International ratings agency Moody's has reaffirmed a stable outlook for Irish banks saying asset quality remains sound, but warns that a sharp rise in interest rates or unemployment would be a threat.
In a new report, Moody's says its stable rating outlook for the Irish banks reflects the ongoing strong operating performance of Irish banks and building societies in addition to robust domestic market shares.
It is also underpinned by the continued buoyancy of the Irish economy, it says.
"Irish banking institutions currently operate in a more normalised economic growth environment than was the case in the mid- to late 1990s, when economic growth was very strong. Nevertheless, profitability remains robust, despite the overall contraction in net interest margins and upward wage pressure," says the report's author, Ms Fidelma Mannion.
Moody's points to challenges for those institutions that need to manage the earnings accruing from their respective life insurance operations, given the impact of volatility in global equity markets on embedded values and asset management fees. In addition, the rating agency notes that the future adoption of International Financial Reporting Standards (IFRS) by Irish banks generally is likely to result in a measure of income volatility.
It states that while a significant proportion of bank lending portfolios are secured against residential mortgages, which helps to mitigate the general risks, it remains cautious about rapid growth in lending. "Rapid loan growth occurring during a comparatively benign economic period has resulted in relatively unseasoned loan portfolios," Ms Mannion says.
While the rating agency does not anticipate a significant increase in Ireland's unemployment or interest rates, a sharp rise in either would present a threat to the credit quality of the country's mortgage lenders generally.
Although Irish banking institutions derive considerable advantage from the availability of strong retail deposit bases, the fact that loan growth has been outstripping deposit growth places added pressure on banks' funding bases. It views the financial institutions' efforts to counter this pressure via the ongoing diversification of funding resources.
The report notes that Royal Bank of Scotland's recent acquisition of First Active will result in added competitive pressure on Irish mortgage lenders but says competition from foreign banking remains limited.
