The issues of loan arrears, capital adequacy and profitability will all "effectively be resolved" in the Irish banking sector in the next two years, according to AIB chief executive David Duffy.
In an article by Mr Duffy published by law firm McCann Fitzgerald as part of its corporate outlook for 2014, Mr Duffy said: "The pillar banks [AIB and Bank of Ireland] are expected to return to profitability during 2014-15 and should be adequately capitalised to meet ECB [stress test] and other criteria unless there are changes to the rules at a European level."
Mr Duffy said it was “vital that the business of banking is normalised sooner rather than later”. He said a normal level of mortgage lending would be between €8 billion and €10 billion a year, not the €40 billion at the peak of the property bubble.
“But right now, due to limited demand, banks are lending about half that level,” he said. “With the banks returning to health, we will see the share of cash buyers in the housing market decline and first-time buyers have access to mortgages they need.”
Mr Duffy said 12,000 to 18,000 houses a year need to be built to keep in line with demographics and growth, “as well as appropriate commercial property developments”.
Debt legacy
The AIB chief said the legacy of debts accumulated during the "boom years" was still too high.
“Our debt/income ratio on some measures is still above acceptable long-term, sustainable levels, so deleveraging still has a way to go, especially in terms of the household balance sheet.”
He said net reductions in lending in the State would continue, because the amounts banks lend to borrowers would be “exceeded by the nominal value of debt repayments by consumers and businesses for the foreseeable future”.
However, he said, the State was now getting to a “tipping point” in this regard as house prices and unemployment levels stabilise.
Mr Duffy argued that more effort needs to be made to achieve regional economic balance. “Dublin has become a European technology hub, which is to the country’s benefit. But we also need greater synergies between the universities, IDA, banks and other parties to build attractive propositions outside of Dublin for future investment.”
Mr Duffy aired his concerns about Ireland’s ability to continue to attract substantial levels of foreign direct investment.
“My concern is that the model for FDI success in the past – affordable, well-educated labour and a good telecoms infrastructure – has left us complacent about the future. We face real skills shortages and the challenge is to equip our schoolleavers and graduates with the skills that will be demanded by a tech-based economy. We must continue to invest in our physical infrastructure.”
Mr Duffy said the end of dairy quotas in the EU in 2015 represented an “enormous opportunity” for the agribusiness sector here to “secure higher levels of productivity, following the example of New Zealand, which in turn will drive export growth.”
