There must have been a large sigh of frustration wafting through the corridors of Treasury Building on Grand Canal Street on Monday after ratings agency Moody’s published its outlook report on the banking sector for 2014.

Moody's is taking a "mostly negative" view of the sector for next year and warned that banks in Greece, Cyprus and Ireland were the "most vulnerable" to failing the euro area stress tests that will be conducted in 2014.

Bang goes our chance of an early upgrade of Ireland’s sovereign rating. Moody’s continues to have Ireland as sub-investment grade.

Hard as it has tried, the National Treasury Management Agency (NTMA), which manages our national debt, has not yet been able to persuade Moody's to re-rate the country's bonds.

This despite our pending exit from the EU-IMF bailout programme with a clean break, the positive recent signals on employment and unemployment, the trunk-loads of cash being invested in Irish commercial property at present, strong exchequer returns for November, and Bank of Ireland paying almost €2 billion to the Government last week for its preference shares thanks to fundraising from new and existing investors.

Herd mentality

According to NTMA chief executive John Corrigan, Moody's negative rating on Ireland prohibits most Asian fund managers from investing in Irish sovereign bonds, whether they are minded to or not. This probably tells us something about the herd mentality of some fund managers, but that's another story.

Moody’s view of the European banking sector looks all the more frustrating when you realise it is using data for the year ended 2012.

The Central Bank recently completed balance-sheet assessments and asset-quality reviews for AIB, Bank of Ireland and Permanent TSB.

This work was based on the banks’ balance sheets as of June 30th, 2013, and presumably would have captured some of the improvement in mortgage arrears and house price rises that have emerged this year as the economy improves.

Unfortunately, the full results of the assessments were not published. AIB and Permanent TSB told us they don't require additional capital but little else. Permanent TSB chief executive Jeremy Masding has since confirmed to The Irish Times it has been requested to make additional provisions but declined to quantify the amount.

Bank of Ireland issued a detailed statement with the same core message on capital but it also flagged that the Central Bank wants it to take an additional €1.3 billion provision on its Irish mortgages and commercial loans.

The bank made clear it disagrees with this analysis and said it was in “ongoing” discussions with the regulator on this matter.

On foot of its banking report, I contacted Moody’s to ask about Ireland’s chance of an early re-rating for our sovereign bonds.

The response was that “Moody’s recently changed the outlook on Ireland’s Ba1 rating to stable from negative, and considers factors affecting the country’s creditworthiness on an ongoing basis”.

I asked why the information around the recent balance-sheet assessments were not factored into Moody’s view on Irish banks.

"Moody's used year-end 2012 data in its European banking outlook to ensure consistency in comparing financials of banking systems across Europe," the agency said. "Our European banking outlook also reflects latest developments in European countries and their economies, as well as recent banks' financials and asset performance data, among other factors, which combined have shaped our forward- looking analysis for 2014."

Cautious view

In other words, Moody’s wasn’t blind to the outcome of the recent balance-sheet assessments here or improvements in our economy.

Moody’s isn’t alone in its cautious view of Ireland’s recovery. Here are some snapshots from the Central Bank’s macro financial review, published last week.

On mortgage arrears: “Despite some recent improvement, the scale of mortgage arrears remains a significant threat to financial stability.”

On SME arrears: “The level of distress among small- and medium-enterprise borrowers is particularly acute. This endangers not only the profitability of the banking sector, but also has far-reaching consequences for the viability of corporates and the employment they generate.”

On credit risk: “Credit risk is . . . a key concern for the domestic banking sector. While the coverage ratio, which shows the value of provisions for impaired loans relative to the value of impaired loans, increased in the third quarter of 2013, uncertainties remain about whether banks are sufficiently provisioned to cope with the outstanding stock of distressed loans.

“The long-term viability of the banking sector depends on its ability to return to profitability. There have been some positive funding developments such as a reduction in official sector liquidity support, strongly supported recent debt issuance, and declines in deposit rates, but the overall profile remains fragile.”

These are the views of the Central Bank, which knows more than most about how the banking sector is
performing.

It’s no wonder Moody’s remains sceptical about Ireland and its banks.