Irish banks face long recovery from Covid-19 loan losses as fears grow over branches
The recovery from the Covid-19 crisis for the Irish banking sector is not expected to be achieved until 2024, although the dismemberment of Ulster Bank’s loan portfolios is likely to present “a wildcard” for the growth of some lenders.
AIB, Bank of Ireland and Permanent TSB will reveal next week the big blow to loan write-downs from the Covid crisis so far when they release their 2020 financial figures.
The three lenders – in which the government has majority and minority stakes – will report significant losses and likely accelerate cost-cutting plans, including closing bank branches across Ireland.
In addition, banks should not regain some profitability until next year, their financial recovery accelerating in 2023, but not reaching pre-Covid profitability levels until 2024.
However, leading analysts have said there is “a wildcard” for some of the lenders who are benefiting from Ulster Bank’s exit from the banking market and the splitting of its € 20 billion loan portfolio.
In addition, the reduction in banking competition will also help stimulate lenders involved in the sale of Ulster. The growth of their loan portfolios has eluded the banks despite the strong economic recovery since the last financial crisis that began six years ago.
So far, AIB – which is 71% government-owned – is in pole position to benefit from the € 20 billion dismemberment with a preliminary deal with Ulster parent company NatWest to acquire 4 billion euros in business loans.
Permanent TSB, of which the government owns 75%, is also in talks to acquire a significant amount of the Ulster mortgage as well as small business loans.
Bolstering Permanent TSB to acquire a large chunk of Ulster’s € 15 billion mortgage portfolio would likely require the state to pump more money into the lender, as well as possibly diluting its stake.
Other banks likely to be involved in the dismemberment of Ulster Bank’s loan portfolios, including the Bank of Ireland, in which the government has a 14% minority stake, are not known at this stage.
For Irish banks, the road to match the returns of their European banking counterparts will likely take a few years, said Diarmaid Sheridan, chief banking analyst at Davy.
Irish banks have faced headwinds to manage legacy loans from the financial crisis and have found it difficult for all lenders to make money during a period of low or negative interest rates, even before the start of the Covid-19 crisis.
Mr Sheridan, however, said Irish banks may not cope with the multi-year fallout like they did from the financial crisis, as the government injected billions to protect household incomes and businesses from the collapse during this crisis.
Eamonn Hughes, senior banking analyst at Goodbody, estimates that AIB will report an overall net loss of € 925 million for 2020 next week, while Bank of Ireland will post a net loss of € 973 million.
For the smaller TSB Permanent, Hughes estimates that the lender will show a total attributable net loss of 143 million euros.