Fitch published its 2014 outlook for the Irish banks yesterday. The rating agency has a stable outlook on the sector and takes comfort from BoI’s anticipated return to profitability next year, while AIB is expected to “achieve monthly profits by 2H 2014”. However Fitch notes that capital ratios are likely to fall further at 2013 year-end due to losses, with the Central Bank’s Balance Sheet Assessment (BSA) potentially exacerbating the decline.
Fitch expects impairment charges to reduce gradually next year as the flow of new impaired loans slows and house prices stabilise. Though it flags a weak commercial property sector, regulatory pressure to resolve forborne loans and long-term arrears as headwinds. The rating agency is also of the view that the Irish banks will become long-term property managers, keeping properties on their balance sheets. Fitch believes that the banks’ low fully-loaded Basel III ratios (June 2013: AIB – 4%, BoI – 5%) “underscores the need for the banks to be capital generative through profitability before their credit profiles can stabilise on a sustainable basis”. In relation to the remaining Preference Shares (which are set to be deducted from regulatory CT1 capital in 2017 under EBA grandfathering rules), Fitch acknowledge that BoI is making progress to reduce its reliance on these instruments but for AIB this may “prove more difficult”.
Overall we would broadly agree with Fitch’s current assessment of the Irish banking sector. We expect both of the pillar banks to return to profitability next year (albeit just breakeven in the case of AIB) while 2013 year-end capital levels are likely to come under pressure following BSA related revisions to RWAs and provisions (though we note that the process of engaging with the regulator on the RWA issue may have longer to run). However it remains to be seen how active the Irish banks will be in property management. The institutions currently lack expertise in this area, but could potentially look to outsourcing for these skills. In any event while repossessions are expected to increase in 2014, we do not envisage the banks flooding the market with new stock, preferring to manage the process in an orderly manner to ensure there is sufficient demand to absorb any new supply. Finally we would also be of the opinion that AIB will struggle to reduce its reliance on Preference Shares over coming years. Bearing in mind the deficit increasing Eurostat government accounting treatment to future stock coupons, we believe the State should convert these instruments to equity in order to enhance the bank’s viability. Such a move would also improve AIB’s quality of capital, giving prospective investors more assurance over the group’s long-term capital structure (important to facilitate a disposal of the State’s €1.6bn CoCo instrument).
<p><h5>Ciaran Callaghan</h5>


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