Irish banks' non-performing loans will increase in the coming quarters as support measures for borrowers during the Covid-19 pandemic come to an end, new research from Fitch Ratings predicts.
However, Fitch added that it expects asset quality deterioration to be much less severe than in the aftermath of the 2008 financial crisis.
Fitch noted that overall non-performing exposures (NPE) increased only moderately at the country's two biggest banks - AIB and Bank of Ireland - last year.
AIB reported a gross NPE ratio of 7.3% at the end of last year, up from 5.4% at the end of 2019, while Bank of Ireland's ratio rose to 5.7% from 4.4%.
"The increases for both banks were partly due to a change in the definition of defaults and did not reflect a real underlying credit deterioration.
Loan-loss coverage levels generally strengthened across loan classes, mitigating the higher NPE ratios," Fitch stated.
The vast majority of payment holidays finished at the end of February, and in over 85% of cases borrowers had returned to pre-pandemic payment arrangements - a level well above banks' initial expectations.
Fitch said it believes this reflects the unprecedented level of government support given to individuals and businesses during the pandemic.
The support schemes, including unemployment and other subsidy schemes for individuals as well as grant schemes for businesses, amounted to nearly 20% of gross national income.
Businesses were also supported by widespread rent and tax deferrals, it noted.
Cash accumulated by borrowers has led to a big increase in banking sector deposits, which has supported debt servicing since the end of payment holidays, it added.
Fitch said that Irish banks significantly frontloaded their pandemic-related expected credit costs in 2020.
It said this resulted in reported net losses but should lead to lower credit charges for 2021.
"Nevertheless, we expect loan impairment charges to be above normalised levels this year as banks continue to adjust their provisioning to reflect actual impaired loan flows, and potentially strengthen it to support NPE disposals," the rating agency added.