Ireland has failed to convince Moody’s it deserves an improved outlook, with the ratings agency retaining the negative outlook it has slapped on the country since 2008.
The group says the outlook – which is consistent with individual ratings for Irish banks and with the negative outlook on the Irish government bond rating – is due to the banks' weak funding and liquidity profiles, the challenging operating environment and Moody’s view that profitability will remain weak.
“The improved capital positions of Irish banks only partly mitigate these fundamental weaknesses,” says Ross Abercromby, vice president and senior analyst at Moody’s. “The outlook expresses Moody's expectations for the fundamental credit conditions in this sector over the next 12 to 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."
This month, Euromoney’s country risk surveyrevealed that Ireland’s bank stability scores increased during the last quarter. Ireland’s score improved by 0.4 points after a quarter in which several banks successfully raised capital secured against existing loans.
Bank stability was the only criteria in the economic section of the survey, where analysts increased their scored during the quarter, although Ireland’s bank score (3.2) remains one of the lowest in Europe.
Moody’s says that 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,” says Moody’s in a statement. “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.”
The ratings agency added that the government has significantly weakened its own credit profile through its support for the troubled banking sector in recent years.
“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,” says Moody’s. “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.”