S&P has upgraded its credit rating for Permanent TSB and its outlook for Bank of Ireland and AIB, as it expects the quality of the lenders’ loan books to continue to improve even as the economy slows.
The firm has upgraded its rating on the operating bank PTSB by one level to BBB, which is eight rungs below its top-notch AAA rating, it said on Thursday. It has also raised the outlooks on its A ratings for AIB and Bank of Ireland to positive from stable.
“Irish banks’ asset quality has been improving over the past decade thanks to continuous balance sheet clean-ups and healthy underwriting standards for new loan generation,” S&P said.
S&P estimates that at year-end 2022, non-performing loans will have fallen to 3.7-3.8 per cent across the three banks from a range of 11.4 per cent at Bank of Ireland and 23 per cent at PTSB in 2016.
While S&P said that elevated inflation and increasing interest rates will put pressure on borrowers’ ability to service debt, it concluded that it expected “the impact to be manageable, and all three banks to stabilise” their stock of non-performing loans at between 3 and 4 per cent.
“The acquisition of performing assets – from KBC Bank Ireland by BOI and from Ulster Bank by AIB and PTSB – will also help in this process,” it said. “We anticipate additional problem loans will emerge, mostly among small and midsize enterprises.”
However, it expects residential mortgages, comprising 50 per cent of gross loans for AIB, 53 per cent for Bank of Ireland and 97 per cent for PTSB, “will likely hold up thanks to still-high employment and low average loan-to-value ratios”.
S&P added: “We note downside risk attached to our macroeconomic forecast but under our current base-case scenario we expect the underlying Irish economy to expand 1.2 per cent in 2023 versus zero per cent for the wider euro zone.”
“Slowing economic activity will spill over to the labour market but we expect unemployment will increase only moderately to a peak of 5.2 per cent in 2023 from our estimate of 4.6 per cent in 2022.”
