Irish banks' non-performing loans will increase in the coming quarters as support measures for borrowers during the pandemic come to an end, Fitch Ratings said on Thursday.
However, the ratings agency expects that the deterioration will be “much less severe” than in the aftermath of the 2008 crisis.
Banks have escaped a sharp increase in non-performing loans during the pandemic to date. According to Fitch, this is due in large part to the “unprecedented level of Government support” channelled to individuals and businesses during the pandemic.
Some 85 per cent of borrowers, who had availed of payment holidays during the pandemic, had returned to normal arrangements as of the end of February 2021, “a level well above banks’ initial expectations”. The record level of savings accumulated during the pandemic has also helped with debt servicing.
Figures show that there has been only a moderate increase in non-performing exposures (NPEs) at both AIB and Bank of Ireland. For example, AIB's NPE had increased to 7.3 per cent by the end of 2020, up from 5.4 per cent at the end of 2019.
Bank of Ireland’s ratio, meanwhile, rose from 4.4 per cent to 5.7 per cent over the same period. Moreover, the increases at both banks were partly due to a change in the definition of defaults and “did not reflect a real underlying credit deterioration”, Fitch said.
Rather, loan-loss coverage levels generally strengthened across loan classes, mitigating the higher NPE ratios.
Pandemic hit
The banks did report “material increases”, however, in Stage 2 (where credit risk has increased since an issue was identified) exposures, across their corporate and SME portfolios, particularly from the hospitality and retail sectors, as well as in their property and construction books.
“These increases signal a significant rise in credit risk due to the pandemic,” Fitch said, noting that such exposures for the two largest banks represented on average 18 per cent of their gross lending at the end of 2020, nearly three times the level at the end of 2019.
While the banks significantly front-loaded their pandemic-related expected credit costs in 2020, which should result in lower credit charges for 2021, Fitch nonetheless expects loan-impairment charges “to be above normalised levels” this year, as banks continue to adjust their provisioning to reflect actual impaired loan flows and potentially strengthen it to support NPE disposals.
