Irish banks must shed a further €9bn of bad loans to meet ECB targets, Moody’s has warned.
Unlike the early period after the crash, when sales of commercial real estate and developer loans dominated the great bank sell-offs, further disposals will be dominated by home loans, the rating agency said.
“This is because legacy mortgage arrears, which take a long time to resolve internally in Ireland due to legal constraints on home repossessions, now account for most of their remaining non-performing loans (NPLs).”
The report by Moody’s Investors Service said Irish banks’ high stock of problem loans is still a burden, despite action since 2013 to reduce the scale of the issue.
And it confirms that the target to cut bad loans to the European average is becoming harder to hit, as the average elsewhere declines.
“The largest Irish lenders will need to shed about €9bn of problematic exposures to bring their ratios of NPLs to gross loans into line with the European average, which has now fallen below 4pc,” said Roland Auquier, a Moody’s assistant vice president
At the start of this year the main banks here came under pressure from Europe’s Single Supervisory Mechanism (SSM), a regulator, to cut their bad loans to around 5pc of all lending, the then average.
That prompted major loan sales this year including by AIB, Ulster Bank and Permanent TSB, and has triggered Bank of Ireland and KBC to rethink their previous and long-held policies of working through customer loans rather than selling.
Bad loans remain a major issue on bank balance sheets here, Moody’s noted, despite, Ireland’s strong economy although it will drive further problem-loan reduction.
Moody’s expects real gross domestic product (GDP) to grow by 5pc in 2018 and 3.5pc in 2019, fuelled by rising employment and investment rather than credit growth
Irish banks’ NPLs will drop to 8pc by the end of 2018, once portfolio sales planned by Permanent TSB, KBC Ireland and Ulster Bank are completed, Moody’s said.
One reason mortgage sales now dominate is that bad loans across other lending areas – such as property, SME, development and buy-to-let property loans happened faster and earlier.
Residential mortgages account for over half of the stock of remaining bad loans, Moody’s said. If they are not sold, the rating agency says they’ll take years to resolve.
“In the absence of loan sales, we expect that the legacy portfolio of non-performing residential and buy-to-let mortgages would require a long time to wind down, as it consists largely of long-term arrears,” Mr Auquier added.
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