“Significant risks” remain in the country’s banking system which may force Bank of Ireland and AIB to raise further capital in the near future, according to a new report by Fitch.
The costs involved in dealing with mortgage arrears, along with the potential need for stronger capital reserves next year, will make it harder for Bank of Ireland and AIB to return to profitability, it says.
Fitch believes impairment charges may rise this year, peaking in 2014, as lenders seek to meet Central Bank targets on mortgage arrears resolutions.
The agency says it does not expect the banking sector to return to operating profitability until 2015 at the earliest due to the impact of these increased charges.
Fitch also says that Government support remains “an important rating driver”. It says it believes the State’s willingness to support the country’s main banks is “undiminished” despite the end of the bank guarantee earlier this year.
Fitch report mistakes debt for equity
However Fitch also made an error in its report in relation to the Government's stake in Bank of Ireland.
The agency says that, in Q1 of 2013, “the (Irish) government’s €1bn stake in Bank of Ireland (15%) was sold into the capital markets."
However the Government actually sold Contingent Convertible debt instruments in Bank of Ireland for €1bn in Q1 2013 - but it still owns 15% of equity in the bank.
In the report Fitch cites - incorrectly - the sale of the 15% stake as evidence of Bank of Ireland’s "stronger financial profile", leading the agency to assign the bank a higher viability rating than AIB.
