Irish banks would sustain little damage if the number of bad debts on their books doubled, according to an analysis of the sector.
A report by Davy Stockbrokers equity research, published yesterday, points out that the amount of money loaned to consumers grew six times to €200 billion between 1994 and 2004.
The average debt to disposable income ratio in the Republic is 140 per cent. This means that the average worker owes the banks €140 for every €100 he or she makes after tax.
However, the report states that as most of this debt is in the form of mortgages and is secured against homes whose value has risen from €88 billion to €470 billion in the last 10 years, people can afford the rising levels of debt.
The study also states that the banks are unlikely to suffer if there is a sharp increase in bad debts.
"The quoted banks earn operating profits that are anywhere between 12 and 20 times current bad debt provisions," the report says.
The firm goes on to estimate that if bad debts were double at each of the State's major financial institutions, it would take 5 per cent off Anglo Irish Bank's pretax profits, 7 per cent off those earned by Allied Banks' and Permanent TSB (the biggest home lender) and 9 per cent from Bank of Ireland's profits.
It adds that Permanent TSB's parent, Irish Life and Permanent, would only suffer a 3 per cent fall in pretax earnings as a group.
The brokers also found that First Active, Permanent TSB and Bank of Ireland, who recently began offering loans of 100 per cent of a home's value to first-time buyers, were willing to loan up to six times the income of a couple earning €60,000 a year.
This would leave the couple with monthly mortgage repayments amounting €37 of €100 of their net income. The report expresses concern that these banks are stretching lending criteria. However, it states that it would take a fall of 20 per cent in property prices to expose borrowers to negative equity.
