Increasing fees and commissions will be critical for Irish banks in the coming years, in order to offset pressure on the difference between the amount of interest they earn versus what they pay out to those lending them money.
That’s according to ratings agency S&P Global Ratings, which says it does not expect banks here to be able to expand their net interest margins further, given competitive movement in the markets, low interest rates, and gradual build up in banks' stock capital buffers.
In a research note on the Irish banking system, the agency says the concentration in real estate and extent of existing tracker mortgages means the quality of the sector’s loan book is typically weaker than in many other EU states.
It says the use of money set aside for losses has in the past helped to support losses, but this benefit is not likely to continue.
It also cautions that it does not expect a material improvement in earnings this year, because of limited revenue diversification and high cost bases
S&P says capitalization remains at levels that are relatively strong.
However, the agency says capital is set to decline a little as loan books expand and dividend distribution policies remain the same..
Overall though Irish banks have demonstrated stability, the organisation claims, despite internal and external challenges.
Their credit profiles have improved materially in recent years, it says, as a result of better economic conditions, placing them in a stronger position to absorb future shocks, like Brexit.
Non-performing loans will continue to fall this year, it predicts, and near-term profitability to remain stable.
As a result, it says short term upgrades to Irish banks are most likely to be based on their improved additional loss-absorbing capacity, it says.
It claims Bank of Ireland has demonstrated a superior track record around the quality of its assets compared with other peers in the market here.
As a result, it says, the positive outlook for the bank suggests it may change the rating on Bank of Ireland to bring it in line with the higher ratings on its international peers.
On Ulster Bank, it says, the positive outlook reflects that of its parent company, the Royal Bank of Scotland.