Irish banks are well prepared to deal with a spike in non-performing loans next year when the effect of payment breaks wear off, according to analysts, as the head of the EU’s agency for winding down failing lenders warned the sector across Europe to be ready to deal with the real impact of Covid-19 on their books.
Meanwhile, Central Bank deputy governor Ed Sibley told Frances Fitzgerald MEP in a letter that his organisation is engaging heavily with banks to make sure they are dealing appropriately with borrowers experiencing financial difficulty.
Mr Sibley reiterated in the letter, dated November 10th, that banks may offer “interim measures” to support borrowers suffering temporary income shocks amid the current coronavirus restrictions, as longer-term solutions are being considered. The Central Bank has consistently said it is best to move to tailored, individual solutions from the blanket, “one-size-fits all” payment breaks offered between March and September.
“In our view, the Irish banks – and regulator – are already all over this issue of the coming rise in [non-performing loans] and are ready,” said Eamonn Hughes, an analyst with Goodbody Stockbrokers.
“As payment breaks are currently running off, the banks will be utilising the significant experience garnered from the last crisis in providing forbearance solutions for customers and the Irish banks already have significant workout teams in place – circa 10 per cent of all staff.”
AIB and Bank of Ireland set aside a combined €2.1 billion of loan impairment provisions in the first half of this year, and forecast their total could come to €2.5 billion-€2.8 billion for 2020, mainly to cover loans that are expected to turn sour next year. The scale of provisions needed next will be driven by the path of the virus and potential delivery of a vaccine. Pfizer and BioNTech said on Monday that their advanced vaccine candidate was more than 90 per cent effective.
Elke Koenig, chair of the EU’s Single Resolution Board (SRB), which was set up in 2016 to order liquidation or restructuring of failing banks, said in an interview published by the Financial Times on Wednesday that non-performing loans (NPLs) could start coming through in the first and second quarters of next year, as the effects of Covid-19 payment holidays and government supports for households and businesses wane.
Ms Koenig cautioned against European Central Bank (ECB) suggestions that there may be a need to set up a euro zone bad bank to remove problem loans from lenders’ balance sheets. She said individual banks were best placed to deal with distressed debt, including through loan sales.
Separately, debt ratings firm DBRS Morningstar noted on Wednesday how the value of Irish loans subject to payment breaks had fallen to €3 billion in mid-October from nearly €10 billion in July.
“The banks reported that the majority of the expired payment break accounts returned to their regular payment schedule, however, as the effect of the pandemic and additional restrictions on the Irish economy in [the fourth quarter] unfolds, borrowers may require additional financial support,” DBRS Morningstar said.
“We expect banks’ asset quality to deteriorate and NPLs to increase although the final impact will depend on the length of economic shutdown, any further support measures and degree of economic contraction.”