WEAKENED LENDING standards during the boom times left Irish banks exposed to commercial property projects that were only viable in the most benign of market conditions, a new report has said.
In a special report into the exposure of banks to European commercial property, international debt rating agency Fitch noted that the three largest Irish banks all showed an impairment rate of 16 per cent on their property and construction loan books earlier this year.
Impairments may have deteriorated further in the meantime as the underlying market has worsened, it said. Data published by SCS/IPD suggests that commercial property prices have fallen by nearly 50 per cent from the peak in the third quarter of 2007.
“Irish banks were among the first to suffer in the current downturn as their exposure to commercial property generally, and development finance in particular, took its toll,” Fitch said.
It said that over the last decade, commercial property loans came to represent a significant proportion of total lending at the main Irish banks and were particularly high relative to the equity of these institutions.
At the end of September, commercial property loans represented just over a quarter of Bank of Ireland’s total loans, while AIB’s exposure stood at 37 per cent of total loans at the end of June.
Meanwhile, 83 per cent of the total loan book at nationalised bank Anglo Irish related to commercial property at the end of March. Furthermore, Anglo’s exposure to these types of loans as a percentage of its tier one capital stood at 1,806 per cent.
“The scale of the portfolios relative to equity means that the severity has been significantly greater at Anglo Irish,” the report noted. “The extent of the problem has been a key driver behind the creation of Nama.”
Fitch warned that it may downgrade the ratings of European banks that it considered most exposed to “downside risk” from continued adverse market developments. However, many banks that are heavily exposed to commercial property already have low ratings from the agency, so the number of negative ratings actions taken by Fitch may be limited.
The report also shows Ireland has had a greater reliance on the construction and development sector than any of its western European counterparts other than Spain.
