As part of Moody’s Irish sovereign upgrade on Friday evening, the rating agency believes that the clean-up of Irish non-performing loans is still in the early stages with mortgage resolutions likely “to increase foreclosures, impairing profitability and potentially dampening the housing market recovery”. However, principally due to improved confidence in the sector coupled with the successful return to market funding, Moody’s is of the view that the government will need to provide “very little, if any, of the capital that the banks may need following the upcoming EU-wide stress tests”. <p>

In terms of potential capital shortfalls and contingent on the scale, we believe BoI will be in a strong position to source any incremental capital from the markets. However given their effective nationalisation, the situation may be more complex with respect to AIB and ptsb. We also note weekend media reports (Sunday Times) that ptsb is likely to move ahead with the disposal of €10bn non-core loans over coming months. While the ECB/EBA stress tests are expected to use the 2013 year-end balance sheet as the starting point for the tests, the bank’s capital buffer is likely to be eroded following the disposal of these assets at below carrying values (particularly from the sale of its UK CHL BTL portfolio) placing further pressure on solvency levels (June 2013: CT1 15.7%). <p>

Contrary to moody’s view, we do not believe that an increase in mortgage resolutions is likely to have a material adverse impact on the Irish housing market recovery or banks’ profitability. While the quantum of foreclosures is likely to rise, we believe that there is sufficient demand to absorb the new supply. In addition the banks’ ability to resolve and cure impaired loans within allocated provisioning may be positive for capital levels and profitability.
<p><h5>Ciaran Callaghan</h5>


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