S&P raises outlook for credit ratings of Ireland’s largest banks

Standard & Poor’s has raised its outlook for Bank of Ireland and AIB credit ratings as lenders stand to benefit from ongoing industry consolidation in Ireland and continued declines in lending levels problematic.

S&P, which raised its outlook for the two banks from stable to negative, added that the “potential asset quality issues” that could still emerge from the pandemic and the war in Ukraine should be “manageable”, given the Republic’s ‘strong’ growth prospects, low private sector indebtedness and tighter lending standards enforced since the financial crisis.

The firm continues to rate the creditworthiness of AIB and Bank of Ireland at BBB-, which is the lowest of what it considers investment levels.

“The impact of the Russian-Ukrainian conflict on the economy and some residual tail risks from the pandemic pose some risk to our base case scenario,” S&P said. “However, we believe that economic growth will continue in Ireland and that any potential negative impact on the banking system will be manageable.

“We expect the underlying national economy to grow by about 4% over the next two years.”

Bank of Ireland, AIB and smaller rival Permanent TSB are set to split Ulster Bank and KBC Bank Ireland’s lending books between them as the two foreign lenders pull out of the market, boosting lending profits of the remaining players in the market. while loan growth and official interest rates remain low.

Focus on costs

S&P also pointed out that Irish banks’ costs remain high, at around 70% of revenue, compared to their European competitors. A cost-income ratio of around 50% is considered the holy grail for banks.

“We believe Irish banks will remain focused on operational improvement and further digital transformation, with the aim of aligning efficiency measures with those of their European peers,” S&P said. “We also believe that Irish banks are on the right track to increase their revenue streams after expanding their product offerings and diversifying their revenue streams over the past year by cooperating more closely with insurance companies and stockbrokers.”

AIB acquired Goodbody Stockbrokers last year and is currently working on a life insurance and pension joint venture with Canada Life. Bank of Ireland agreed last year to buy brokerage firm Davy.