable in the medium term, ahead of the ECB's asset quality review (AQR) and stress test in 2014.
The two largest banks, BOI and AIB, are on a path to profitability. A significant reduction in funding costs since 2H12 has helped earnings. This was mainly from lower deposit pricing and the removal of fees when the Irish Bank Eligible Liabilities Guarantee scheme expired at end-1Q13. Fitch expects loan impairment charges to reduce gradually next year as the flow of new impaired loans slows and house prices stabilise. Fitch believes BOI is likely to report profits in 2014 and AIB to achieve monthly profits by 2H14.
But there will still be challenges for asset quality. A weak commercial property sector and regulatory pressure to resolve a high proportion of forborne loans and long-term arrears could derail improvements to asset quality.
Applying 2019 Basel III rules, which exclude perpetual preference shares received as part of the state recapitalisation process, Fitch estimates that Common Equity Tier 1 (CET1) ratios would reduce to 5 per cent in BOI and 4 per cent in AIB at end-June 2013, which are weak in view of the high levels of net impaired loans to equity. This underscores the need for these banks to be capital generative through profitability before their credit profiles can stabilise on a sustainable basis. BOI has begun to make preparations to reduce its reliance on the perpetual preference shares, but for AIB, Fitch believes this will happen later and could prove more difficult.
Full press release
Fitch Ratings' Report: 2014: Outlook: Irish Banks (registration required)
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