Full Text: Moody’s: Outlook for Ireland’s banking system remains negative

The following is the text of today’s Moody’s press release on the Irish banking system.

London, 21 November 2011 — The outlook on Ireland’s banking system remains negative, says Moody’s Investors Service in a Banking System Outlook published today. The negative outlook has been in place since 2008 and continues to reflect (i) the banks’ weak funding and liquidity profiles; (ii) the still very challenging operating environment; and (iii) the rating agency’s view that profitability will remain weak. The improved capital positions of Irish banks only partly mitigate these fundamental weaknesses. The outlook expresses Moody’s expectations for the fundamental credit conditions in this sector over the next 12-18 months.

"We expect the operating environment for Irish banks to remain very difficult over the outlook period, primarily as a result of government’s considerable austerity efforts, the continued financial market turmoil in the euro area, and deterioration in the global economic environment," explains Ross Abercromby, a Moody’s Vice President and Senior Analyst.

The substantial weakening in the funding and liquidity profiles of the banking sector is a key driver of the negative banking system outlook. The banks continue to rely on short-term central bank funding from the European Central Bank and in some cases from the Central Bank of Ireland. Moody’s expects that the banks will regain substantial market funding access only after they make considerable progress in deleveraging.

Overall, profitability will likely remain weak, due to the tough operating conditions, weak funding profiles and negative asset-quality trends. Although the main Irish banks benefit from substantial domestic franchises, Moody’s expects the difficult domestic environment to impair pre-provision earnings and net profits.

Through its support for the troubled banking sector in recent years, the government has significantly weakened its own credit profile. The banks now have to deal with the implications of this as the government aims to reduce its debt burden and restore its financial flexibility. In our opinion, the substantial reduction in the government’s net spending between 2011-2015 is likely to place considerable pressure on the country’s recovery prospects. This will have a significant impact on banks’ profitability and is leading to a weakening of already poor asset quality.

The banks’ credit exposures to Irish sovereign debt and to government-guaranteed debt issued by the National Asset Management Agency also contributes to the negative outlook on asset quality. However, Moody’s views the raising of substantial capital in 2011, mainly from the Irish government, as credit positive. The four domestic banks that are supported by the government now have the capital resources to cope with loan losses anticipated by Moody’s stress-case scenario.

The negative system outlook is consistent with the negative outlooks on the individual ratings for Irish banks, and with the negative outlook on the Irish government bond rating.

Moody’s report, entitled "Banking System Outlook: Ireland", is available on www.moodys.com