Post-bailout report takes fizz out of banks’ bullishness

European Commission warns on mortgage arrears

On Monday, the European Commission published its latest post-bailout programme surveillance report on Ireland, with plenty of commentary on the banks. Photograph: The Irish Times
On Monday, the European Commission published its latest post-bailout programme surveillance report on Ireland, with plenty of commentary on the banks. Photograph: The Irish Times

With various political parties promising all sorts of tax concessions after the general election on foot of improved exchequer finances, we’re starting to feel good about ourselves again.

Heck, we're even beginning to think more positively about our domestic banks, helped last year by the return of capital to the State by Permanent TSB and AIB and talk of the National Asset Management Agency achieving a profit (if you can call it that) of €1.75 billion on its wind up.

An even bigger cheque is anticipated from AIB this year via a stock-market flotation.

In an interview with me last week, AIB’s chief executive, Bernard Byrne, cited strong investor interest in our economic recovery with AIB seen as a good “proxy” for Ireland.

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On Monday, the European Commission published its latest post-bailout programme surveillance report on Ireland, with plenty of commentary on the banks.

Much of it was positive but it also highlighted some of the challenges and potential pitfalls ahead. They don’t make for great reading.

It noted the improving bank solvency here seven years on from the crash but said that, in the context of low lending volumes and the persistent low-interest-rate environment, the sustainability of banks’ profitability over the medium term should be “closely monitored”.

The improved profitability of Irish banks over the past year or so has been supported by a high level of loan loss provision write-backs. The Commission said we should “continue to carefully monitor banks collateral valuations and make sure banks are not prematurely writing back provisions and lowering provision coverage ratios”.

Mortgage arrears

It said further efforts were required to reduce mortgage arrears. Some 86.6 per cent of restructured mortgages were meeting the terms of their new arrangements as of September 2015, suggesting more than one in seven were not. And it noted that almost 40 per cent of concluded arrangements and the majority of long-term mortgage arrears involve a potential loss of ownership. It’s a sobering statistic.

The commission said recent reforms aimed at streamlining court proceedings were expected to result in a reduction in the number of adjournments. “However, these rules will not apply to the more than 12,000 repossession cases already in the pipeline.”

In addition, it wants the authorities to “remain vigilant” in relation to the commercial real estate (CRE) sector, which was largely dependent on debt funding from banks in the run-up to the crash in 2008.It highlighted how 45.2 per cent of all CRE loans were impaired at the end of September 2015, while SME/ corporate loans had a non-performing ratio of about 16.9 per cent.

Arrears of more than 90 days

The balance of mortgages in arrears of more than 90 days represented 15 per cent of total mortgages held by banks and non-banks in Ireland in the third quarter of last year. This was down from a high of 19.9 per cent in the third quarter of 2013 but is still very high.

In September 2015, mortgage accounts in long-term arrears declined for the first time. However, as a proportion of the total balance, long-term arrears increased to 64 per cent.

Non-banks held a significant proportion of these arrears at 24.8 per cent and it called for these groups to be “carefully monitored”.

The commission also noted how repossessions continued to increase from a low base, but remain modest when compared with the number of impaired mortgage accounts.

For example, there were 2,682 repossessed properties with lenders at the end of September, compared with more than 52,000 long- term mortgage arrears accounts.

The report highlighted how interest rates here are higher than the euro zone average. “In September 2015, banks’ average small corporate loan interest rate for new business was higher than the euro-area average, at 5.7 per cent compared to 3.2 per cent respectively,” the report said.

For mortgages, the average bank floating interest rate was more than 4 per cent at the end of September, compared with 2.1 per cent in the euro area. This will give oxygen to the view that Irish bank interest rates are a rip-off.

The picture painted by the commission is of a lot done but an awful lot more to do.

Happy New Year to you, too.

Twitter: @CiaranHancock1