Fitch Ratings has said Ireland's economy is highly exposed to Brexit and a weakening of the operating environment here could slow improvements in asset quality and capitalisation among the banks.
Fitch expects the UK votes to leave the EU to be negative for the Irish economy “but the extent of any weakening of its operating environment, triggered by a potential slowdown of growth in the UK, sterling depreciation, and potential future trade barriers, will only become clear as the EU-UK negotiations develop”.
Fitch added that a decline in property prices here, as well as rising unemployment and reduced investment confidence could put pressure on Irish banks' asset quality and profitability.
Given Irish banks’ direct exposure to the UK, Fitch believes a downturn in British property prices is a risk for Bank of Ireland in particular, as UK loans – retail mortgages and commercial real estate loans – account for 44% of the lender’s overall loan portfolio.
However, Fitch said AIB is “less exposed to a downturn in the UK's operating environment because the UK represents a lower 16% of its lending”.
Fitch’s expectation of continued improvements had been the main driver for the positive outlooks on the ratings of both AIB and Bank of Ireland.
The Viability Ratings of both lenders have been upgraded five times since end-2012.
But a weaker operating environment, sparked by slowdown in economic growth, and reducing investor confidence, could reduce the banks' profitability and limit their ability to dispose of impaired loans, according to Fitch.
