IRISH BANKS' exposure to property and construction lending, combined with their over-reliance on higher loan-to-value lending, has raised concerns at rating agency Standard & Poor's (SP), which has issued six ratings actions on Irish banks, including a downgrade of Irish Life and Permanent.
S & P said that asset quality concerns among Irish banks was a major issue, citing evidence that some property and construction loans, particularly those to small residential property developers, are deteriorating as the economy slows. The rating agency also expressed concern over the weighting of Irish banks' mortgage books toward recent higher loan-to-value lending, as well as buy-to-let lending.
Worst hit in the ratings actions was Irish Life Permanent, which had its long-term counterparty credit rating downgraded to "A" from "A+", although its "A-1" short-term counterparty credit rating was affirmed. According to S & P, the downgrade reflects the bank's challenged business and financial position in its banking division, arising from continued disruption in wholesale funding.
"With a primarily wholesale-funded balance sheet, and a competitive Irish mortgage sector constraining re-pricing, Irish Life Permanent (ILP) has been affected more than other Irish banks, most of which have broader business profiles and more balanced funding bases in comparison," the rating agency said.
The long-term counterparty credit and insurer financial strength ratings on Irish Life Assurance, a core operating subsidiary of ILP, were also lowered to "A" from "A+". The outlook on both entities remains negative.
Anglo Irish Bank's outlook was lowered to negative from stable, due to the bank's concentration on commercial property-backed lending. "Without a core deposit franchise, Anglo is more exposed than its higher rated peers to a precipitous deterioration in the economy," said S & P, adding that the negative outlook reflects the rating agency's view that there is a one-in-three chance or greater of a change in the rating in the next two years.
Ireland's two largest banks, AIB and Bank of Ireland, both had their ratings affirmed but their outlook was revised from positive to stable, due to their reliance on lending to the property and construction sectors. S & P considers both banks to be overweight in property and construction lending - 36 per cent of AIB's loan book falls into this category, as does 26 per cent of Bank of Ireland's total loan portfolio - and the rating agency expects increasing pressures on profitability from property and construction loan books as the economic slowdown continues in Ireland and Britain and losses emerge.
S & Paffirmed the ratings on IIB Bank and Ulster Bank.
Looking to the medium-term, the agency believes the outlook for Irish banks will remain bright. "We believe that the Irish banking system will remain solid, being underpinned by good profit margins, clear strategies that are being adjusted to the new operating environment, sound liquidity, and adequate capitalisation," said Nigel Greenwood, credit analyst with Standard & Poor's. However, if asset quality concerns emerge further and if the Irish and UK downturn is more severe than expected, then S & P said that Irish banks' ratings will be under additional negative pressure.
