Moody's Lifts Outlook on Irish Banking System to Stable (IRE)

The outlook for Ireland's banking system has been changed to stable, replacing the negative outlook that had been in place since 2008, says Moody's Investors Service. The stable outlook reflects the strengthening of banks' credit fundamentals, underpinned by an improved domestic economic performance. However, Moody's observes that while most of the short-term objectives have been achieved, the country's banking sector faces persistent challenges associated with the large stock of non-performing loans and commercial property exposure -- thus limiting further material improvements for the sector in the next 12 months.

The new report: "Banking Sector Outlook: Ireland", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"Ireland's stable banking system outlook reflects the significant improvement of the country's operating environment over the past year, and our expectation that its GDP growth will continue to outperform that of its EU peers over the next two years," says Dany Castiglione, a Moody's Assistant Vice President -- Analyst, and author of the report. "As a result, we anticipate a stabilisation of Irish banks' profitability metrics in 2015, as low funding costs continue to benefit net interest income. However further upside for Ireland's banks is limited, as new lending growth is still insufficient to offset the effects on revenues of loan deleveraging and redemptions," adds Castiglione.

Moody's observes that Ireland's favourable operating environment is already translating into a much lower inflow of new problem loans and an increase in property prices that continue to help strengthen banks' asset quality metrics. In addition, the European Central Bank's Comprehensive Assessment showed that Ireland's banking system maintains an adequate level of provision coverage.

Despite the overall positive developments, Moody's highlights the potential risks arising from the higher level of long-term arrears (i.e., regarded by the rating agency as the riskiest category among the non-performing assets). Efforts to clear these arrears have, so far, been ineffective, with foreclosures still at negligible levels. Moreover, although Irish banks' high solvency ratios further improved in 2014 aided by a combination of internal capital generation and reduction in risk weighted assets, the stock of non-performing loans remains sizeable and material relative to the banking sector's equity. In addition, banks' current regulatory capitalisation is also undermined by (1) the large amount of Deferred Tax Assets, which will ultimately not be counted as equity under the Basel III framework; and (2) the future role of government in the banks' capital.

Nonetheless, Moody's also notes that Ireland's banking system displays a favourable funding profile, with the sustained improvement in loan-to-deposit ratios supported by reduced funding needs, a material reduction in the use of wholesale and central bank funds, and a moderate increase in customer deposits. However, given that the bulk of the deleveraging process is now completed, further significant improvements are unlikely.

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