Irish banks’ NPLs set to rise due to pandemic
Irish bank non-performing loans will rise in the coming quarters as measures to support borrowers during the pandemic end, Fitch Ratings said on Thursday.
However, the rating agency expects the deterioration to be “much less severe” than in the aftermath of the 2008 crisis.
Banks have escaped a surge in NPLs during the pandemic to date. Much of this is due, Fitch said, to the “unprecedented level of government support” channeled to individuals and businesses during the pandemic.
Some 85% of borrowers, who had taken payment holidays during the pandemic, had returned to normal terms by the end of February 2021, “a level well above the initial expectations of the banks”. The record level of savings accumulated during the pandemic also contributed to debt service.
The figures show that there has been only a moderate increase in non-performing exposures (NPEs) to both AIB and the Bank of Ireland. For example, AIB’s NPE had risen to 7.3% at the end of 2020, up from 5.4% at the end of 2019.
The Bank of Ireland’s ratio, meanwhile, fell from 4.4% to 5.7% over the same period. Moreover, the increases at both banks were in part due to a change in the definition of defaults and “did not reflect a real underlying deterioration in credit,” Fitch said.
On the contrary, loan loss coverage levels have generally strengthened across all loan categories, mitigating higher NPE ratios.
Banks have, however, reported “significant increases” in Stage 2 (where credit risk has increased since a problem was identified) in exposures, across their corporate and portfolio portfolios. SMEs, especially in the hospitality and retail sectors, as well as in their properties and construction books.
“These increases signal a significant increase in credit risk due to the pandemic,” Fitch said, noting that these exposures for the two largest banks averaged 18% of their gross lending at the end of 2020, nearly three times the level at the end of 2019.
While banks have significantly advanced their expected pandemic-related lending costs in 2020, which should lead to lower lending charges for 2021, Fitch nonetheless expects loan depreciation charges “to be higher than expected. normalized levels ”this year, as banks continue to adjust their provisioning to reflect actual impaired loan flows and possibly strengthen it to support NPE disposals.