S&P raised its credit rating for Permanent TSB and raised its outlook for AIB and Bank of Ireland on improving asset quality, higher interest rates and strengthened market positions at all three banks.
The rating agency upgraded PTSB’s rating by one notch to BBB/A2 due to its operational profitability and reduction in non-performing loans, in line with higher-rated European peers.
The outlook for AIB and Bank of Ireland has been revised to positive from stable, suggesting that rating upgrades may be on the cards for both in the coming year.
The upgrades follow S&P’s recent upgrade to the outlook for Ireland’s post-Budget 2023 government rating and reflect the dramatically improved performance of domestic Irish banks this year.
“The quality of Irish banks’ assets has improved over the past decade thanks to continued balance sheet cleaning and solid underwriting standards for new loan origination,” S&P said.
“Despite a weakening macroeconomic environment, higher interest rates and a continued focus on cost discipline will improve operational profitability for Irish banks.”
The agency cited PTSB’s improved loss-absorbing capacity, led by Eamonn Crowley, as a key reason for the upgrade, and also pointed to the lower stock of non-performing loans, which was driven by the acquisition of Ulster Bank assets.
S&P said it expects troubled loans to emerge among SMEs over the next year, though PTSB’s exposure to the sector is very small, with 97 percent of its loan portfolio in residential mortgages.
All three banks should benefit from rising interest rates as banks re-rated their loan books, with spreads helped by a large proportion of cheap deposits and the increased size of their loan books following acquisitions of Ulster Bank and KBC.
While S&P forecasts a slowdown in the Irish economy in 2023, it still expects growth of almost 2 per cent.
The agency said banks are unlikely to see a significant increase in non-performing loans during this period due to strict underwriting standards.
Rating upgrades are possible within two years for AIB and Bank of Ireland in an upside scenario where both increase risk-adjusted returns despite tougher economic conditions.
Both AIB and the Bank of Ireland recently upgraded their own profitability forecasts given the European Central Bank’s rapid rate hike since July.
According to internal models of both banks, every increase in interest rates by 1 percent leads to additional net interest income of around 300 million euros. ECB interest rates have risen 2.5 percent since six months ago.
https://www.independent.ie/business/irish/s-and-p-sees-better-prospects-in-coming-year-for-remaining-irish-banks-42239602.html S&P sees better prospects for the remaining Irish banks in the coming year