Ratings giant Fitch sees Irish banks’ bad debts rise and state credit guarantee scheme fail

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The amount of nonperforming loans on the books of major Irish banks will increase this year, with the end of Covid support, but the impact is expected to be less severe than after the 2008 financial crisis.

International rating agency Fitch has said – as is widely anticipated – that bad debt levels will increase with the end of borrower support measures, especially payment breaks.

He said uptake of the government-backed credit guarantee scheme is likely to remain low, removing a layer of loan protection for banks.

Fitch said he also expected Irish bank loan depreciation charges – or the amount lenders set aside to cover the cost of bad debts – to remain above normal levels this year.

Earlier this month, the country’s two largest banks reported heavy losses for 2020 due to large bad debt provisions.

AIB has set aside 1.46 billion euros for bad debts related to Covid, while the Bank of Ireland has taken a provision of 1.1 billion euros.

Bad loans

At the end of 2020, 7.3% of AIB’s gross loan portfolio consisted of non-performing loans. The percentage of bad debts on the books of the Bank of Ireland, meanwhile, fell from 4.4% to 5.7%.

However, since the start of this year, AIB has made two sales of non-performing loan books – one for € 150m and a long-term non-performing portfolio for € 600m – bringing its bad debt rate down to 6%.

The bank’s medium-term objective is to reduce its percentage of non-performing loans to 3%. The Bank of Ireland is also considering selling its own non-performing mortgages.

In a research note on the Irish banking sector, Fitch highlighted the two banks’ sales plans and the priority given to low single-digit percentages of bad loans as a positive sign.

“Both banks have tested executives to manage stressed assets, which should help resolve emerging lending issues,” he said.

The EU warned in November that European banks may only start to see the worst effects of a new wave of non-performing loans in 2021.

In response, analysts here and the Central Bank said Irish banks are already well prepared.

Fitch also said Irish banks should remain “less protected” than their counterparts elsewhere who used state guaranteed loans more during the crisis.

He noted that the companies here benefiting from the government-sponsored € 2 billion credit guarantee scheme were “extremely weak” – at just 0.2% – and that it was “unlikely to increase by. significantly ”.

Arrears

Meanwhile, just under 55,000 private residential mortgages were in arrears at the end of December, according to the Central Bank.

That was down 462 accounts – or 0.8% – from the previous quarter.

The slow decline in arrears may continue, but almost half of these mortgages have been past due for more than two years.

Brokers Ireland said “not enough is being done” to tackle Ireland’s mortgage debt crisis, noting that 30% of arrears cases have been in the red for more than five years and many will never be resolved.

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